By Mrs. Gordana Baltovska– member of the Stopanska Banka a.d. Bitola board in charge of risk, finance and accounting.

Financial stability is crucial for an economy and its disruption may cause many side effects, as it was witnessed during the global financial crisis, which was triggered by the high rate of indebtedness and the inadequate risk management. In Macedonia, the financial stability,to a large extent depends on the banking system, while other segments such as leasing, pension funds, investment funds and insurance sector, have smaller share and modest impact. The stability of the banking system is in a relatively good level, primarily because of the caution and capitalization of banks, the low level of inter-sectoral linkagesof individual financial institutions, as well as, the absence of cross-ownership and large financial groups which minimize the risks of spilloversfrom one segment to another .

Mrs. Gordana Baltovska
Mrs. Gordana Baltovska

However, the banking system and Macedonia did not remain immune to the events on the world scene. As a result of the negative effect of crisis on the real economy, the credit risk and the uncertainty of recovering of the investments increased, and also the credit exposure in riskier categories and the number of non-performing loans registered growth. In order to improve the resilience of the financial system and create conditions for overcoming the weaknesses, the National Bank of The Republic of Macedonia, continually innovated the regulatory reforms, whose implementation meant taking a deeper approach to risk management.

Risk management involves the activities such as: identification of risk exposure for all categories of assets with estimate of their potential losses, risk assessment including measurement and analysis of losses in the past in order to estimate the variables that will affect the future,  control of the risk in terms of reducing or eliminating the risks of losses using all types of collaterals, financing risks by providing reservations, insurance, development of administrative techniques and use of expert knowledge and practices, and finally, monitoring of the risks.

Risk management in the banking sector in Macedonia is in accordance with regulatory requirements and the risk profile of banks, and each bank is obliged by its internal policies, to cover all material risks that the bank is exposed to,while performing certain or all types of financial activities , thereby achieving the suitable indicators such as the rate of capital adequacy, liquidity indicators, indicators for the credit risk, interest rate risk, foreign exchange risk, operational and other risks on a consolidated basis.

So far, the progress in the approach to risks in the banking system of The Republic of Macedonia can be seen from the following table.

Table: Indicators of financial stability of the banking system in the Republic of Macedonia

Indicators (in %) 2013 2014
Liquid assets to total assets 31,2 29,8
Rate of capital adequacy 16,8 15,7
The net open foreign exchange position / own funds 15,6 17,5
Non-performing loans / gross loans 10,9 10,8
RОАА 0,6 0,8
RОАЕ 5,7 7,4

The indicators show that the liquidity of banks is satisfactory, the capitalization is high and the rate of capital adequacy is twice higher than the legally prescribed one. The exchange rate’s risk is controlled by maintaining the net open foreign currency position at the lowest level, while non-performing loans to gross loans are slightly increased.

Considering the importance of the process of risk management for long-term stability and profitability of the Bank, as well as the expected further changes in the regulation of the Central Bank in accordance with changes in the Basel Capital Accord – Basel 3, Stopanska banka a.d. Bitola managed to significantly improve the performance in the area of risk management during the year 2014.

Thus, credit risk indicators point to quantitative and qualitative strengthening of the credit exposure. The growth rate of 16.76% of total credit exposure in 2014 was followed by simultaneous improvement of the qualitative structure so that exposure to clients classified in A risk category increased from 81.56% in 2013 to 84.89% in 2014. Credit exposure to clients classified in B risk category also registered an annual growth from 1.10% to 2.44%, while exposure to clients in C, D and E risk category decreased from 17.34% in 2013 to 12.67% in 2014. In parallel with the positive trend in these indicators, impairment provisions as a percentage of total credit exposure decreased from 16.32% to 12.22%.

As a complementary feature of the credit risk management, Stopanska banka a.d. Bitola paid proper attention to non-performing loans management and sale of foreclosed property. The Bank’s activities in this area have contributed to the reduction of the share of non-performing loans in the gross loan portfolio of non-financial entities from 24.65% in 2013 to 17.43% in 2014, and recovery of previously written-off interest receivables in the amount of 4.00 million euros. The share of foreclosed properties in total assets was reduced by 4.92 percentage points annually and were realized capital gains in the amount of 59.51 million euros. The improvement in the stated indicators had a positive reflectionon the financial results of the Bank.

As to liquidity risk as one of the risks to which banks are exposed, during the 2014 Stopanska banka a.d. Bitola continued to successfully manage the assets and liabilities while ensuring timely and regular settlement of the Bank’s liabilities i.e. optimal liquidity. In that context, the liquidity ratio up to 30 days, as the ratio between assets and liabilities falling due in the next 30 days was 2.77. Liquidity ratio up to 180 days, as an indicator of the coverage of liabilities falling due within the next 180 days with assets maturing within the same period, was 1.69. The share of liquid assets in total assets during the whole of 2014 was higher than 30% so that as of 31.12.2014 this indicator amounted 37.57%.Such indicators have a large contribution in providing long-term financial stability and further strengthening of the customers’ confidence as a precondition for improving the market position under the Bank’s strategic objectives.

Besides credit and liquidity risk management, the Bank placed an appropriate emphasis on management of other risks (market, operational, strategic, reputational risk) while maintaining the appropriate capital levelsin accordancewith the regulation. During 2013 and 2014, currency risk-weighted assetsamounted less than 2.00% of the total risk-weighted assets, while the share of operational risk-weighted assets amounted about 8.00% in two consecutive years. The rest of the risk-weighted assets is attributed to credit risk.

Speaking of risk management, maintenance of proper capital adequacy ratio is crucial for the Bank. As of 31.12.2014, this indicator amounted up to 20.20% which is significantly higher than the legally prescribed minimum of 8%. The capital adequacy ratio was also higher than 20% and amounted up to 20.77%, as of 31.12.2013. The indicator for the coverage of risk-weighted assets with core capital (Tier 1 Ratio) at the end of 2014 stood at 19.71%, which indicates the high quality of the structure of the Bank’s own funds in which the core capital accounts for 97.57%.

Such realization will facilitate the Bank’s transition towards the Basel 3 capital requirements that predict further strengthening the capital framework especially the core capital, aiming to increase the resilience of the banking sector and creating conditions for achieving sustainable economic growth in the short and long term. In this context, the Basel 3 requires an increase in the minimum rate of core capital from 4% to 6%, and introduces two additional amounts of capital:capital conservation buffer (min 2,5% of the risk-weighted assets) and countercyclical buffer (0 to 2.5% of therisk-weighted assets). Although Basel 3 does not predict changes in the minimum capital adequacy ratio of 8%, however with the introduction of the two additional capital buffers the real capital adequacy ratio will increase by at least 2.5 percentage points.

Considering the Basel 3 innovations in the area of capital base strengthening, the Central Bank’s activities for migration from Basel 2 to Basel 3, as well as the current performance of Stopanska banka a.d. Bitola in this segment, we can expected relatively easy and quick adjustment of the Bank to the new bank capital requirements.

To sum up, the risk management data for Stopanska banka a.d. Bitola represent an image of healthy and stable bank, which successfully balances between optimizing the risks on one hand and profitable operation on the other hand, while acting in accordance with existing regulation. In the future, the Bank’s efforts will be directed towards improving the risk management processes in accordance with the expected changes in regulation and internal evaluations, aiming to maintain financial stability as a prerequisite for profitable operations in the long term.

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