The adverse macroeconomic environment in the aftermath of the Lehman Brothers episode impacted negatively on the profi tability and effi ciency of the banking sector. Already in 2008 a moderate decline in return on average assets and return on average equity was recorded, while in the course of 2009 profi tability indicators halved to 0.7% and 5.6% respectively
(see Table 14). The main driver behind this deterioration was the increase in loan loss provisions, which represented 27% of total operating income in 2009. Revenue generation was also affected, as indicated by the moderate increase in the cost-to-income ratio in the last couple of years. Nevertheless the banking sector in the former Yugoslav Republic of Macedonia has significantly improved its performance compared with the period 2000-04.
Net interest income has traditionally been the key driver of revenues, generating 65% of total operating income in 2009. The net interest margin (i.e. net interest income over average total assets) increased somewhat in 2009 to reach 4.1%, providing a fi rst line of defence against potential loan losses. It is noteworthy that the interest rate spread (i.e. the spread between loans and deposits) has widened in foreign exchange and foreign exchange clause loans since 2006, the difference increasing substantially in 2009.
Table 14 The former Yugoslav Republic of Macedonia: profitability of the banking sector 2002 2003 2004 2005 2006 2007 2008 2009
Total operating income 1) Percentage of total income 75.6 72.2 82.7 83.5 93.3 93.5 94.6 99.5
of which:
Net interest income Percentage of operating income 47.0 48.7 52.0 56.3 59.6 59.7 61.9 65.5 Net non-interest income Percentage of operating income 53.0 51.3 48.0 43.7 40.4 40.3 38.1 34.5 General administrative expenses Percentage of operating income 90.9 87.0 74.5 66.6 62.0 58.4 62.1 62.8 Operating expenses
(excluding loan loss provisions) Percentage of operating income
Loan loss provision expenses Percentage of operating income 30.9 39.8 34.7 28.6 15.5 17.3 16.9 27.0
Income tax Percentage of operating income 1.3 1.4 2.5 2.8 2.8 2.2 3.2 0.3
After-tax profi t/loss Percentage of operating income 6.4 7.6 8.1 17.9 26.7 28.8 23.2 10.3 Net interest income Percentage of average assets 2.8 2.9 3.5 3.9 4.0 3.8 3.8 4.1 Net non-interest income Percentage of average assets 3.2 3.0 3.2 3.0 2.7 2.6 2.4 2.2 Interest rate spread
(total loans – total deposits) Percentage points
Denar spread 2) Percentage points ... ... ... 6.9 6.5 4.6 3.7 3.2
Foreign exchange spread 2) Percentage points ... ... ... 6.5 6.7 6.5 4.2 4.2
Denar with foreign exchange clause spread 2) Percentage points ... ... ... 6.8 7.0 5.6 4.0 5.7
Return on average assets 3) Percentage 0.4 0.5 0.6 1.2 1.8 1.8 1.4 0.7
Return on average equity 3) Percentage 2.0 2.3 3.1 7.5 12.3 15.2 12.5 5.6
Source: NBRM.
1) Data revised to include extraordinary income in total income.
2) Figures for 1999-2004 are incompatible with data from 2005 onwards owing to a change in methodology for calculating banks’ weighted interest rates.
Y U G O S L A V R E P U B L I C O F M A C E D O N I A NON-BANK FINANCIAL INSTITUTIONS
The fi nancial sector of the former Yugoslav Republic of Macedonia continues to be dominated by the banking sector, which accounted for 89% of total fi nancial sector assets in 2008.26 Nonetheless, the non-bank fi nancial sector experienced far-reaching structural changes in 2006-08. The share of insurance companies in total fi nancial sector assets shrank considerably to 4.2% (from 7.5% in 2006), mainly on account of the reduction in the sector’s assets in 2007. The share of leasing companies doubled (3.1% in 2008 against 1.4% in 2006), while pension funds, launched only in 2006, expanded to 1.8% of total assets. The share of savings banks (1.2%) remained fl at, while brokerage houses, pension fund management companies and investment funds together accounted for around 0.4% of
fi nancial sector assets.
Like the banking sector, the non-bank fi nancial system is highly concentrated and largely foreign- owned (except for brokerage houses). However, concentration decreased in most segments in 2006-08, a trend which is expected to continue in the near future (e.g. the number of leasing companies doubled in 2008). Certain activities remain underdeveloped (e.g. life insurance represents only 4% of gross insurance premiums; real estate leasing represents only 1.5% of the total value of active leasing agreements). Cross-sector ownership is at a relatively low level. The business ties between banks and non- bank fi nancial institutions consist of the deposits of the non-bank fi nancial institutions placed with banks, which in turn constitute only 3.4% of the total deposits of the banking sector.
2.3 RISKS AND SHOCK-ABSORBING CAPACITIES CREDIT RISK
Credit risk is the key risk that banks in the former Yugoslav Republic of Macedonia are facing – as already mentioned, the loan book represents a very signifi cant part of their balance sheet. In addition, since 2004 the former Yugoslav Republic of Macedonia has experienced a prolonged credit boom, with private sector credit recording a year-on-year
growth of 24-39% (see Table 15). In 2009 a deceleration in credit growth was recorded, with private sector credit growth declining to 8.9% year on year (from 34.6% in 2008). This deceleration is not necessarily negative from a fi nancial stability perspective. Previous growth rates were not sustainable in the long term and might have raised concerns over asset quality. Moreover, there has been no credit crunch, considering that credit growth remains positive; more importantly, credit growth has only halved in real terms (since infl ation turned negative in 2009).
The deceleration in credit growth has been more pronounced for household loans. Their annual growth rate declined to 2.6%, while in the period 2004-08 it was in the range of 37-64%. This development can be partly explained by the introduction of prudential measures. Firstly, in March 2008 the risk weights for calculating banks’ capital requirements on credit cards and current account overdraft exposures were increased to 125% (from 100%). The share of these types of claims in total household loans is important: credit card balances represent around one-third and overdrafts 11%. As a result of the aforementioned measure, a signifi cant slowdown in the growth of credit card balances has been recorded, while the impact on overdraft balances has been muted. Secondly, quantitative restrictions on household credit growth were applied – basically aiming at limiting the cumulative growth rate of household credit at 18.1% between May and December 2008 and at 11.3% for the whole of 2009.27 This measure was abandoned in 2010, by which time household credit growth had already decelerated signifi cantly.
Overall indebtedness of households and non-fi nancial enterprises increased in 2008 but levelled off in 2009. Household debt (including
Data on the overall fi nancial sector were available only up to 26
2008 by the cut-off date.
In particular, if the household credit growth rate of a bank or 27
savings house exceeded the monthly growth rate set by the NBRM at the end of a specifi ed month, the bank or savings house then had to place a compulsory deposit with the central bank.
Table 15 The former Yugoslav Republic of Macedonia: selected banking sector stability indicators
2002 2003 2004 2005 2006 2007 2008 2009