financial stability in the republic of belarus 2016

Financial Stability in the Republic of Belarus 2016

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This analytical survey has been prepared by the Financial Stability Department in concert with the Monetary Policy and Economic Analysis

Directorate, Banking Supervision Directorate, Financial Markets Operations Directorate, Banking Operations Regulation Directorate, Balance of Payments and Banking Statistics Directorate, Non-bank Operations Regulation Department, Payment System and Digital Technologies

Directorate, and Securities Market Development Department of the National Bank of the Republic of Belarus


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CONTENTS EXECUTIVE SUMMARY .............................................................................. 4

CHAPTER 1. EXTERNAL AND INTERNAL MACROECONOMIC RISKS ................................................................................................................. 9

CHAPTER 2. NON-FINANCIAL SECTOR ............................................... 16

CHAPTER 3. FINANCIAL SECTOR ......................................................... 22

3.1. BANKING SECTOR ........................................................................................................ 23

3.2. INSURANCE SECTOR.................................................................................................... 44

3.3. OTHER FINANCIAL INTERMEDIARIES’ SECTOR ..................................................... 50

CHAPTER 4. FINANCIAL MARKETS ...................................................... 65

4.1. FOREIGN EXCHANGE MARKET ................................................................................. 65

4.2. CREDIT AND DEPOSIT MARKET ................................................................................ 66

4.3. INTERBANK CREDIT MARKET .................................................................................... 71

4.4. SECURITIES MARKET .................................................................................................. 76

4.5. BANK MANAGEMENT FUNDS ..................................................................................... 83

CHAPTER 5. PAYMENT SYSTEM OF THE REPUBLIC OF BELARUS ........................................................................................................ 85

CHAPTER 6. MACROPRUDENTIAL MEASURES ................................ 90

6.1. SYSTEMIC RISKS ........................................................................................................... 90

6.2. FINANCIAL SECTOR ASSESMENT PROGRAM ........................................................ 101

6.3. ASSET QUALITY REVIEW ........................................................................................... 104

6.4. INSTITUTIONAL MEASURES ..................................................................................... 107

APPENDICES ............................................................................................... 112


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EXECUTIVE SUMMARY

Financial stability is the state of the financial system, at which banks and non-bank financial institutions and other financial intermediaries, the financial market and the payment system carry out the activities inherent thereto in a due manner and are capable to carry out such activities in the case of the destabilizing impact of domestic and external factors.

In 2016, financial stability in the country was ensured and the country’s financial sector remained stable versus the major risks. The key financial stability indicators were within acceptable ranges. Regulatory capital adequacy in the banking sector as a whole totaled 18.6% as at January 1, 2017. It is higher than the minimum value set with respect to a separate bank and is in line with the regulatory capital adequacy level in the neighboring countries and the countries which are the trade partners of the Republic of Belarus. In 2016, all banks met the minimal regulatory capital requirement.

The positive dynamics of the absolute values of the insurance sector development in the Republic of Belarus is being preserved. The segment of leasing organizations is being actively developed. The stable and smooth functioning of the country’s payment system was ensured, key risks were limited, and the threats of their transformation into the systemic risk was prevented from happening.

As at July 1, 2016, the official monetary unit of the Republic of Belarus – the Belarusian ruble – was redenominated. The corresponding decision was made by Edict of the President of the Republic of Belarus No. 450 dated November 4, 2015. The redenomination was carried out by means of replacement of circulating banknotes of the 2000 series by the banknotes and coins of the 2009 series in proportion of 10,000 Belarusian rubles of the 2000 series versus 1 Belarusian ruble of the 2009 series.

The main external challenges for the stability of the financial system were the instability in the global oil commodity markets and reduction of oil deliveries from the Russian Federation in 2016 H2. A sharp reduction in the price for oil in the global markets at the beginning of 2016 led to the depreciation of the Russian ruble exchange rate versus the US dollar and resulted in the depreciation of the national currency with a view to maintaining the competitiveness of the national goods in the external


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markets. Taking into account the high level of assets dollarization it caused a considerable growth of the banking sector’s credit risk.

In 2016, the growth of the global economy slowed down to a slight degree compared with 2015 due to the deceleration of the growth rates of the industrialized economies. At the same time, in the Russian Federation – the major trade partner of the Republic of Belarus – the economic situation was gradually improved.

Macroeconomic situation in the Republic of Belarus in 2016 was characterized by the recovery of the economic activity in the second half of the year after its considerable decline in 2015.

The credit risk was still the most significant one as to the amount of potential losses for banks. The share of bad assets in the assets exposed to credit risk totaled 12.8% as at January 1, 2017, having grown over the year by six percentage points.

At that, the banks’ credit risks and the government finances sector’s risks are complementing and intensifying each other due to the fact that around 18% of the banks’ credit portfolio are guaranteed by the Government and local authorities and state-owned enterprises account for the considerable part of borrowers. Fiscal risk potential under the liabilities owed to the Belarusian banks is evaluated in the amount of 8-10% of the GDP.

The share of bad assets grew, to a great extend, due to the worsening of the financial indicators of activities of the real sector’s enterprises, primarily, the state-owned ones, against the background of low economic activity. Another factor of growth of the credit risk potential is a significant share of liabilities owed to banks in foreign exchange in the enterprises’ debt under credit in the absence of the corresponding receipts in foreign exchange.

Financial condition of the nonfinancial institutions sector in 2016 saw no significant changes compared with 2015. The actual settlements discipline worsened, with high debt load being still in place. At the same time, a number of positive changes was noticed: the share of unprofitable and low-profit enterprises went down, net losses of loss-making enterprises were reduced, and the share of loss-making economic entities in the total number of organizations declined.

A number of decisions aimed at improving financial stability of the largest borrowers was taken in 2016. However, despite of them, the problem aspects in the activities of certain enterprises are getting stable character,


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which is an indication of one of the major problems of the Belarusian economy – low investment return of financial recourses and inefficiency of their distribution among the real sector’s branches.

High dollarization of banks’ assets was still in place – at the end of the year the share of the operating banks’ assets in foreign exchange totaled 61.7%. As at January 1, 2017, the share of foreign exchange deposits in the overall structure of households’ bank deposits totaled 76.3%. At the same time, in 2016 the trend towards reduction of the level of banks’ assets and liabilities dollarization was observed.

A significant volume of gross external debt, which developed in the sectors of the economy, bears a risk for the financial stability of the country, including, due to the high price of servicing it. The total payments designed to repay the principal amount of gross external debt and servicing it (excluding repayment of trade credits and banks’ short-term liabilities) amounted in 2016 to USD 6.3 billion (interest and other payments accounted for 22.2% of this amount), which is equivalent to 13.2% of the GDP, or 21.2% of goods and services export.

In 2016, the situation in the domestic foreign exchange market improved compared with the previous year and was characterized by the establishment of the considerable net supply of foreign exchange on the part of households and reduction of net demand in the segment of enterprises.

The level of systemic bank risk in 2016 reduced due to the shrinking of the credit gap practically to zero by the end of the period under review, surplus of liquidity, as well as certain improvements in the banking sector’s position versus the other countries in 2016 Q4. At that, 2016 witnessed a certain reduction of the banking sector’s systemic risk concentration.

At the same time, the attained balance is unstable and the potential of financial risks remains at a high level. High credit risk in the banking sector caused by the low efficiency of the state-owned enterprises’ activities, dollarization of banks’ balances, as well as significant level of fiscal risks and external debt were the key threats to financial stability in 2016.

Under the conditions of the above-mentioned challenges and problems the system of measures designed to ensure financial stability is implemented in the country.

An inter-agency consulting and coordinating body – Financial Stability Council – was established in 2016 and is operating with a view to


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strengthening the system of financial security and coordinating the measures designed to raise financial stability.

In 2016 H1, the Republic of Belarus cooperated with the IMF and the World Bank within the Financial Sector Assessment Program (FSAP). The FSAP mission assessed the progress achieved in ensuring compliance with the international standards in the field of the banking sector supervision, insurance area and financial market infrastructures. The experts noted significant success in implementing the process of integrated banking supervision in Belarus and ensuring stable functioning of the payment system. The FSAP mission also assessed the development of corporate management in the state-owned financial institutions, financial reporting standards and audit practices, the measures aimed at securing creditors’ rights and legal basis of insolvency regulation, as well as designing the strategy of the digital banking development by the National Bank.

As part of the FSAP, the stress-testing of the banking sector’s stability was carried out independently by the experts of the National Bank, 11 largest banks and the IMF. The stress-tests were based on the same macroeconomic scenarios for 2016-2018, which reflect the main risks – longstanding slowing-down of the growth rates in Russia and in the world as a whole due to the low or falling-down prices on energy, depreciation of the national currency exchange rate, and increase in interest rates.

The results of stress-tests, which were obtained by the National Bank and banks, are, on the whole, in line with the IMF’s assessments and evidence the adequate sustainability of the Belarusian financial institutions. At the same time, in the case of the negative development of the macroeconomic situation, separate banks will be in need of additional capitalization.

Based on the results of assessments, the National Bank and the Government of the Republic of Belarus organized the work aimed at implementing the FSAP mission’s recommendations, in particular, the plan of actions designed to implement recommendations made in follow-up of the Program of assessment of the financial sector of the Republic of Belarus, the implementation of the majority of which is scheduled for the next 3-5 years, was developed.

In July 2016, a special audit of nine largest Belarusian banks was carried out as to the assets quality assessment by the most authoritative


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international audit companies. This procedure was aimed at determining possible losses under banks’ credit portfolios, caused both by the worsening of the debtors’ financial condition and general economic situation, as well as assessment of the impact of these losses on the banks’ capital.

The assets quality review (AQR) revealed the potential violation of the capital adequacy requirements in three banks. These banks developed and submitted to the National Bank the plans of measures, which are designed to ensure regulatory capital adequacy and envisage procedures aimed at reducing the credit risk accepted by banks, including by means of improving the quality of security under granted credits.

Partial transfer of bad assets to the JSC “Asset Management Agency”, which was established in 2016, was geared towards resolution of the banks’ bad debt.

With a view to ensuring the stable functioning of the banking sector and developing efficient measures designed to release the banks of the Republic of Belarus from the bad assets the work aimed at implementing the project on establishing the market of bad assets in the Republic of Belarus was organized at the National Bank. The main strategic objectives of this project are:

- a complex analysis of factors hindering formation of the bad assets market in the Republic of Belarus;

- a stimulation of activities designed to release the banks from the bad assets, improvement of the methods and forms of state participation; and

- a facilitation of formation of the institutional, functional, and legal environment to establish efficient market of the banks’ bad assets.

In 2016 a number of steps was taken in the area of imroving efficiency of managing state-owned enterprises: a stage-by-stage reduction of directed lending to state-owned enterprises continued; targeted gross indicators for state-owned enterprises were partially substituted by the efficiency and profitability indicators; and primary basis for increasing the efficiency of monitoring state-owned enterprises and analysing risks was laid.


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CHAPTER 1. EXTERNAL AND INTERNAL MACROECONOMIC RISKS The main external factors which made an impact on the development of the Belarusian economy in 2016 were instability in the global raw materials market of oil and potash fertilizers in the first half of the year and reduction of oil deliveries from the Russian Federation in the second half of the year.

In 2016, the raw materials and goods markets were characterized by high volatility. A significant factor was uncertainty as to the decision on limiting the crude oil production by the countries-suppliers of oil of the OPEC and the countries, which are not the OPEC members. The global oil prices have been recovering since 2016 Q2. The price for Brent oil grew up from USD36.5 per barrel in 2016 Q1 to USD51.6 per barrel in 2016 Q4.

The agreements on the reduction of the crude oil production by the countries being the major crude oil producers, which were reached in November 2016, made the major impact on the oil quotations. But, the high level of oil stocks and a slow growth rate of the global economy may be the reasons for further formation of oversupply in the oil market and preclude from declaring the formed fundamental changes in the short-and-medium term in the explicit manner. Prices for Urals oil in 2016 Q4 totaled USD47.9 per barrel, a 9% growth compared with Q3.

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70

90

110

150

250

350

450

550

650

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV 2011 2012 2013 2014 2015 2016

Oil prices, USD

Price per ton of oil imported in the Republic of Belarus

(left-hand scale)

Price per barrel of Urals oil (right-hand scale)

Source: the NBRB


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The global market of potash fertilizers was characterized in 2016 by low demand due to a large volume of stocks accumulated by the importers.

In 2016, the situation in the potash fertilizers market was complicated: the prices were declining and the negotiations for new contracts were protracted due to the large volume of stocks accumulated by the importers. The analysts forecasted impossibility of stabilizing the potash market if the agreements of major importance for the branch won’t be signed.

In mid-2016 the Belarusian Potash Company signed agreements on the delivery of fertilizers with India and China, that led to the growth of physical volumes and value of potash fertilizers exports.

The prices for potash fertilizers exported by the Republic of Belarus

remained practically unchanged in 2016 Q4 compared with the previous quarter: a drop by 0.8%.

In 2016, the growth of the global economy slightly slowed down compared with 2015 due to the decline in the volumes of production in the industrialized countries. At the same time, the economic situation in the Russian Federation – the main trade partner of the Republic of Belarus – was gradually improving.

According to the assessments of the International Monetary Fund (hereinafter – the “IMF”), the global economy grew in 2016, on the whole, by 3.1% versus 3.2% a year earlier, with the growth rates in the industrialized countries going up by 1.6% (a 0.5 percentage point decrease on the previous year) and in the transition economies and developing countries – by 4.1% (the same as in 2015). The following main factors contributed to the slowing

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I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV 2010 2011 2012 2013 2014 2015 2016

Dynamics of wold prices for potash fertilizers, USD per ton

Source: the NBRB.


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down of the global economic growth: slowing down of the economic growth in the industrialized countries and decline in global trade.

In 2016, the consumer price index (hereinafter – the CPI) totaled 100.7% (100.3% in 2015) in the industrialized countries and 104.5% in the developing countries (104.7%).

The economy of the euro area grew in 2016 by 1.7% (a decline by 0.3 percentage point compared with 2015). At that, the growth rates of its economy have been higher than those of the American one for the first time since 2008.

The economic situation in the Russian Federation was characterized in 2016 by the manifestation of the attributes of the revival of the economic activity. The real GDP in 2016 (according to the first assessment of the Rosstat) dropped by 0.2% versus 2015, compared with a decline by 3.7% in 2015. At that, the annual growth rate of the output in Russia was evaluated as positive in 2016 Q4 and inflation went down to a considerable degree: consumer prices went up by 5.4% over 2016.

Macroeconomic situation in the Republic of Belarus in 2016 was characterized by the recovery of economic activity in the second half of the year following its considerable decline in 2015.

Despite a decline in the volumes of production under certain types of activities related to oil processing and in construction, the growth of production of agricultural products, transport services, and recovery of industrial production in 2016 H2 were conducive to the overall improvement of situation in the Belarusian economy. In 2016 (according to the first assessment), the volume of the GDP dropped by 2.6% versus 2015 (in 2015 – by 3.8%).

Decline in consumer activity, especially in 2016 H2, made an impact on the volume of retail turnover and services provided to households. Retail turnover declined in comparable prices in 2016 by 4.1% (by 1.3% in 2015). Paid services to households went down by 4.4% (by 2.3% a year earlier).

An investment activity was still low. In 2016, investment in fixed capital dropped in comparable prices by 17.9% (in 2015, by 17.5%).

In 2016, inflation was slowing down. Over the year, the CPI was lower than its level in 2015 by 1.4 percentage points, totaling 110.6%.


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Foreign trade turnover dropped in 2016, but not to a such considerable degree as a year earlier, that was due to the recovery of economic activity in the countries – main trade partners in 2016 H2.

Reduction of external turnover of goods and services of the Republic of Belarus totaled 9%. Imports of goods and services went down by 8.7% to USD29.8 billion under the influence of the change in domestic demand; exports – by 9.2% to USD29.8 billion that was, mainly, due to a decline in global prices for energy resources. Balance of foreign trade in goods and services in 2016 was negative in the amount of USD27.3 billion (in 2015, the balance was positive totaling USD121.2 million).

A decline in investments in fixed capital by 17.9% in 2016 compared

with 2015 resulted in the decreased investment import (by USD0.6 billion, or by 17.6%) and intermediate import (by USD1.6 billion, or by 8.5%). Import of consumer goods dropped by USD0.6 billion, or by 7.9%.

A positive balance of receipts under export and payments under import dropped from USD2.7 billion in 2015 to USD2 billion in 2016. Reduction of global prices for oil and oil products led to shrinkage of the share of the US dollar and the euro in receipts in favor of the Russian ruble.

5.5 5.9 2.3 2.5

18.1 14.4

-7.1 -6.5 -3.4 -2.8

-19.2 -17.6

-40

-30

-20

-10

0

10

20

30

2015 2016

Structure of foreign trade in goods

Intermediate goods

Investment goods

Consumer goods

Exp

ort

Impo

rt

USD

bn

Source: the NBRB


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Shares of currencies in receipts and payments in foreign trade, %

2015 2016

USD Euro Russian

ruble USD Euro Russian

ruble Receipts from export of goods and services, incomes and transfers

26.7 36.7 33.7 25.9 31.2 40.1

Payments under import of goods and services, incomes and transfers

27.8 25.6 45.0 24.5 26.8 46.7

Flexible exchange rate policy made it possible to maintain the price competiveness of the Belarusian export in 2016.

Over 2016, the dynamics of the real effective exchange rate made a positive impact on the competiveness of the Belarusian goods in foreign markets.

The real effective exchange rate of the Belarusian ruble, as measured by the producer price index, depreciated due to the weakening of the nominal effective exchange rate of the Belarusian ruble since early 2016 by 12.7%.

Improvement in the current account and increase in the capital inflow under the financial account contributed to the formation of the

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-20.0

-10.0

0.0

10.0

20.0

30.0

2010 2011 2012 2013 2014 2015 2016

Change in indexes of the Belarusian ruble real exchange rate to the currencies of the countries which are major trade partners, as measured by the price index of

industrial producers (to December 2009) %

Source: the NBRB.


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surplus of the balance of payments. At the same time, investment attractiveness of the Republic of Belarus in 2016 was still at a low level.

Where in 2015 the net inflow of capital under the financial account totaled only USD0.7 billion (1.2% of GDP), in 2016 it amounted to USD1.3 billion (2.7% of GDP). In 2016, current account deficit totaled USD1.7 billion (3.6% of GDP), having dropped by 7.6% compared with 2015.

Foreign Direct Investment (FDI) in 2016 stood at USD1.2 billion (2.5% of GDP), compared with USD1.5 billion (2.7% of GDP in 2015), with the reinvested incomes worth USD0.7 billion accounting for its major part. In 2016, net inflow of direct investments to the non-financial sector of the economy, excluding the amount of reinvested incomes, totaled USD0.5 billion, being higher than the amount obtained in 2015 by USD0.2 billion.

The budgetary policy in 2016 was aimed at ensuring well-balancing.

In 2016, the consolidated budget of the Republic of Belarus ran a surplus of 1.3% of GDP (in 2015, 1.8%). According to the preliminary data, its revenues amounted to BYN28.5 billion (30.2% of GDP). The expenses of the consolidated budget totaled 29.0% of GDP.

The republican budget for 2016 also ran a surplus of 1.0% of GDP (1.7% of GDP in 2015).

1.1 0.7

-0.3

0.8 0.4

0.5

-0.9

0.4

-0.7

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2015 2016

Main items of the capital inflow under the financial account

Attraction of funds by enterprises

Attraction of funds by banks

Attraction of FDI on net basis

Attraction of funds by the Government and the National Bank (with account of attraction of credits to finance the balance of payments)

Reinvested income

USD

bn

Source: the NBRB. .


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A significant volume of gross external debt in the sectors of the economy bears risk for the country’s financial stability, including, due to the high price of servicing it.

Total payments to repay the principal amount of gross external debt and service it (excluding repayment of trade credits and banks’ short-term liabilities) amounted in 2016 to USD6.3 billion (interest and other payments accounted for 22.2% of this amount), which is equal to 13.2% of GDP, or 21.2% of goods and services export.

The Government external debt of the Republic of Belarus amounted as at January 1, 2017 to USD13.6 billion, having grown over 2016 by USD1,198.9 million, or by 9.6%, adjusted for the currency translation differences. In 2016, the Government attracted external loans in the amount of USD1,934.9 million; repaid – USD892.4 million.


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CHAPTER 2. NON-FINANCIAL SECTOR In 2016, financial condition of the non-financial organizations sector saw no significant changes compared with 2015. At the same time, some positive changes manifested themselves: the share of unprofitable and low-profit organization went down, net losses of loss-making enterprises declined, and the share of loss-making economic entities in the total number of economic entities decreased.

In 2016, non-financial organizations sold products, goods, works, and services by 1.2% more, in real terms1, than in 2015 (a year earlier the proceeds dropped by 4.7%).

The profit from the sale of products, goods, works, and services declined in real terms by 1.6%, with the pre-tax profit growing by 28.9%, and net profit – by 43.6%.

The share of unprofitable and low-profit enterprises (with profitability ranging from 0% to 5%) calculated with respect to the total number of reported organizations, went down in 2016 by 1.9 percentage points and totaled 58.3%.

In 2016, 19% of organizations were in the red compared with 21.7% in 2015. The amount of net losses dropped 1.6 times. The amount of net losses per loss-making organization averaged BYN1.8 million in 2016.

1 Adjusted for the GDP deflator

.

48.6%

24.7%

19.2%

3.9% 3.6%

Grouping of organizations by return on sales in 2015

0-5

5-10

10-20

20-30

>30

45.7%

24.7%

21.6%

4.5% 3.5%

Grouping of organizations by return on sales in 2016

0-5

5-10

10-20

20-30

>30


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In 2016, the actual settlements discipline deteriorated, with high debt load of the non-financial sector of the Belarusian economy being still in place.

A decline in monetary receipts to the enterprises’ accounts led to an increase in 2016 in the shares of overdue accounts payable and receivable in their total amounts (from 16.4% as at January 1, 2016 to 17.3% as at January 1, 2017 and from 22.4% to 22.9% respectively).

As at January 1, 2017, 75.2% of organizations had overdue accounts

receivable (74.4% a year earlier) and 64.4% of organizations had overdue accounts payable (64.6% a year earlier). The continuation of the trend towards an increase in these shares may adversely affect the non-financial organizations’ creditworthiness in the future.

The total debt load coefficient2 of organizations dropped in 2016 by 6.3 percentage points, amounting to 691% as at January 1, 2017.

2 Ratio of total accounts payable to average monthly revenues from the sale of products.

8 10 12 14 16 18 20 22 24 26

01.01.2014 01.07.2014 01.01.2015 01.07.2015 01.01.2016 01.07.2016 01.01.2017

%

Share of overdue accounts receivable and payable in total amount thereof

Accounts receivable Accounts payable Source: the Belstat.

55 60 65 70 75 80 85 90

01.01.2014 01.07.2014 01.01.2015 01.07.2015 01.01.2016 01.07.2016 01.01.2017

%

Source: the Belstat.

Ratio of finished stock and average monthly volume of production


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In 2016, a number of decisions aimed at improving financial soundness of the largest borrowers was taken. However, the problem aspects in the activities of certain enterprises turn stable, that indicates one of the major problems of the Belarusian economy – low investment return on financial resources and inefficiency of their distribution among the real sector’s branches.

The amount of withdrawn circulating funds in the stocks of finished goods was still high. As at January 1, 2017, the stocks of finished goods in the industrial enterprises’ warehouses totaled BYN3,659.7 million, having grown over the year by 9.3%.

An inter-agency working group established by the mutual decision of the Council of Ministers and the National Bank was operating in 2016, the activities of which were aimed at tackling the tasks of supporting the real sector of the economy, ensuring provision of credit resources to enterprises under the conditions of deterioration of their financial condition and lowering of the ability to use their own credit obligations due to negative macroeconomic trends.

The decisions, which were taken at the meetings of the inter-agency working group, were aimed at improving financial soundness of the largest borrowers. For this purpose, the banks redistributed the debt burden on the borrowers as pertains to the change in maturity, lowering of interest rates and provision of a grace period (installment plan) for the payment of interest. As at January 1, 2017, debt of the top 100 borrowers totaled BYN13.6 billion, the volume of their debt refinanced by banks – BYN5.5 billion.

But, despite the debt refinancing and implementation of certain support measures, financial condition of many enterprises being considered is still complicated, and the problem aspects in activities of some of them turn stable. A high level of debt burden is observed against the background of the low level of paying capacity. A number of enterprises take inadequate measures designed to reduce expenses and improve their financial condition, including by means of alienating non-core assets. Individual enterprises have low level of use of production capacities and considerable stocks of finished products.

It should be noted that state-owned enterprises make the major impact on the growth of the bad assets’ share in the assets exposed to credit risk. As at January 1, 2017, the volume of the state-owned enterprises’ bad assets


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totaled BYN3.1 billion, having grown 2.7 times over the year; the share in the banking sector’s bad assets – 59.5%. In this regard, the risks generated by the state-owned enterprises of the real sector of the economy bear potential threat to the financial stability in the country. Unsatisfactory condition of a number of state-owned enterprises manifests one of the major problems of the Belarusian economy – low investment return on financial recourses and inefficiency of their distribution among the real sector’s branches. Agriculture is a case in point. The share of this branch in the GDP’s structure by the types of economic activities fluctuated during the last decade within the range of 7-8%, moreover, in recent years it even felt down to some extent. At the same time, the share of agricultural enterprises in the outstanding debt of the corporate sector of the economy under the credits of banks and JSC “Development Bank of the Republic of Belarus” amounted in different years to 13-14.5% (with the upward trend), being practically 2 times higher than participation of the agricultural enterprises in production of the GDP.

2011 2012 2013 2014 2015 2016 The share of agriculture in the structure of GDP, %

8.0 8.1 6.8 7.3 6.3 6.8

The share of agriculture in debt under credits, %

12.9 13.8 13.8 13.3 14.4 14.5

Interest rate on all banks’ credits in rubles, % 15.5 22.7 20.8 20.4 20.8 16.4

including credits to agriculture, % 7.4 13.9 15.9 13.5 10.7 8.5

The share of banks’ bad assets in the corporate segment, %

4.59 7.16 5.67 5.41 9.11 18.30

including in the agricultural branch, %

5.53 7.58 10.45 9.11 9.58 34.72

On the other hand, during 2011-2016 the share of banks’ bad assets in

the assets exposed to credit risk and placed in the agricultural branch was 1.5 times higher, on average, than in the corporate sector as a whole (in 2016, the excess was nearly twofold), while the interest rates on banks’ credits in the


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national currency for agricultural enterprises were always considerably lower than for enterprises of other branches (in separate periods – up to 2 times). Having regard to the form of ownership dominating in the agriculture, the above-mentioned factors underline once again the need for improving efficiency of the state-owned enterprises as the key factor of maintaining financial stability in the country.

The population’s debt under credit went down in real terms, with the households’ debt burden remaining practically unchanged compared with the previous year.

In 2016, the credit amounts in real terms (adjusted for the consumer prices growth) owed by natural persons to banks were down by 5.9% (by 2.5% in 2015). At the same time, households’ debt burden3 in 2016 remained practically unchanged and amounted to 12.3% as at early 2017 (as at early 2016 –12.2%) due to a decline in the population’s real monetary incomes.

In 2016, as well as in the previous years, households were a net creditor of the banking system of the Republic of Belarus. The natural persons’ debt to the banking sector amounted as at year-end 2016 to 37.5% of the volume of their deposits, as at year-end 2015 – 35.6%. At the same time, households’ debt in Belarusian rubles as at late 2016 exceeded the level of households’ ruble deposits by 57% (as at year-end 2015 – by 70%). Households’ debt in foreign exchange to the banking sector continued to decline due to the persisting ban on lending to households in foreign exchange, with the natural persons’ foreign exchange deposits going down as well.

In order to assess the degree of availability for households of purchasing housing it is necessary to consider the conditions, under which such purchasing is carried out. Since a significant part of population purchases housing on credit (on the market or soft terms), an efficient instrument of analyzing the availability of purchasing housing is the debt service-to-income ratio (DSTI), which represents itself the ratio of the flow of payments under the existing debt (including both the repayment of the principal amount under credit, as well as the payment of interest) to the amount of current expenses. In other words, the DSTI shows what share of income the borrower should regularly direct to repay credit (the level of debt burden).

3 The ratio of the debt under credits granted by banks to households to the annual volume of their income.


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The figure below represents the DSTI calculated for the family of two persons, each of which receives the average income for Belarus, under the condition that a credit for construction (purchasing) of a one-room flat of the area 40 square meters, which is located in the center of Minsk, was obtained.

The DSTI is given for different terms of lending.4 The heaviest burden

is on the borrowers using market lending (only in 2010 the corresponding DSTI dropped up to 55%, i.e. net income of one family member was sufficient for servicing debt). Through much of the last five years, the market DSTI amounted to over 100%, indicating the low level of availability of market lending for the majority of population of Belarus. Only at the end of 2016 the market DSTI dropped to 89%, with declining of the interest rates in the credit market being the key factor of this process.

4 Market lending – the loan amounts to 80% of the housing price, the interest rate is set on the conditions of a bank, and the term of lending is 25 years; preferential lending – the loan amounts to 90% of the housing price, the interest rate amounts to fifth part of the refinance rate, but no less than 5%, and the term of lending is 20 years; and preferential lending to the families with many (three and more) children – the loan amounts to 100% of the housing price, the interest rate amounts to 1%, and the term of lending is 40 years.

0

20

40

60

80

100

120

140

160

180

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Debt service-to-income ratio under different terms of lending, %

preferential DSTI market DSTI DSTI for families (3 and more children)


22

CHAPTER 3. FINANCIAL SECTOR

In 2016, the banking sector continued to play the dominant role in carrying out financial intermediation functions. At the same time, non-bank segments of the financial sector were developing at the outstripping rates.

In 2016, the financial sector’s aggregate assets5 amounted to BYN101.4 billion (having grown over the year by 3.6%), or 107.5% of the GDP, of which the share of the National Bank accounted for 21.1%, banks and non-bank financial institutions – 65.5%, insurance sector – 2.8%, leasing companies – 3.2%, JSC “Development Bank of the Republic of Belarus” – 5.9%, and State Institution “Agency for Guaranteed Repayment of Natural Persons’ Bank Deposits” – 1.4%. The share of assets of microfinance institutions and assets of the JSC “Belarusian Currency and Stock Exchange” does not exceed 0.05% of the financial sector’s assets on aggregate.

At the same time, over 2016 the share of banks and non-bank financial institutions in the financial sector’s assets dropped by 1.0 percentage point (with the nominal growth of the banks’ and non-bank financial institutions’ assets by 2.1%), while the shares of JSC “Development Bank of the Republic of Belarus”, the insurance sector and the segment of leasing companies grew

5Assets of the National Bank of the Republic of Belarus, banks and non-bank financial institutions, insurance sector, segment of leasing companies, microfinance organizations, JSC “Development Bank of the Republic of Belarus”, JSC “Belarusian Currency and Stock Exchange”, and State Institution “Agency for Guaranteed Repayment of Natural Persons’ Bank Deposits”.

21.1 66.4

2.6 3.0 5.5 1.3

Structure of the financial sector's assets as at January 1, 2016, %

National Bank

Banks and non-bank financial institutions

Insurance sector

Leasing companies Source: the NBRB.

21.1 65.5

2.8 3.2 5.9 1.4

Structure of the financial sector's assets as at January 1, 2017, %

Microfinance institutions

Development Bank

Belarusian Currency and Stock Exchange

Agency for Guaranteed Repayment of Natural Persons’ Bank Deposits Source: the NBRB.


23

by 0.4, 0.2, and 0.2 percentage point respectively, indicating the outstripping development of the non-bank segment of the financial market.

In 2016, the broad money supply-to-GDP ratio, which is an important indicator characterizing the overall level of development of the financial sector and the economy as a whole, stood at 35.7%, increasing by 1.8 percentage points compared with 2015.

3.1. BANKING SECTOR

As at January 1, 2017, the banking sector of the Republic of Belarus comprised 24 operating banks, including 19 banks with the participation of foreign capital. Over 2016, the state’s share in the banking sector’s aggregate authorized capital dropped from 82.0% to 80.3% and, at the same time, the share of foreign capital went up from 15% to 16.7%. The share of other investments remained at the level of 3.0%. As at January 1, 2017, 5 state-owned6, 5 private, and 14 banks controlled by foreign capital were operating. As at January 1, 2017, 5 banks underwent bankruptcy and liquidation procedures.

A high level of concentration of the banking sector’s assets and capital was still in place. As at January 1, 2017, five largest banks accounted for 79.1% of assets and 73.2% of capital of the banking sector (79.5% and 75.3% respectively in early 2016). The Herfindahl-Hirschman index7 calculated on the basis of assets grew to a small extent from 0.231 and 0.238. The same index calculated on the basis of capital declined from 0.234 to 0.219. The distribution of the banking sector’s assets and capital became more even to a slight extent. The Gini index8 calculated on the basis of assets and capital was 0.748 and 0.694 (0.767 and 0.729 as at January 1, 2016). 6 Here and hereinafter:

- state-owned banks (SOBs) – a group of banks with the majority interest in the authorized capital belonging to the Government agencies and legal persons of state ownership;

- foreign banks (FBs) – a group of banks with the majority stake in the authorized capital belonging to the foreign capital; and

- private banks (PBs) – a group of banks that are not included into SOBs and FBs groups. 7 The Herfindahl-Hirschman index reflects the extent of concentration of the indicator and takes on values from 0 to1. Value 0 corresponds to minimum concentration, less than 0.10 – to low concentration, from 0.10 to 0.18 – to average concentration, and above 0.18 – to high concentration. 8 The Gini index allows for evaluating the extent of disparity indicating how evenly one or another variable is allocated among the participants. Value 1 corresponds to the total concentration and value 0 – to the parity of all participants.


24

In 2016, the banking sector’s performance indicators were still at a high level.

In 2016, the banking sector earned profit of BYN1.0 trillion (before tax), a BYN0.29 billion, or 39.7%, increase on the previous year. One of the operating banks made nominal loss as at the year-end 2016. As at January 2017, the banking sector’s earned profit (after tax) totaled BYN884.9 million.

Growing profit of the banking sector made an impact on the improvement of the banking sector’s efficiency indicators, that manifested itself in the growth of the return on assets indicators (from 1.32% to 1.63%) and capital indicators (from 10.41% to 12.60%) of the banking sector.

Discrimination between constituent elements in the structure9 of the

return on equity of the banking sector shows that an increase in the profit margin and the level of risk were the main factors behind an upward pressure on the return on equity in 2016. At the same time, a decline in the return on the risk weighted assets and financial leverage curbed the growth of the return on equity. Dynamics of change in the profitability indicators had a multidirectional character over the year.

Over 2016, the banking sector’s capital adequacy indicators were higher than requirements set for an individual bank. The regulatory capital quality worsened to a slight degree. 9 Four components may be singled out in the structure of the return on equity: the profit margin; the return on risk-weighted assets; the level of risk; and the financial leverage. The profit margin is calculated as the ratio between profit (before tax) and net revenues from banking; the return on risk-weighted assets – as the ratio between net revenues from banking and risk-weighted assets; the level of risk – as the ratio between risk-weighted assets and all assets; and the financial leverage – as the ratio between assets and equity.

110 120 130 140 150 160 170 180 190 200 210 220 230 240

8 9

10 11 12 13 14 15 16 17 18 19

01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

%

%

Profitability of the banking sector (before tax)

Return on equity Return on assets*100 (right-hand axis) Source: the NBRB.


25

Since January 1, 2016, the regulatory capital has been calculated in line with the approaches specified by the international standards Basel III (the first official data on calculation in line with new approaches were obtained as at February 1, 2016).

Over 2016, the amount of the banking sector’s risk-weighted assets10 was up by BYN5.0 billion, or by 12.0% (in 2015, the growth accounted for BYN6.1 billion, or 17.2%). The regulatory capital adequacy changed to an insignificant degree – from 18.7% to 18.6%, with the prescribed requirement for an individual bank being 10%.

The dynamics of the regulatory capital adequacy ratio varied in different groups of banks. For example, the capital adequacy ratio of state-owned banks decreased from 19.7% in early 2016 to 17.7% as at January 1, 2017, despite a 19.1% growth of risk-weighted assets over the year. The capital adequacy ratio of foreign banks went up from 16.6% to 19.8%, with the risk-weighted assets of this group decreasing over 2016 by 0.3 percentage point. As for the group of private banks, the growth of risk-weighted assets by 22.4% had a negative impact on the capital adequacy ratio, which decreased from 25.4% to 24.1% over 2016.

In 2016, along with the growth of the aggregate amount of the banking sector’s Tier 1 capital (by BYN0.5 billion, or by 8.2%) banks were also raising their regulatory capital at the expense of the sources that generate Tier II capital. An increase in the registered authorized capital of banks and the revaluation of fixed assets became the main sources of growth of the banking sector’s regulatory capital in 2016.

10 Assets evaluated in terms of the level of credit, market, and operational risks for the purpose of calculating the regulatory capital adequacy.


26

In 2016, banks’ Tier II capital grew by BYN0.4 billion, or by 23.0%. As

a result, the quality of the regulatory capital worsened – the Tier II / Tier I ratio grew by 3.8 percentage points to 31.3% compared with January 1, 2016.

In 2016, credit risk was the most significant one to sustainable operation of the banking sector. This was associated with the potential of credit risk accumulated due to worsening of financial indicators of the enterprises of the real sector of the economy, primarily, of the state-owned ones, on the background of continuing decline in economic activity and heavy debt load on enterprises. Another factor of growth of the credit risk potential is a significant share of liabilities owed to banks in foreign exchange in the enterprises’ debt under credit in the absence of the corresponding receipts in foreign exchange.

In 2016, the banking sector’s assets exposed to credit risk dropped by 0.8% (or by 3.8% excluding exchange rate fluctuations) and totaled BYN40.2 billion in equivalent. In 2016, assets in the national currency grew by 1.2%, while assets denominated in foreign exchange, vise versa, declined by BYN0.9 billion in equivalent (by 7.1%). In 2016, the value of the indicator characterizing the overall level of the banking sector’s exposure to credit risk11 increased against the background of deceleration in credit processes and amounted to 59.8% by the end of the year (55.0% as at year-end 2015).

11 The ratio of assets weighted for credit risk for the purpose of calculating the regulatory capital adequacy to total assets.

10

12

14

16

18

20

01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

%

Banking sector's capital adequacy indicators

Regulatory capital adequacy Core capital adequacy (Basel II) / from February 1, 2016 Tier I capital adequacy (Basel III) Capital-to-assets ratio

Source: the NBRB.


27

In 2016, the credit risk profile (the structure of assets exposed to credit risk classified under risk groups) worsened against the background of declining volume of credit investments. The share of assets classified under Group I dropped by 7.3 percentage points to 71.5%. Accordingly, the share of assets forming Group II increased by 1.8 percentage points and stood at 14.6%. The shares of assets classified under Groups III, IV, and V accounted for 8.7% (a 3.8 percentage points increase in 2016), 2.2% (a 0.8 percentage points increase), and 1.9% (a 1.3 percentage points increase) respectively.

By the turn of 2017, the banking sector’s bad assets12 totaled BYN5.1 billion, growing over 2016 nearly 2 times (by 85.7%), or by BYN2.4 billion. Assets classified under Group V were responsible for the largest increase of 3.3 times, while assets forming Group IV increased 1.6 times, and assets forming Group III grew 1.8 times.

12 Assets classified under Groups III, IV, and V for the purpose of establishing special provision.

-10

0

10

20

30

40

01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

%

Growth of assets exposed to credit risk

Total assets Extended to economic entities Extended to households Source: the NBRB.

72.3

19.4 8.3

Structure of bad assets as at January 1, 2016, %

Group III Group IV Group V Source: the NBRB.

68.4

16.9 14.7

Structure of bad assets as at January 1, 2017, %

Group III Group IV Group V Source: the NBRB.


28

The share of bad assets in the banking sector’s total assets exposed to credit risk went up from 6.83% as at January 1, 2016 to 12.79% at the turn of 2017. The share of bad assets denominated in the national currency grew over the year from 6.26% to 12.41%; in foreign currency from 7.22% to 13.05%.

Debt under credit owed by a number of largest state-owned borrowers is classified under risk Group I and Group II due to the availability of government guarantees. At the same time, their financial stability indicators suggest that the debt owed by them may be classified under risk Group III, Group IV, and Group V. In the absence of government guarantees the share of the banking sector’s bad assets in the assets exposed to credit risk could be larger.

The volume of prolonged debt grew over 2016 by 88.1%, uncollectable debt written off the balance sheet – by 60%, with the banking sector’s loan portfolio13 declining by 4.9%.

Dynamics of a credit gap, i.e. deviation of the current level of credits issued to the economy from the long-term equilibrium trend (the level of credit debt which is considered to be normal for the given country having regard to its historical experience and the current macroeconomic and monetary conditions of functioning), may be an assessment of the credit risk potential in future. The carried out assessments of credit risk evidence that by the end of 2016 the credit gap approached the equilibrium. In other words, at the end of the period under review the debt under credit did not make any significant pressure on the formation of imbalances in the economy.

13 Legal persons accounted for the bulk of debt written off the balance sheet – 89.7%.


29

The legal persons’ loan portfolio was the main source of credit risk. The level of systemic risks in the sphere of lending to households remained very low.

The dominating part of credit risk of the banking sector is concentrated in the legal persons’ loan portfolio. As at January 1, 2017, the corporate sector accounted for 68.9% of assets exposed to credit risk. The structure of assets by types of economic activity remained practically unchanged during the year. According to the data of banking reporting: the processing and mining industry accounted for 52.6% of the banks’ total debt under credit; wholesale and retail trade, repair of cars and motor cycles – 16.5%; and agriculture, hunting and forestry – 10.0%.

Lending to entities of the agricultural, forestry and fishing industries, economic entities of the construction industry and transactions involving real estate poses the highest risks: as at January 1, 2017, the share of bad assets in banks’ assets exposed to credit risk stood at 34.7%, 24.7 and 25.2% respectively (the share of bad assets in the industrial sector is equal to 17.1%).

Banks’ claims on natural persons grew over 2016 by BYN0.27 billion, amounting to BYN7.3 billion (a 3.8% growth) as at January 1, 2017. The share of bad assets in the assets loaned to natural persons totaled 0.79% as at late 2016.

At the end of 2016, a minor increase in the volumes of consumer lending was observed, while the share of non-performing consumer loans accounted for 2.93%, having declined by 1.02 percentage points since the beginning of

-20 -15 -10 -5 0 5 10 15 20 25

0

2,000

4,000

6,000

8,000

10,000

12,000

Credits to the economy in prices as of January 2000, BYN bn. Equilibrium level of lending (by the model), BYN bn. Credit gap (right-hand axis), %

Dynamics of the credit gap in the Republic of Belarus


30

the year. Bad debt on the loans for purchase of real estate was insignificant and accounted for only 0.16% as at January 1, 2016.

Banks with foreign capital and private banks that specialize in retail lending assume the highest risks in terms of lending to households. For example, if at January 1, 2017 state-owned banks accounted for 79.9% of retail lending and 16.0% of related bad assets, Belarusian banks with foreign and private capital accounted for only 21.1% of retail lending and 84.0% of bad assets.

The share of assets exposed to credit risk was extended by the banking sector to economic entities within financing the implementation of government programs and activities.

The share of legal persons’ debt – secured by guarantees of the Government of the Republic of Belarus and local executive and administrative bodies – in bank assets exposed to credit risk stood at 14.6% as at January 1, 2017 and did not exceed 16.5% during 2016 as a whole. The share of bad assets of this category grew almost twice over 2016 (12.06% as at the year-end).

The coverage level of established special provisions on the assets exposed to credit risk was 5.77%, having grown since early 2016 by 1.04 percentage points. The level of coverage of bad assets by actually established provisions thereon amounted to 33.9% as at the end of the year.

In 2016, the practice of rendering financial support to the economic entities by means of providing a grace period (payment by installments) in repaying credits issued to finance government programs and measures continued due to the increased level of failures in repaying credits and growing level of bad debts. In particular, as at January 1, 2017, banks and the JSC “Development Bank of the Republic of Belarus” provided a grace period (payment by installments) in repaying debts under credits to the organizations of the agricultural complex worth BYN1,519.1 million within the measures established by Edict of the President of the Republic of Belarus No. 348 “On Measures Designed to Raise the Efficiency of Work of the Organizations of the Agricultural Complex” dated July 17, 2014.


31

In 2016, with a view to tackling the current problems of institutions of,

primarily, the private form of ownership, Edicts of the President of the Republic of Belarus on measures on financial recovery of legal persons were enforced. The analogous decisions of the Head of the state were drafted with respect to the organizations of the agricultural complex for their implementation in 2017.

In 2016, the banking sector maintained liquidity indicators values that were in excess of secure functioning requirements prescribed for an individual bank.

In 2016, the banking sector’s sensitivity to the potential deterioration in the quality of the loan portfolio remained at a high level.

The materialization of the scenario in which the quality of the banking sector’s loan portfolio is deteriorating would result in the failure of one bank (with its share of assets in total assets of the banking sector accounting for 1.4%) to comply with the regulatory capital requirements.

Furthermore, an additional capital of BYN12.8 million (BYN66.9 million as at January 1, 2016) would be needed in order that this bank comply with the prescribed requirement.

The banking sector would continue to incur significant losses if the above shock materializes – they would be 3 times as much as the profit earned by banks over 12 months (4 times as at January 1, 2016), amounting to the third part of the capital.

Stress testing results

Indicators 01.01.2016 01.10.2016 01.01.2017 Change

over quarter

over 12 months

Capital adequacy ratio, % Actual value 18.7 18.0 18.6 0.6 -0.1 Calculated value 13.9 13.2 14.1 0.9 0.2 Change -4.8 -4.8 -4.5 0.3 0.3

Losses in respect of profit over 12 months, times Ratio 4.0 4.1 2.8 -1.30 -1.20

Losses versus capital, % Ratio 29.3 30.4 29.1 -1.30 -0.20

The amount of additional investments in capital, BYR billion

Sum 66.9 91.3 12.8 -78.5 -54.1

The banking sector as a whole would be able to withstand potential deterioration in the quality of the loan portfolio: capital adequacy ratio would amount to 14.1%, with the prescribed requirement for an individual bank being 10%.


32

As at January 1, 2017, the banking sector’s liquid-to-total assets ratio stood at 30.8%, with the requirement for an individual bank being 20%, and the short-term liquidity ratio was 2.09, with the minimum requirement for an individual bank being equal to 1.

The liquidity coverage ratio14 calculated by banks in compliance with

International Standards Basel III reflects the situation with liquidity in 2016 and the banking sector’s vulnerability to the relevant risk fairly well. Meanwhile, this indicator is not deemed to be a prudential requirement and is used by the National Bank for monitoring liquidity. In 2016, the average weighted liquidity coverage ratio for the banking sector grew from 117.6% to 170.6%.

14 The liquidity coverage ratio (LCR) characterizes the ratio between the sum of highly liquid assets and net outflow of monetary funds during next 30 days. The LCR shows how existing unencumbered highly liquid assets enable the bank to continue its operation for at least one month in the context of hypothetical stressful situation which is included in the calculation of the indicator. More specifically, considered stress scenario suggests that such events as the outflow of the portion of deposits held by households, partial loss of major funding sources, and the growth of market volatility would take place and is taken into account in the LCR multiplying balances of various banks’ liabilities by corresponding coefficients subject to the probability of the above funds outflow. The LCR recommended value is 100%.

70

120

170

220

270

320

370

420

0

5

10

15

20

25

30

35

01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

%

Banking sector liquidity indicators

Liquid-to-total assets ratio Short-term liquidity*100 (right-hand axis) Current liquidity (right-hand axis)

Source: the NBRB.


33

In 2016, predominantly long-term lending in the context of insufficient

resources with corresponding maturities was conducive to the increase in the banking sector’s exposure to liquidity risk. Thus, in 2016 the gap between the banking sector’s long-term assets and liabilities grew almost threefold.

Households’ and economic entities’ funds constituted the main sources of replenishing the resource base of the banking sector in 2016.

In 2016, funds attracted by natural persons grew by 1.9%, or BYN0.39 billion. The volume of funds attracted from economic entities increased by 3.9% (by BYR0.47 billion).

In 2016, the amount of resources provided by the National Bank to the

banking sector went down by 75.3%, from BYN1.6 billion to BYN0.4 billion. The share of the National Bank’s resources in the structure of the banking sector’s liabilities went down to a considerable extend and stood at

70

100

130

160

190

220

250

280

310

01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

%

Liquidity coverage ratio by groups of banks

Banking sector Large banks Medium-sized banks Small banks Source: the NBRB.

8.3

2.5

19.2 32.3

3.0 19.0

15.7

Structure of liabilities as at January 1, 2016, %

Government NBRB Enterprises Households Banks Non-resident

Source: the NBRB.

9.8

0.6

19.5 32.2

2.9 17.7

17.3

Structure of liabilities as at January 1, 2017, %

Government NBRB Enterprises Households Banks Non-resident

Source: the NBRB.


34

0.6% as at January 1, 2017. The share of the Government’s resources increased by 1.6 percentage points to 9.8% (a decrease by BYN1.1 billion to BYN6.3 billion in absolute terms).

The size of gross external debt of the banking sector of the

Republic of Belarus in relation to aggregate banks’ liabilities and the National Bank’s gold and foreign exchange reserves is still high.

In 2016, the degree of the banking sector’s resistance as a whole became higher in respect of potential withdrawal by natural and legal persons of 20% of their funds.

Given a 20% outflow of deposits held by households and enterprises, 11 banks whose assets account for 88.1% of the total amount of the banking sector’s assets would lack liquidity (in early 2016, there were 10 such banks, with their assets accounting for 72.5% of the total amount of assets). If the scenario in question is materialized:

- 3 banks (60.2% of the total amount of assets) would fail to comply with the liquid-to-total assets ratio;

- 2 banks (1.9% of the total amount of assets) would fail to comply with the short-term liquidity ratio;

- 9 banks (86.2% of the total amount of assets) would fail to comply with the instant liquidity ratio; and

- 7 banks (73.3% of the total amount of assets) would fail to comply with the current liquidity ratio.


Indicators January 1, 2016

October 1, 2016

January 1, 2017

Change over the quarter

over 12 months

Instant liquidity ratio, % Actual value 214.6 163.6 142.3 -21.3 -72.3 Calculated value 56.6 27.7 24.4 -3.3 -32.2 Change -158.0 -135.9 -117.9 18.0 40.1

Current liquidity ratio, % Actual value 123.3 136.8 131.8 -5.0 8.5 Calculated value 64.9 58.9 71.0 12.1 6.1 Change -58.4 -77.9 -60.8 17.1 -2.4

Short-term liquidity ratio, times Actual value 2.1 2.4 2.1 -0.3 0.0 Calculated value 1.4 1.8 1.3 -0.5 -0.1 Change -0.7 -0.6 -0.8 -0.2 -0.1

Liquid-to-total assets ratio, % Actual value 32.0 28.8 30.8 2.0 -1.2 Calculated value 23.1 19.3 21.1 1.8 -2.0 Change -8.9 -9.5 -9.7 -0.2 -0.8

In the event of the shock materialization in the banking sector as a whole, the values of the current liquidity ratio and of the liquid-to-total assets ratio would be higher than the prescribed minimum requirements.


35

In 2016, the amount of the banking sector’s external debt fell by 8.1%, or USD0.5 billion, and amounted to USD5.98 billion as at January 1, 2017. Long-term funds (the maturity of which exceeded one year) dominated the structure of external borrowings. As at January 1, 2017, their share in the total amount of foreign debt stood at 65.3%.

As at January 1, 2017, Russia and Germany were the largest creditors of the banking sector of the Republic of Belarus. The Belarusian banks owe to the residents of these countries USD3.5 billion and USD0.7 billion in equivalent, respectively.

As at January 1, 2017, the Belarusian banks controlled by foreign capital attracted 55.1% of non-residents’ total funds in the banking sector, including banks controlled by Russian capital – 46.7%. The share of funds attracted from non-residents in the Belarusian banks’ liabilities went down from 19.0% to 17.7%.

The size of gross external debt of the banking sector of the Republic of Belarus in relation to aggregate banks’ liabilities and the National Bank’s gold and foreign exchange reserves is an identification of heightened risks to stable functioning of banks. As at January 1, 2017, the ratio of the banking sector’s external debt to the international reserve assets totaled 121.4%.

Liabilities to non-residents by country, %

57.0

12.9

3.8

2.8 2.7

2.2 2.2 14.4

As at January 1, 2016 Russia

Germany

Austria

Poland

Italy

Great Britain

Switzerland

Other countries Source: the NBRB.

58.1

11.8

2.3 2.4 2.5 2.0 2.0

16.3

As at January 1, 2017 Russia

Germany

Austria

Poland

Italy

Cyprus

Switzerland

Other countries Source: the NBRB.


36

In 2016, an increase in indicators of the banking sector’s open

foreign exchange position was responsible for a slight growth in its sensitivity to potential fluctuations in exchange rates of foreign currencies. Meanwhile the shares of the foreign currency constituent in the banking sector’s assets and liabilities went down over the year.

2016 saw an increase in indicators of the foreign exchange position characterizing the banking sector’s direct sensitivity to the risk of potential fluctuations in exchange rates of foreign currencies, an indication of the increase in the overall level of the banking sector’s exposure to foreign

In 2016, the degree of the banking sector’s resistance to the outflow of non-residents’ funds remained at a low level.

Given a 50% outflow of non-residents’ funds, there would be 14 banks lacking foreign

exchange liquidity, with the share of such banks’ assets standing at 81.3% of all assets of the banking sector (nearly 10 percentage points below the level as at the beginning of the year). In the banking sector as a whole, only one liquidity requirement set for corresponding liquidity ratio in all currencies – the current liquidity requirement (a decline up to 61.2%) – would be violated.



October 10, 2016

January 1, 2017


over 12 months

Instant liquidity ratio in foreign currency, % Actual value 176.5 131.3 123.2 -8.1 -53.3 Calculated value 55.5 27.3 44.2 16.9 -11.3 Change -121.0 -104.0 -79.0 25.0 42.0

Current liquidity ratio in foreign currency, % Actual value 109.6 108.0 109.8 1.8 0.2 Calculated value 56.7 40.4 61.2 20.8 4.5 Change -52.9 -67.6 -48.6 19.0 4.3

Short-term liquidity ratio in foreign currency, times Actual value 1.5 1.8 1.9 0.1 0.4 Calculated value 1.3 1.6 1.4 -0.2 0.1 Change -0.2 -0.2 -0.5 -0.3 -0.3

Liquid-to-total assets ratio in foreign currency, % Actual value 39.8 33.6 36.0 2.4 -3.8 Calculated value 32.4 25.1 29.3 4.2 -3.1 Change -7.4 -8.5 -6.7 1.8 0.7

In the event of the above shock materialization the following ratios would be below

the prescribed requirements: the current liquidity ratio at 10 banks (with the assets’ share of 74.8%), the short-term liquidity ratio at 5 banks (with the assets’ share of 9.7%), the instant liquidity ratio at 8 banks (with the assets’ share of 33.9%), and the liquid-to-total assets ratio at 5 banks (with the assets’ share of 8.5%).


37

exchange risk. Over the year, the ratio of the total open foreign exchange position to the banking sector’s regulatory capital was within the requirement prescribed for individual banks (no more than 10%), amounting to 6.98% as at January 1, 2017 (4.47% as at January 1, 2016).

In 2016, the overall majority of banks maintained long foreign exchange position. As at January 1, 2017, the indicator of the banking sector’s net open foreign exchange position accounted for 6.39% of the regulatory capital.

By the turn of 2017, the share of foreign currency claims in the total amount of clients’ debt on lending and other asset-related operations dropped to 56.2% (57.8% by the turn of 2016), while clients’ debt under credit in foreign exchange (in dollar terms) dropped by 13.2% over the year and in the national currency – by 2.2%. The share of attracted foreign currency resources in the total amount of the banking sector’s liabilities decreased from 67.3% to 64.7%.

2

4

6

8

10

12

14

16

18

01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

%

Banking sector's open foreign exchange position (OFEP)

Total OFEP-to-capital ratio Net OFEP-to-capital ratio Source: the NBRB.


38

In 2016, households preferred to place savings in deposits in Belarusian rubles. Natural persons’ deposits in the national currency grew by 12.4%, in foreign exchange (in the US dollar terms) went down by 9.5%. The share of the foreign currency constituent in the total amount of natural persons’ deposits attracted by banks declined over the year from 79.1% to 76.3%.

The share of funds in foreign exchange in the total amount of deposits held by economic entities in 2016 went down up to 63.7%, with the balance of deposits in foreign exchange (in US dollar terms) declining by 11.9% and the balance of enterprises’ funds in Belarusian rubles growing by 24.5%.

50.0

60.0

70.0

80.0

90.0

30.0

40.0

50.0

60.0

70.0

80.0

01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

%

Foreign currency constituents-to-total amount ratio

Clients’ funds Clients’ debt under credit Households’ funds (right-hand axis) Enterprises’ funds (right-hand axis)

Source: the NBRB.

The banking sector’s vulnerability to the devaluation of the national currency against foreign currencies grew in 2016 to an insignificant degree and was still at the low level.

As at January 1, 2017, 2 banks had short foreign exchange position with their insignificant share in total assets of the banking sector (10%). A 30% depreciation of the Belarusian ruble against foreign currencies would lead to a decline in the banking sector’s regulatory capital adequacy ratio by 2 percentage points, on the whole, and would stand at 16.6%, which is an indication of the banks’ high capacity to withstand foreign exchange risk.



October 1, 2016

January 1, 2017


over 12 months

Capital adequacy ratio, % Actual value 18.7 18.0 18.6 0.6 -0.1 Calculated value 16.4 15.6 16.6 1.0 0.2 Change -1.7 -2.4 -2.0 0.4 -0.3

Losses versus profit over 12 months, times Ratio -0.3 0.6 0.3 -0.3 0.6

Losses versus capital, % Ratio -2.1 4.3 2.8 -1.5 4.9


39

In 2016, the overall level of the banking sector’s exposure to interest rate risk went up. At that, the risk that banks may incur losses in case of changes in interest rates on assets and liabilities denominated in foreign currency was higher than the same risk under transactions in Belarusian rubles.

Key indicators characterizing the banking sector’s exposure to interest rate risk (the relative change in net interest income and economic cost of capital) attest to the increase in banks’ sensitivity to the changes in interest rates on claims and liabilities denominated both in the national currency and foreign exchange.

In 2016, the volumetric and temporal structure of assets and liabilities denominated in the national currency and sensitive to the changes in interest rates improved: positive cumulative interest rate gap between assets and liabilities in the national currency totaled BYN0.8 billion. Data for early 2017 showed that, given a 1% per annum change in the yield on claims and liabilities denominated in the national currency, the banking sector’s net interest income will change by 0.46% (by 0.07% in early 2016). The potential relative change in the economic cost of the banking sector’s capital will amount to 0.89% (0.76% in early 2016).

-20

-10

0

10

20

30

40

up to 30 days from 31 to 90 days from 91 to 180 days from 181 days to 1 year

over 1 year

%

Relative gap between Belarusian rubles-denominated assets and liabilities sensitive to the change in interest rates

January 1, 2016 January 1, 2017 January 1, 2016 - accumulation curve January 1, 2017 - accumulation curve

Source: the NBRB.


40

The banking sector’s exposure to the interest rate risk associated with financial instruments denominated in foreign exchange increased in 2016. The volumetric and temporal structure of assets and liabilities denominated in foreign exchange and sensitive to changes in interest rates worsened in 2016. The cumulative interest rate gap between claims and liabilities denominated in foreign exchange and with maturities of up to one year widened by BYN4.1 billion in 2016 and amounted to BYN5.8 billion as at January 1, 2017.

The relative change in the banking sector’s net interest income increased from 1.09% as at January 1, 2016 to 3.56% as at January 1, 2017, given a 1% per annum change in interest rates on assets and liabilities denominated in foreign exchange. At the same time, an increase in the net interest margin on financial instruments denominated in foreign exchange from 4.12% to 4.30% was observed in 2016. An increase, compared with the beginning of the year, in the potential relative change of the economic cost of the banking sector’s capital by 0.81 percentage points from 0.77% to 1.58% is also an indication of the increase in the banking sector’s exposure to the risk of change in the yield on assets and liabilities denominated in foreign exchange.

-25

-20

-15

-10

-5

0

5

10

15

up to 30 days from 31 to 90 days from 91 to 180 days from 181 days to 1 year

over 1 year

%

Relative gap between foreign exchange-denominated assets and liabilities sensative to change in interest rates

January 1, 2016 January 1, 2017 January 1, 2016 - accumulation curve January 1, 2017 - accumulation curve Source: the NBRB.


41

In 2016, the overall relative level of the banking sector’s exposure to

financial risks remained at the previous level.

As at January 1, 2017, given a 1,000 basis points upward movement of the yield curve in foreign exchange, the capital adequacy ratio would decline in 16 banks with their share of assets in the total amount of the banking sector’s assets accounting for 82.4% (in 13 banks accounting for 74.9% of assets as at January 1, 2016). However, the ability of the banking sector as a whole to withstand such shock would remain at high level. Stress testing results


October 1, 2016

January 1, 2017


over 12 months

Capital adequacy ratio, % Actual value 18.7 18.0 18.6 0.6 -0.1 Calculated value 18.7 17.6 17.4 -0.2 -1.3 Change 0.0 -0.4 -1.2 -0.8 -1.2

Losses versus profit over 12 months, times Ratio 0,0 0.2 0.6 0,4 0,6

Losses versus capital, % Ratio 0,2 1,9 6,5 4,6 6,3

As at January 1, 2017, the banking sector’s sensitivity to the upward movement of yield curves in the national currency saw no significant changes and in foreign exchange went up compared with January 1, 2016. The ability of the banking sector as a whole to generally withstand such shocks will remain at high level.

The parallel 1,500 basis points upward movement of the yield curve in

Belarusian rubles will incur the banking sector extra costs which would amount to the level of the annual profit made by banks. At that, the capital adequacy requirement of all banks would be higher than regulatory minimum. The banking sector’s regulatory capital adequacy ratio would stand at 16.8%.



October 1, 2016

January 1, 2017


over 12 months

Capital adequacy ratio, % Actual value 18.7 18.0 18.6 0.6 -0.1 Calculated value 17.2 16.3 16.8 0.5 -0.4 Change -1.5 -1.7 -1.8 -0.1 -0.3

Losses versus profit over 12 months, times Ratio 1.1 1.2 0.9 -0.3 -0.2

Losses versus capital, % Ratio 8.0 9.1 9.8 0.7 1.8


42

In 2016, the accumulated potential of credit risk made an upward pressure on the growth of the banking sector’s exposure to risks. But, the measures taken by the National Bank, which were aimed at restructuring the banks’ credit portfolio made in possible to reduce the impact of credit risk and improve the banking sector’s liquidity.

0.0 0.4 0.8 1.2 1.6 Credit risk

Liquidity risk

Foreign exchange risk

Interest rate risk

Return rate

Capital adequacy

Diagram of risks weighted for their significance, as at January 1, 2017

January 1, 2016 January 1, 2017

Source: the NBRB.

The diagram of risks is an integrated (aggregated) evaluation of the relative level of the

banking sector’s soundness which is based on a combination of the analysis of the dynamics of financial soundness indicators and the results of the banking sector’s stress testing within the foreseeable historic time period.

The scheme for plotting composite indicator which evaluates the level of risks in the

banking sector is based on the use of multiple indicators characterizing various factors affecting its soundness and employs the system of weighting coefficients which show the significance of each factor when identifying the overall level of risks.

The majority of weights in the suggested algorithm were assigned in an expert manner based on the experience and knowledge of the National Bank’s specialists. However, an expert survey into banks was conducted with a view to refining the evaluations of the significance of the main risk factors made by experts of the National Bank as well as enhancing the objectiveness of the integrated evaluation of the banking sector’s exposure to risks which made it possible to take into account their viewpoint when identifying the significance of the main characteristics of the banks’ soundness.


43

Dynamics of the banking sector’s level of risks

2015 2016 2017

01.01 01.04 01.07 01.10 01.01 01.04 01.07 01.10 01.01

Overall level of risks 7 8 9 8 5 8 7 6 5 Liquidity risk 5 5 5 5 4 4 3 2 2 Capital adequacy 8 7 7 6 6 7 7 6 7 Credit risk 5 5 6 7 3 6 7 7 4 Foreign exchange risk 6 9 8 6 5 6 6 6 5 Interest rate risk 3 5 4 3 2 4 1 1 5 Return rate 5 6 6 6 9 8 9 9 6

In 2016, the majority of banks noted the change in business activity in

the economy, deterioration in the financial standing of the borrowers and foreign economic factors as the main sources of risk. A significant impact on the increase in risks was also made by the policy designed to reduce interest rates, which was implemented over the year (a factor of change of interest rates in the domestic financial market).

Sources of risk Number of banks that noted corresponding

source

2016 Q1 2016 Q2 2016 Q3 2016 Q4

Change in prices for goods and services 1 0 1 2

Change in the business activity in the economy 21 21 23 23

Deterioration in the financial standing of debtors 25 25 21 21

Change in interest rates in the domestic financial market 5 12 15 9

Insufficient liquidity 7 4 3 1 Change in the situation in the domestic foreign exchange market 14 5 1 1

Change in the situation in the domestic stock market 0 0 0 0

Change in the situation in the domestic real estate market 3 4 6 4 Change in approaches to the regulation of the economic activity 0 0 0 0

Change in approaches to the regulation of banking 12 8 4 4

External economic factors 16 15 14 10

Increased competition in the banking sector 2 2 3 8

Operating incidents 0 0 4 0 The Republic of Belarus’s country risk from a bank shareholder’s viewpoint 5 4 2 4


44

3.2. INSURANCE SECTOR

As at January 1, 2017, 19 insurance companies, including eight state-owned companies and companies in which more than 50% of stakes were owned by the state (hereinafter – “state-owned insurance organizations”) carried out insurance activities in the insurance market of the Republic of Belarus; 29 insurance brokers conducted intermediary insurance activities15. Three insurance companies conducted exclusively voluntary life insurance and supplementary pension insurance according to the legislation, one company was involved in reinsurance activity.

Eight insurance companies were foreign-owned. In 2016, the share of foreign capital in the aggregate authorized capital of the insurance companies of the Republic of Belarus increased by 1 percentage point and totaled 4.1% (the quote of foreign investors’ participation in the authorized capital of the insurance companies of the Republic of Belarus is 30%).

Two insurance organizations (Belgosstrach and Beleximgarant) and an insurance organization which is involved, exclusively, in reinsurance (state enterprise “Belarusian National Reinsurance Organization”) have financial soundness rating assigned by international rating agencies. As at January 1, 2017, the rating of the above-mentioned organizations assigned by Fitch Ratings was “B-”, stable outlook16.

In 2016, the bulk of insurance business was still concentrated in 10 insurance companies (mainly state-owned17), which held leading positions in terms of assets values. In 2016, these 10 companies accounted for 93% of the insurance sector’s total assets.

In 2016, the insurers’ equity capital slightly increased, totaling BYN1.4 billion as at January 1, 2017. The share of the authorized capital in the insurance sector’s equity capital grew over the reported period to a small degree (by 0.4 percentage point) and amounted to 79.5%. The insurance organizations’ assets went up to a greater extent than their equity capital (by 11.9% and 4.7% respectively), that led to further decrease in the ratio

15 At that, three insurance companies and two insurance brokers are undergoing liquidation procedure; the decisions on termination of special permits (licenses) for insurance activities were taken with respect to one insurance organization. 16 RAEX rating agency (“Expert RA”, the Russian Federation) assigned “A” rating (high level of credibility) to the Public Joint Stock Insurance Company Ingosstrakh Insurance Company. 17 Share of the state-owned insurance companies’ assets, included in the said 10 companies, in the total amount of the insurance sector’s assets grew to a small degree – from 89.3% to 89.5%.


45

between the equity capital and the assets of the insurance sector – from 54.0% to 50.5%.

In 2016, the trend towards the growth of insurance premiums volume of both voluntary and compulsory insurance continued, with the state-owned insurance organizations still dominating.

In the year under review, insurance premiums collected by insurance companies of the Republic of Belarus amounted to BYN1 billion, a 20% increase, with the state’s share totaling 86.4%. The volume of state-owned companies’ insurance premiums amounted to BYN0.9 billion in the period under review (a 19.5% increase compared with 2015), including premiums on voluntary insurance – BYN0.4 billion (a 27.3% increase compared with 2015). In 2016, insurance premiums of non-state-owned insurance organizations amounted to BYN0.1 billion, a 24.2% increase compared with 2015.

The volume of insurance premiums under the voluntary and compulsory insurance amounted to BYN0.54 billion and BYN0.45 billion respectively. As a result of the outstripping growth of the voluntary insurance premiums their share in the overall insurance portfolio stood at 54.9%, a 2.8 percentage points increase compared with 2015.

In the segment of voluntary insurance premiums the highest growth was observed in voluntary life insurance (increment by 97.1%), medical expenses insurance (45.0%), insurance of business risk (41.2%), insurance of construction and installation risks (4.9 times), insurance of liability for non-performance (improper performance) of bonds issuer’s obligations (40.3%), and insurance of civil liability of air vehicles owners (41.4%).

Compulsory insurance of the civil liability of vehicles owners (23.4%), compulsory industrial-accident and occupational diseases insurance (15.2%), voluntary business property insurance (11.7%), voluntary natural persons’ property insurance (11.2%), and voluntary medical expenses insurance (5.6%) accounted for the dominating shares in the overall amount of the insurance premiums.

Overall market insurance premiums under the kinds of insurance associated with life insurance (life insurance and supplementary pension insurance) accounted for BYN86.7 million in the insurance market as a whole, the annual growth rate – 149.0%. The share of the mentioned kinds of cumulative insurance in the overall amount of the insurance premiums grew


46

by 1.7 percentage point compared with 2015 and amounted to 8.8% (the share of the Republican Affiliate Unitary Joint Enterprise “Stravita”, the affiliate company of Belgosstrakh, accounted for 75.1% of the insurance premiums under cumulative kinds of insurance).

The most important macroeconomic indicators characterizing the state and development of the insurance market – insurance premiums/GDP ratio and amount of insurance premiums per capita – amounted to 1.05% and BYN103.9 in 2016 against 0.92% and BYN86.6 in 2015. Insurers’ assets/GDP ratio totaled 3%.

Despite a positive dynamics of the absolute indicators of the insurance market development in the Republic of Belarus, the main macroeconomic indicators of the given segment of the financial market “lag behind” the respective indicators of the European states18. Along with that, among the Eurasian Economic Union (EEU) member - states, the Republic of Belarus is second only to Russia in terms of insurance premiums/GDP ratio values: Russia – 1.3%, Kazakhstan – 0.7%, Armenia – 0.6%, and Kyrgyzstan – 0.24%.

The outpacing growth of insurance premiums against the amount of insurance payments brought about a decrease in the share of insurance payments in the amount of insurance premiums.

According to the results of the activities in 2016, the insurance organizations ensured the outpacing growth of insurance premiums (20.1%) over the growth of the insurance payments. Over the year under review, the volume of the insurance payments totaled BYN0.54 billion, having grown by 14.4% compared with 2015. As a result, the share of insurance payments in the amount of insurance premiums totaled 54.7%, a 2.7 percentage points decrease against the 2015 level.

In 2016, insurance organizations continued to follow the earlier adopted approaches in implementing the underwriting policy, which made it possible to adequately assess the amounts of risks accepted for insurance during the entire insurance period. These approaches include, inter alia, improvement of conditions for insurance and the tariff policy. As a result, in the year under

18 Thus, in 2015, insurance premiums/GDP ratio averaged (in percent): in Europe – 7.0, the USA – 8.1, Great Britain – 10.8, France – 9.3, Germany – 6.2, Czech Republic – 3.7, and Poland – 3.2.


47

review, the combined loss ratio19 of the non-life insurance companies stood at 83% (93% in 2015).

With that, in 2016, the indicators of the insurance sector’s effectiveness significantly deteriorated.

According to the results of the financial and economic activities in 2016, profit earned by insurers totaled BYN130.1 million before taxation, a 38.7% decrease on the 2015 level. Net profit generated by the insurance sector as a whole dropped by 36.5% and amounted to BYN93.3 million.

In 2016, the return on equity20 and assets21 of the insurance sector amounted to 9.4% and 4.8% respectively due to the outpacing growth of the insurance companies’ equity over that of their profit.

Decrease of the insurance sector’s profit against 2015 due to accounting in the structure of profit for 2015 of the significant volume of income gained as a result of a significant depreciation in 2015 of the Belarusian ruble, led to both a drop in profit and a shrinkage of the sector’s profitability against 2015: return on equity dropped by 7.1 percentage points, of assets – by 4.2 percentage points. It is worth mentioning that in 2014, which is comparable to 2016 in terms of functioning, return on equity amounted to 8.9%, of assets – 5.4%.

The dynamics of indicators characterizing the level of the underwriting risk22 shows a low degree of the Belarusian insurance sector’s exposure to this risk.

One of the factors determining the degree of the underwriting risk is the adequacy of the amount of insurance reserves established by the insurer to the risks accepted for insurance, i.e. the adequacy of the insurance reserves.

As at January 1, 2017, the amount of insurance reserves established by the insurers of the Republic of Belarus totaled BYNR1.1 billion (a 23.1% growth compared with the state as at January 1, 2016), of which the mathematical reserves accounted for BYN0.35 billion and the technical reserves – BYN0.72 billion, with the annual growth rates being 36% and 19 The combined loss ratio is calculated as the ratio of the sum of insurance payments and change in provisions for losses and expenses associated with conduct of the case to the amount of collected insurance premiums. 20 The ratio between the volume of profit (before tax) earned by insurance companies over the year and the average annual amount of the insurance sector’ equity. 21 The ratio between the volume of profit (before tax) earned by insurance companies over the year and the average annual amount of the insurance sector’ assets. 22 Underwriting risk is a probability of making loss (actual results being below the target), as well as of a failure to perform obligations to the policyholders in full and in a timely manner due to an incorrect assessment of risks accepted for insurance.


48

18% respectively. A significant growth of mathematical reserves was caused by laying the insurer under obligation to transfer, when maintaining all kinds of insurance associated with life insurance, no less than 50% of profit earned from the investment of mathematical reserves funds and allocation thereof in addition to the guaranteed return provided in the insurance policy to increase the savings of the persons insured under such policy (paragraph 6 of Provision on the Insurance Activities in the Republic of Belarus approved by Edict of the President of the Republic of Belarus No. 530 dated August 25, 2006).

As at January 1, 2017, the ratio of the reserves established by the insurance companies to the average amount of insurance payments over the past three years stood at 239.0%, having grown over the year by 2 percentage points. Its value confirms that the Belarusian insurers reserved sufficient funds to pay the claims upon the occurrence of the insured events.

In 2016, the total amount of large claims paid by the country’s insurance companies totaled BYN40.3 million, or 3.95% of the average annual amount of the established insurance reserves (BYN23.6 million and 2.9% respectively in 2015). Thus, despite a certain growth of this indicator, the risk of a decrease in the amount of insurance reserves owing to large payments may be assessed as low.

In the year under review, the insurance sector’s equity capital adequacy ratio23 stood at 133%. A rather high value of the above-mentioned indicator gives evidence of the availability of additional sources of fulfilling by the insurance companies of their liabilities to policyholders in case of inadequacy of insurance reserves.

In 2016, the degree of exposure of the country’s insurance sector to market (stock market, foreign exchange, and interest rate) risks stood at a low level.

In 2016, the insurance sector’s exposure to stock market risk increased, while being at the low level. In 2016, the total sum of insurance companies’ investments in business entities’ and banks’ securities increased by 18.8%, amounting to BYN244 million, or 8.7% of the insurance sector’s assets as at January 1, 2017 (BYN205 million, or 8.1%, as at early 2016). The insurance sector invested significant monetary funds in the securities of state-owned banks – 44.6% of the total amount of assets. 23 Adequacy of the insurers’ equity is defined as equity/established insurance reserves value ratio.


49

The insurance sector’s exposure to potential fluctuations in exchange rates of foreign currencies may be assessed as low. In the course of 2016, the insurers’ assets in foreign currency exceeded relevant liabilities, resulting in a predominantly long foreign exchange position. As at January 1, 2017, the insurance sector’s net open foreign exchange position accounted for plus 33.9% of the aggregate amount of the equity capital (as at January 1, 2016 – 31.5%). Excess of open foreign exchange position over the volume of equity capital is conducive to protection of the insurers’ assets from devaluation and makes it possible to minimize the risk of losses caused by the growth in liabilities denominated in foreign exchange.

An exposure to interest rate risk is only inherent in insurance organizations providing long-term insurance which involves accumulation of monetary funds. The peculiar feature of this kind of insurance is incorporation in the insurance programs of payouts with a guaranteed return rate (guaranteed income rate) accrued on funds accumulated under insurance policies, which makes them sensitive to the change in interest rates. A small share of life insurance premiums (long-term insurance) in the overall structure of insurance premiums (as at January 1, 2017 – 8.8%) is conducive to a low degree of the insurance sector’s, as a whole, exposure to interest rate risk.

In 2016, the degree of the insurance sector’s sensitivity to credit risk remained low as well.

For the insurance sector, credit risk means the risk of the counterparties’ failure to perform their obligations under the agreements on reinsurance and investment (placement) of monetary funds, as well as other economic agreements.

As at January 1, 2017, total receivables of the insurance sector (excluding accounts receivable under payments of regular installment premiums) amounted to BYN135 million, including the receivables in arrears over 30 days – BYN10.2 million (as at January 1, 2016, BYN124.3 million and BYN10.5 million respectively), or 13.7% of the total amount of insurance premiums (15.1% in 2015).

In 2016, liquidity risk continued to be of minor importance for the country’s insurance sector stability.

The Belarusian insurance sector’s assets are traditionally characterized by a high degree of liquidity. As at January 1, 2017, the country’s insurance


50

companies placed 66.1% of assets on accounts with banks (current (settlement) accounts and accounts for managing funds received under term deposit agreements) or used them to purchase government securities. Thus, insurance companies were still able to regulate, without material losses, their liquidity through the purchase and sale of government securities that are freely traded in the market or through early withdrawal of funds from accounts for managing funds received under term deposit agreements.

As at January 1, 2017, the current liquidity ratio24 in the country’s insurance sector as a whole remained practically unchanged and stood at 116% (111% as at January 1, 2016). The level of current liquidity gives evidence that the insurance sector assets are sufficient for financial and economic activities and timely repayment of the term obligations.

3.3. OTHER FINANCIAL INTERMEDIARIES’ SECTOR

In 2016, the JSC “Development Bank of the Republic of Belarus” continued to strengthen its positions in the financial intermediation market. Credit risk, the level of which slightly decreased compared with 2015, continued to be the most significant one for sustainable functioning of the institution. The foreign exchange and liquidity risks were insignificant.

The JSC “Development Bank of the Republic of Belarus” (hereinafter – the “Development Bank”) – the main purpose of which is to improve funding for government programs and socially important investment projects – has been a big player in the financial intermediation sphere since 2012. In 2016, the Development Bank continued its activities in financing government programs and events, supporting export and small and medium entrepreneurship.

In the year under review, the Development Bank continued to perform a new function of assets manager in the interests of the state. The given function is stipulated in Edict of the President of the Republic of Belarus No. 257 “On Certain Issues of Purchasing Banks’ Assets Established in the Course of Lending to Enterprises of Woodworking Industry, and Specifying

24 The current liquidity ratio is defined as a ratio between monetary funds, short-term accounts receivable, financial investments and short-term liabilities and insurance reserves.


51

the Limit of Domestic Government Debt”, dated June 24, 2015 (hereinafter – Edict No. 257). For the purpose of implementation of Edict No. 257, the Ministry of Finance purchased assets and relevant rights under loans provided by the Belarusian banks (JSC “JSSB Belarusbank”, JSC “Belagroprombank”, “Belinvestbank” JSC, and JSC BPS-Sberbank) for modernization of woodworking enterprises. The total amount of assets purchased by the Ministry of Finance and transferred to the Development Bank for management totaled over BYN1.4 billion.

Within 2016, the assets of the Development Bank went up by 12%, totaling BYN6.1 billion as at January 1, 2017. In the year under review, the Development Bank’s revenues totaled BYN181 million, a 2% increase compared with 2015. The positive factor that influenced the revenues dynamics was the increase by 4.5% of net interest income against the 8% increase of net deductions to special reserves to cover potential losses under assets and operations which are not reported on the balance-sheet. The cost of risk (the ratio between net deductions to reserves and assets exposed to credit risk) amounted to 2.7% at the end of 2016, having dropped by 0.4 percentage point compared with the beginning of the period.

The excess of assets growth rate over the net interest income growth rate was conducive to the shrinkage in the net interest rate margin (after the establishment of reserves) from 4.4% to 3.6%. In 2016, the Development Bank’s return on assets amounted to 3.2%, having fallen by 0.7 percentage point over 12 months as a result of the outpacing growth rate of assets over that of profit.

In 2016, the regulatory capital of the Development Bank went up by 11% and amounted to BYN1.3 billion. At the same time, risk-weighted assets grew by 31.0%. This was responsible for the drop of the regulatory capital adequacy ratio from 35.0% to 30.5% over the year.

Taking into account the specific nature of its activity, the Development Bank is most of all exposed to the credit risk. In 2016, the total volume of credits provided to the customers grew by 14%, amounting to BYN3.7 billion at the year-end. The balance of bad and prolonged debt accounts decreased by 48% (with the balance of prolonged debt increasing by 24.6%), while the share of bad debt in the total value of the credit portfolio dropped from 5.8% to 2.6%.

http://www.belapb.by/


52

As at early 2017, special provisions for potential losses on assets exposed to credit risk were established in full. The coverage level of established provisions for bad assets was 81%. As at January 1, 2017, the share of assets classified under Risk Group V totaled almost 65% in the structure of the Development Bank’s bad assets.

In connection with the fact that the Development Bank’s obligations, the share of which amounted to around 60% in the structure of liabilities, were represented mainly by long-term and medium-term financial instruments, it had no problems concerning imbalance of money flows over the year, and its exposure to liquidity risk was rather low.

In 2016, the share of foreign exchange component in the obligations of the Development Bank grew from 34% to 40%. Besides, the attracted resources were the source of assets established in foreign exchange and thus the maximum value of total open foreign exchange position on all the foreign currencies were no more than 9% of the regulatory capital.

In 2016, the leasing organizations’ activities were characterized by positive financial results. The share of the overdue debt in the volume of the leasing payments, accrued within the reported period, decreased; the volume of the new business increased. A significant part of the leasing portfolio was still generated by leasing organizations established with participation of bank capital.

As at January 1, 2017, the register included 95 leasing organizations, 27 of which were established with foreign capital participation. 10 leasing organizations were established with participation of bank capital.

As at January 1, 2017, aggregate authorized capital of the leasing organizations totaled BYN385.8 million, a BYN69.1 million, or 21.8%, increase over the year.

Entities of the leasing market were present in all the regions of the Republic of Belarus. As at January 1, 2017, the major share of the 95 leasing organization included in the register was registered in Minsk – 60 leasing organizations; 11 – in Minsk Region, 8 – in Brest Region, 4 – in Vitebsk Region, 5 – in Grodno Region, 5 – in Gomel Region, and 2 – in Mogilev Region. Leasing organizations opened 13 branches in the regions of the Republic of Belarus,

With the purpose of creating favourable conditions for promotion of Belarusian products in the foreign markets and decreasing risks in concluding


53

international leasing deals, eight affiliate companies were registered abroad, seven of which were established by OSC “Promagroleasing”.

In 2016, the leasing market activities had positive financial results. Aggregate profit of the leasing organizations amounted to BYN171.4 million, of which BYN86.3 million, or 50.3%, is the profit gained by the leasing organizations established with participation of bank capital. With that, eight organizations finished 2016 with losses, with the aggregate amount of their losses totaling BYN0.5 million. The share of the lessors’ fees (income) in the volume of leasing payments accrued over 2016 totaled 17.5% (in 2015 – 17.6%).

As at January 1, 2017, the share of the overdue debt in the volume of the leasing payments accrued in 2016 amounted to 3.2% (as at January 1, 2016 – 4.1%). With a view to maintaining financial stability, mitigating insolvency risk and ensuring timely fulfillment of obligations to counteragents, the leasing organizations are making provisions for doubtful debts.

As at January 1, 2017, the volume of leasing portfolio (the lessees’ debt excluding the overdue debt) amounted to BYN2,302.5 million, having dropped by 6.1% over 2016.

A decrease in the leasing portfolio was due to the slowdown of the growth in the volume of the concluded new financial lease (leasing) agreements in the middle of 2016 caused by the decline in business activity of the economic entities and investment in fixed capital.

1 817.6 1 946.4

2 116.4

2 393.3 2 453.1 2 453.1 2 525.0 2 368.2

2257.6 2 302.5

1 000.0

1 500.0

2 000.0

2 500.0

3 000.0

BYN million

2015

2016

Dynamics of the leasing portfolio

Source: the NBRB. January 1 April 1 July 1 October 1 January 1


54

Financial leasing operations with the condition of repurchase of the leasing item accounted for the major share (97.4%) of the leasing organizations’ leasing portfolio. Liabilities under agreements entered into in the national currency amounted to 66.1% of the leasing portfolio.

Five leasing organizations established with participation of banks’ capital (OJSC ”АSB Leasing“, OJSC ”Promagroleasing“, ”VTB Leasing“ JLLC, ”Raiffeisen - Leasing“ JLLC, and OJSC ”Agroleasing”) accounted for about 70% (BYN1,610.0 million) of the aggregate leasing portfolio.

As at January 1, 2017, the export leasing operations25 accounted for 3.1% of the total leasing portfolio.

As at January 1, 2017, the volume of new business (the value of the financial lease (leasing) agreements entered into over 2016) stood at BYN1,111.5 million, having grown by BYN57.8 million, or 5.5%, compared with 2015. Obligations under agreements concluded in the national currency account for 84% in the total volume of the new business.

As at January 1, 2017, the share of the new business volume totaled 1.18% of GDP, which is a bit lower than the level as at the late 2015 (1.21% of GDP). The volume of the new business of the leasing organizations amounted to 11.7% of the volume of the long-term credits issued by banks to the economic entities.

Over 2016, excess of the volume of the new business over its value as at the end of 2015 was due to the growth in the volume of new agreements concluded with natural persons. Thus, aggregate price of the new agreements of the financial lease (leasing) concluded with natural persons over 2016 totaled BYN242.7 million. As at the end of 2015, this indicator stood at BYN62.7 million. With that, the volume of the new business under agreements concluded with legal persons declined compared with the data for 2015. Over 2016, 6,166 agreements of financial lease (leasing) worth BYN868,8 million were entered into with this category of lessees, a drop by 411 agreements, or BYN122.2 million, compared with 2015.

Over 2016, 167.5 thousand items of leasing, the total value of which amounted to BYN756.3 million, were passed to lessees, a 110,1 thousand items, or BYN107 million, increase compared with 2015. With that, 153.1

25 International leasing, where a lessor and a seller (deliverer) of an item of leasing are entities of the Republic of Belarus, while a lessee is an entity of other state.


55

thousand items of leasing worth BYN167.9 million were passed to natural persons.

Items of leasing were purchased by leasing organizations at the expense of both own and attracted funds. In 2016, a slightly more than 50% of the items of leasing worth BYN378.9 million were purchased at the expense of own funds (in 2015 – 38.2% worth BYN248.2 million). 49.9% of the items of leasing worth BYN377,4 million were purchased at the expense of bank targeted credits (in 2015 – 61.8% worth BYN401.1 million).

With that, the lessees’ advance payments accounted for 36.4% of the own funds (in 2015 – 42.2%).

As at January 1, 2017, the debt of leasing organizations under credits attracted for their leasing activities from banks amounted to BYN1,314.6 million, of which:

- owed to resident banks – BYN1,028.2 million (including in foreign exchange – BYN330 million in the equivalent); and

- owed to non-resident banks – BYN286.4 million (including in foreign exchange – BYN136.7 million in the equivalent).

As at January 1, 2017, overdue debt of leasing organizations under credits attracted for leasing activities from banks totaled BYN22.8 million, or 1.7% in the total amount of debt of leasing organizations under banks’ credits.

20,274.0

36,458.0

147,232.0

30,873.0

65,359.0

173,655.0

10,599.0 28,901.0 26,423.0

0 20,000 40,000 60,000 80,000

100,000 120,000 140,000 160,000 180,000 200,000

01.01.2015 01.01.2016 01.01.2017

Leasing agreements

number of agreements with natural persons

total number of agreements

number of agreements with legal persons

Source: the NBRB.


56

With a view to implementing provisions of the Law of the Republic of Belarus “On Protection of Consumer Rights”, dated January 9, 2002, as well as mitigating risks of both parties while concluding the leasing transactions with natural persons, Resolution of the Board of the National Bank of the Republic of Belarus No. 432 dated August 9, 2016 introduced changes to the Rules of Carrying out Leasing Activities approved by Resolution of the Board of the National Bank of the Republic of Belarus No. 526 dated August 18, 2014. The above-mentioned changes involve the provision to the lessee being a natural person of the written information on possible terms and conditions of leasing before concluding the financial lease (leasing) agreement, as well as compiling, at the request of a lessor or a lessee being a natural person of a fixed or rough cost sheet or calculation of the leasing payments (schedule of leasing payments). Besides, the reasons for and the order of changing an amount or an order of definition of the amount of leasing payments under the financial lease (leasing) agreement under the agreement of parties or by a lessor on an unilateral basis are clearly defined.

Resolution of the Board of the National Bank of the Republic of Belarus No. 345 dated June 22, 2016 introduced changes to the Instruction “On the Volume and Order of Disclosure of Information on the Leasing Activities and Financial State of the Leasing Organizations Included into the Register of Leasing Organizations” approved by Resolution of the Board of the National Bank of the Republic of Belarus No. 495 dated August 1, 2014 in terms of specifying information about the transactions carried out within the framework of leasing activities which is placed on the official website of the leasing organization.

Decision on introduction of such changes was taken on the basis of monitoring of the leasing organizations’ websites. It was aimed at ensuring receipt by the engaged users of a more detailed and specific information on the activities of leasing organizations and on their transactions, that will help them to take weighted decisions in the area of economy.

The work on drafting and finalizing the Edict of the President of the Republic of Belarus “On Modifying Edicts of the President of the Republic of Belarus on the Issues of Leasing Activities” prepared for the purpose of building up the relevant legislative framework for granting in possession and use of residential houses and apartments to the natural persons under the agreements of financial lease (leasing).


57

In 2016, within the framework of consumer rights protection one leasing organization was excluded from the Register in line with paragraph 4 of part 5 of subclause 1.5 of clause 1 of Edict of the President of the Republic of Belarus No. 99 “On the Issues of Leasing Activities Regulation” dated February 25, 2014 for systemic (2 times over the calendar year) non-fulfillment by a leasing organization of the National Bank’s written instructions on remedying violations.

In 2016, the segment of microfinance organizations consisting, for the most part, of lombards, did not bear any threats to the financial stability due to the insignificant volume of the operations carried out thereby.

As at January 1, 2017, 115 microfinance organizations (four consumer cooperatives, four funds, and 107 lombards) were on the Register of Microfinance Organizations. In 2016 Q4, 107 microfinance organizations carried out activity on providing microloans (four consumer cooperatives, three funds, and 100 lombards). As at January 1, 2017, assets of microfinance organizations amounted to BYN23.5 million, equity capital – BYN15.0 million, liabilities – BYN 8.5million, and net profit over 2016 – BYN3.7 million.

In 2016, the overall amount of the monetary funds attracted by microfinance organizations totaled BYN7.3 million, including:

- by consumer cooperatives – BYN0.3 million (from natural persons being founders – BYN0.25 million, or 83.3%, from other persons – BYN0.05 million, or 16.7%);

- by funds – BYN0.2 million (BYN0.1 million, or 50%, from both the natural persons being founders and from other persons); and

- by lombards – BYN6.8 million (from property owners, founders (participants) – BYN4.4 million, or 64.7%, from other persons – BYN2.4 million or 35.3%.

In 2016, the amount of the microloans granted by microfinance organizations totaled BYN100.9 million, including:

- consumer cooperatives granted BYN0.9 million. Microloans granted to natural persons for the purposes of carrying out craft activities accounted for the major share – BYN0.6 million, or 66.7%;


58

- funds granted BYN4.0 million. Microloans granted to natural persons for the purposes of the business and entrepreneur initiative comprised the major share – BYN3.6 million, or 90.0%; and

- lombards granted BYN96.0 million. Microloans granted against the pledged goods made of precious metals and stones accounts for the major share – 85.5% (BYN82.1 million), against the pledge of other movable property – 9.6% (BYN9.2 million), and against the pledged vehicles – 4.9% (BYN4.7 million).

For the purpose of ensuring financial soundness of consumer cooperatives and prompt analysis of the results of their activity, the National Bank set financial ratios and their limits, as well as requirements to establishing reserves and the minimum amount of a mutual investment fund and a mutual financial assistance fund.

As at January 1, 2017, the minimum amount of the mutual investment fund (BYN1,050) and mutual financial assistance fund (hereinafter – “MFAF”) (100% of the mutual investment fund) was met by all the consumer cooperatives. Total amount of mutual investment fund of the consumer cooperatives stood at BYN5.3 thousand, MFAF – BYN365.8 thousand.

As at January 1, 2017, reserve for potential losses under microloans26 was established in the total amount of BYN170.0 thousand.

As at January 1, 2017, consumer cooperatives did not establish a reserve for writing off bad debt27 for the reason of absence of the overdue debt (for more than 730 days) under granted microloans.

As at January 1, 2017, the ratios of short-term, middle-term and long-term liquidity28 with the prescribed minimum value of 70%, 80%, and 90% respectively are considered as fulfilled by all the consumer cooperatives, as

26 The given reserve is generated at the level of at least 35% of the total amount of the overdue debt under the principal debt, interests for using a microloan, forfeit (fines, penalties), as well as sums receivable as a result of applying other sanctions, including indemnification of losses, for violation of provisions of an agreement, for delay under the principal debt for the term of 31-365 days, 50% – for delay under the principal debt for 365-730 days, 100% – when awarded by a court. 27 The given reserve is established at the level of at least 100% of the total amount of the overdue debt under the principal debt, interest for using a microloan, forfeits (fines, penalties), as well as sums receivable as a result of applying other sanctions, including indemnification of losses, for violation of provisions of an agreement, for delay under the principal debt for the term exceeding 730 days. 28 The given ratios are calculated as a ratio of the amount of the consumer cooperative borrowers’ obligations with the remaining maturity of up to and including 30, 90 and 180 days, including those until redeemed, and the amount of the consumer cooperative obligations to their members with the remaining maturity of up to and including 30, 90 and 180 days, including those until redeemed and with the overdue term of repayment.


59

far as they do not have obligations to their members with the remaining period to maturity of up to 30, 90, and 180 days, including the until redeemed liabilities and those with overdue term of repayment.

In 2016, the work on developing the market of over-the-counter financial instruments in the country continued. As at January 1, 2017, the Register of Forex Companies incorporated six legal persons, for ensuring sustainable functioning of which financial ratios and their limits were established.

With a view to building up a system of state regulation of activities of forex companies and executing control thereof, Edict of the President of the Republic of Belarus No. 231 “On Carrying out Activities in the Over-the-counter Forex Market” dated June 4, 2015 (hereinafter – Edict No. 231) was adopted, which came into force on March 7, 2016. The National Bank was appointed as the government agency responsible for the regulation of operations in the OTC forex market.

According to paragraph 1 of Edict of the President of the Republic of Belarus No. 231, the following entities are authorized to carry out the activities on conducting operations involving non-deliverable OTC financial instruments initiated by natural and legal persons (activities in the OTC forex market) in the Republic of Belarus:

- legal persons registered in the Republic of Belarus, the authorized capital of which is formed in compliance with the requirements of Edict No. 231 in the amount of at least BYN200 thousand, and included by the National Bank in the Register of Forex Companies (hereinafter – forex companies);

- National Forex Center; - banks; and - non-bank financial institutions. Five forex companies and the Joint Stock Company

“MinskTransitBank” (within the framework of the joint project with DukascopyBankSA, Switzeland) started to carry out activities directly in the OTC forex market (i.e. operations with non-deliverable OTC financial instruments initiated by natural and legal persons).

As at January 1, 2017, the assets of forex companies amounted to BYN2.7 million, equity – BYN1.2 million, liabilities – BYN1.5 million.


60

Aggregate authorized capital of the forex companies totaled BYN1.6 million, including those of non-residents – BYN1.2 million (or 75.0%).

In 2016, the total number of the mentioned companies’ and bank’s clients amounted to 974, the number of the operations initiated thereby – 176,986. The total volume of the clients’ positions opened under the mentioned operations totaled USD3.9 billion (taking into account the leverage). Clients of the forex companies and the bank placed margin security worth USD3,001 thousand, with the share of clients of the forex companies totaling USD853 thousand, or 28.4%.

As at January 1, 2017, the total amount of contributions to the guarantee fund of the National forex centre amounted to USD461 thousand. The given fund is build up with the aim of fulfilling obligations of forex companies, banks, and non-bank financial institutions on returning marginal security to clients (in case of incapability of forex companies to fulfill such obligations at the expense of their own funds and security capital, and of banks and non-bank financial institutions – at the expense of their own funds).

The requirement on building up security capital, which is replenished by them at the expense of funds in foreign exchange contributed by clients as a margin security, and is placed at the current (settlement) bank accounts with a special regime of functioning for a forex company opened in at least two banks or non-bank financial institutions of the Republic of Belarus, is applied to the forex companies.

As at January 1, 2017, all forex companies complied with the requirement on meeting the minimum amount of security capital (50% of the margin security). Security capital amounted to USD316 thousand, or 55.2% of the margin security.

The National Bank established financial requirements and their limits for the purpose of ensuring financial sustainability of forex companies and analyzing the results of their activities in a prompt manner.

As at January 1, 2017, the marginal ratio of the sum of monetary funds attracted from clients to the forex companies’ own funds (up to 20) was met by all forex companies.


61

As at January 1, 2017, the ratios of instant, current and short-term liquidity29 were met by all forex companies, with the prescribed minimum values being 0,2, 0,7 and 1 respectively.

The ratio of maximum amount of open positions (no more than 0.2) which is calculated as a ratio of difference between the amount of margin security under open positions of the forex companies’ clients on all the basic assets and the amount of the margin security under open positions carried over to the external counteragent or the National forex centre to the own capital of a forex company, amounts to zero at all forex companies. This evidences the fact that forex companies carry over positions opened by clients to the external counteragents30.

In 2016, the indicators characterizing financial stability of the State Institution “Agency for Guaranteed Repayment of Natural Persons’ Bank Deposits” (hereinafter – the “Agency”) had positive dynamics.

The Agency was established in December 2008 with a view to ensuring the guaranteed repayment of monetary funds in Belarusian rubles and foreign exchange placed by the natural persons on the accounts and/or in deposits with banks and non-bank financial institutions to protect the rights and lawful interests of such persons. The Agency fulfills its functions according to Law of the Republic of Belarus No. 369-З “On Guaranteed Repayment of Natural Persons’ Bank Deposits” dated July 8, 2008 (hereinafter – the Law).

As at January 1, 2017, 24 banks with a special permit (license) to engage in banking operations, issued by the National Bank, which empowers them to carry out banking transactions involving opening and/or maintaining natural persons’ bank accounts and/or attracting natural persons’ monetary funds into bank deposits, were registered with the Agency.

As at January 1, 2017, the Agency’s property totaled BYN1,418.5 million.

29 The given ratios are calculated as the ratio of an amount of the forex company’s assets to the amount of the forex company’s liabilities. Lists of assets and liabilities of a forex company included in the calculation of each liquidity indicator are established by Resolution of the Board of the National Bank of the Republic of Belarus No. 67 as of February 10, 2016 having regard to assets liquidity and terms of liabilities repayment. 30 When calculating the amount of margin security under the open positions of the forex companies’ clients under a separate basic asset, margin security under the open position, at which a positive financial result of a client under the operation is ensured in case of a positive change (increase) in the basic asset’s price, is included in the calculation with a positive sign; margin security under the open position, at which a positive financial result of a client under the operation is ensured in case of a negative change (decrease) in the basic asset’s price, is included into the calculation with a negative sign.


62

Over 2016, the Agency’s property was formed due to: - banks’ obligatory contributions; - income from allocations and (or) investments of temporary free

monetary funds of the Agency into deposits and securities; and - proceeds from the Joint Stock Company Delta Bank obtained as

repayment of the Agency’s claims passed thereto as a result of repayment of a compensation under deposits.

Agency’s reserve is a part of the Agency’s property and is intended for repayment of bank deposits to natural persons.

As at the end of 2016, the amount of the reserve totaled BYN1,330.6 million31, having increased by BYN240.3 million, or 22%, over the year.

Over 2016, special-purpose contributions worth BYN115.3 million, difference resulted from the change in the national currency exchange rate in the amount of BYN47,6 million, and receipts from banks aimed at repaying the Agency’s claims passed thereto as a result of repayment of a compensation of deposits worth BYN57.7 million, income from investments and (or) allocation of reserve funds in the amount of BYN20.2 million, and a fee for late payment of regular contributions worth BYN6 thousand were responsible for the growth in the amount of the Agency’s reserve.

Over the year, deposits of natural persons were compensated in the amount of BYN108 thousand.

31 Minus established reserve repaid as compensation of the occurring liabilities in the amount of BYN390 thousand.

19.1 38.3 143.2

232.3 381.9

664.9

1, 090.3

1, 330.6

2009 2010 2011 2012 2013 2014 2015 2016

Agency’s reserve

Source: the Agency.


63

As a result of the reserve growth, the Agency’s reserve amount/natural persons’ deposits volume ratio grew from 5.59% as at the beginning of the year to 7.02% as at the year-end.

As at January 1, 2017, the Agency’s monetary funds were placed and (or) invested in full into:

• deposits of the National Bank of the Republic of Belarus – BYN85.5 million, USD505.3 million, and EUR68.0 million; and

• long-term government bonds – BYN84.4 million. Monetary funds of other property were placed and (or) invested into:

• deposits of the National Bank of the Republic of Belarus – BYN17.1 million; and

• long-term government bonds – BYN58.8 million.

1.2% 3.3%

51.9% 30.5%

13.1%

Structure of the Agency’s reserve as at January 1, 2017

income from investment of the monetary funds of reserve in securities income from placement of monetary funds on deposit accounts banks’ obligatory contributions

currency translation differences

debt collected from banks, which resulted due to repayment of compensation to natural persons

143.3

1, 231.3

Structure of the Agency’s investment portfolio as at January 1, 2017

Government securities

Deposits

Source: the Agency.

Source: the Agency


64

In the period under review, the placement and (or) investment of temporary free monetary funds of the Agency’s property made it possible to receive income in the amount of BYN28.8 million, of which income from placement and (or) investment of the monetary funds of the reserve totaled BYN20.2 million. Over 2015, this kind of income amounted to BYN14.7 million, of which income from placement and (or) investment of the monetary funds of the reserve – BYN7.6 million.

Average return on government long-term bonds with interest income totaled 9%, on deposits in the Belarusian rubles – 22%, in foreign exchange – 0.1%.


65

CHAPTER 4. FINANCIAL MARKETS

4.1. FOREIGN EXCHANGE MARKET

In 2016, the situation in the domestic foreign exchange market improved compared with the previous year and was characterized by significant net supply of foreign exchange from households and decrease in the net demand in the enterprises’ segment.

In 2016, the volume of the domestic foreign exchange market

amounted to USD70.1 billion, a 3.6% decrease on the 2015 level. The volume of the stock exchange segment stood at USD9.3 billion, having shrunk by 46.2%, the volume of the OTC segment – USD49.7 billion, a 15.3% increase over 2016. Redistribution of the volumes of the foreign exchange transactions in favor of the OTC segment was due to lifting, in May 2015, of the earlier established restrictions on carrying out foreign exchange transactions in the OTC market, as well as decreasing, since September 1, 2016, of the amount of obligatory foreign exchange sale for the Belarusian exporting enterprises from 30% to 20% of the proceeds in foreign exchange.

The volume of cash foreign exchange market totaled USD11.1 billion, a 10% decrease over 2016.

Over 2016, resident economic entities: - sold foreign exchange worth USD16.1 billion, a 10.1% decrease on

the 2015 level (by USD1.8 billion); and - purchased foreign exchange worth USD16.3 billion, a 11% decrease

on the 2015 level (by USD2 billion). As a result, net demand for foreign exchange of the resident economic

entities stood at USD0.2 billion over 2016 (in 2015 – USD0.4 billion). At that, January and December accounted for the main volume of purchase (USD0.45 billion in aggregate), in February - November, net sale of foreign exchange amounted to USD0.24 billion.

In January 2016, households were a net purchaser of foreign exchange (USD0.2 billion), over February-December 2016 – net seller of foreign exchange (USD2.1 billion). Over 2016 as a whole, households sold on a net basis USD1.9 billion (over 2015 – USD0.1 billion).


66

The bulk of transactions with foreign exchange in the domestic market

of the Republic of Belarus was carried out in the US dollars (56.9%). Compared with 2015, the share of this currency in the transactions with foreign exchange decreased by 3.7 percentage points, with the share of euro growing from 22.8% to 23.9% and the Russian ruble from 16.3% to 18.8%. The volume of transactions with other foreign currencies remained insignificant (less than 1%).

Over 2016, the official exchange rate of the Belarusian ruble decreased by 5.5% against the US dollar (up to BYN1.9585/USD1), against euro – by 0.7% (up to BYN2.0450/EUR1), and against the Russian ruble – by 27.1% (up to BYN3.2440/RUB100). The official exchange rate of the Belarusian ruble decreased by 14.7% against the currency basket32. The most drastic decrease was at the beginning of the year as a result of the increased households’ and economic entities’ demand for foreign exchange under the influence of the devaluation expectations caused by the depreciation of the Russian ruble.

Thus, in 2016, development of the situation in the foreign exchange market did not threaten financial stability.

4.2. CREDIT AND DEPOSIT MARKET

In 2016, improvement of the deposit market structure was observed, which manifested itself in the increase in the share of the long- 32 Values of the currency basket as at December 30, 2016 were calculated with the new weight ratios.

-2,000

-1,000

0

1,000

2,000

2014 2015 2016

USD

mln

Source: the NBRB.

Balance of foreign exchange purchase/sale by economic entities and households

Balance of foreign exchange purchase/sale by households

Balance of foreign exchange purchase/sale by economic entities


67

term irrevocable deposits in the national currency and foreign exchange, as well as in the decrease in the volume of foreign exchange deposits.

Over 2016, households’ term ruble deposits grew by BYN336.2 million, or 12.9%. At that, in January - February their decrease amounted to BYN148.9 and BYN36.9 million respectively, and in March - December – their increase totaled BYN522 million. Since March 2016, the growth in the households’ ruble deposits was due to the stable situation in the domestic foreign exchange market.

In December 2016, the interest rates on the natural persons’ fresh term bank deposits in the national currency amounted to 14.3% per annum, a 10.3 percentage points decrease against December 2015.

Within the framework of implementation by the National Bank of the strategy aimed at improving the banks’ resource base by dint of minimizing the share of short-term deposits in the deposit market in the structure of the natural persons’ newly attracted deposits in the national currency, the growth of the irrevocable deposits share from 32.2% in January 2016 to 60.5% in December 2016 was observed.

24.3 25 25.5

18.5 18.6 19.3

17.8

15.6 15 14.6 14.3 14.3

-200

-150

-100

-50

0

50

100

10

15

20

25

30

January February March April May June July August September October November December

2016

BYN million % Dynamics of growth of term bank deposits in national currency and average interest rates

Growth of term bank deposits of natural persons in the Belarusian rubles

Average interest rates on the fresh term bank deposits of natural persons in the national currency Source: the NBRB


68

Structure of the fresh term irrevocable deposits of natural persons in the national currency, %

January March June September December

Up to 1 month 8.9 7.0 4.2 5.0 5.7 from 1 to 3 months 19.1 10.8 17.7 22.2 17.5 from 3 to 6 months 7.3 14.1 16.1 17.1 10.9 6-12 months 6.0 16.8 14.1 18.5 15.1 1 year 37.0 29.5 10.8 9.1 14.8

Total short-term 78.3 78.1 62.9 72.0 64.0 1-2 years 21.3 20.3 29.6 23.4 30.6 2-3 years 0.3 0.8 7.6 4.7 5.3 Over 3 years 0.0 0.8 0.0 0.0 0.0

Total long-term 21.7 21.9 37.1 28.0 36.0 With that, the share of the long-term irrevocable deposits in the total

volume of the natural persons’ fresh irrevocable deposits grew from 21.7% to 36% respectively.

Implementation of measures in the sphere of the interest policy by the National Bank made it possible to expand the spread between the yield on the long-term and short-term deposits, that made a positive impact on the strengthening of stability of the banks’ ruble resource base.

In December 2016, the return on the natural persons’ long-term fresh irrevocable bank deposits in the national currency exceeded the return on the natural persons’ short-term fresh irrevocable bank deposits by 4.2 percentage points (average interest rates under short-term deposits stood at the level of 15.7% per annum, long-term – 19.9% per annum), in January 2016 – by 1.7 percentage points (average interest rates under short-term bank deposits stood at the level of 27.5% per annum, under long-term – 29.2% per annum).


69

As at January 1, 2016, the share of deposits in foreign exchange totaled

84.5% in the structure of the households’ term deposits, a decrease by 2.2 percentage points over the year.

Structure of natural persons’ term deposits in 2016, %

01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017 deposits in the national currency

15.5 14.0 14.8 16.6 17.7

deposits in foreign exchange 84.5 86.0 85.2 83.4 82.3

Over 2016, households’ term foreign exchange deposits decreased by

USD692.6 million, or by 9%, that was, mainly, due to shrinkage in households’ real disposable money income, with a desire to maintain consumption at the previous level being still in place, as well as measures on dedollarization of the economy taken by the National Bank, the implementation of which against the background of the national currency appreciation made it possible to raise attractiveness of the return on savings in the national currency.With that, in the period under review, the growth in the share of irrevocable deposits from 33.1% in January 2016 to 45.5% in December 2016 was also observed in the structure of the natural persons’ fresh deposits in foreign exchange. The share of the long-term irrevocable deposits in the total volume of the fresh irrevocable deposits in foreign exchange grew from 27.4% to 49.3% respectively.

27.5 27.8 27.8 26.4 23.5 23.1

21.3 18.3 17.2 16.9 16.0 15.7

29.2 28.8 29.4 29.4 26.9 26.6

24.5 21.4 20.3 20.3 19.9 19.9

10

15

20

25

30

35


Average interest rates for natural persons under fresh term irrevocable deposits in 2016

Total short-term Total long-term Soure: the NBRB


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Structure of fresh term irrevocable deposits of natural persons in foreign exchange, %

January March June September December

Up to 1 month 2.1 1.5 0.3 0.3 0.0 from 1 to 3 months 20.3 13.7 14.9 17.9 13.9 from 3 to 6 months 39.2 27.4 24.8 22.7 15.5 6-12 months 8.7 24.2 20.2 26.9 19.0 1 year 2.3 4.5 0.9 1.6 2.3

Total short-term 72.6 71.3 61.1 69.4 50.7 1-2 years 4.7 11.0 11.0 16.2 15.1 2-3 years 22.7 17.6 27.9 14.4 34.1 More than 3 years 0.0 0.1 0.0 0.0 0.0

Total long-term 27.4 28.7 38.9 30.6 49.3 The monetary policy implemented by the National Bank in 2016

made credit resources cheaper for the economy. Together with that, insufficient number of the effective investment projects against the heavy debt load on enterprises constrained the growth of the lending volumes.

As compared to the previous period, a slowdown in lending to the

economy was observed over 2016. Claims of banks and the Development Bank on the economy decreased

over 2016 by 2.8% (over 2015 – grew by 20.4%), including in the national currency – by 1.3% (over 2015 – went up by 7%), in foreign exchange – decreased by 9% (over 2015 – went down by 14.6%).

34.2

33.8

34.2 32.3

29.5 27.2

24.7 23.5 22.2 21.8 20.9

20.8 15

20

25

30

35

40


Average interest rates on fresh banks’ credits to legal persons in the national currency on the market terms (excluding interbank credits) in 2016

Source: the NBRB


71

The enterprises debt under credit significantly changed due to the transfer of bad assets to Vitebsk and Minsk Regional Executive Committees and the newly established JSC “Asset Management Agency”33. Claims of banks and the Development Bank on the economy increased over 2016 by 0.2%, excluding the operations involving transfer of bad assets.

Within the framework of the implemented dedollarization policy, the liabilities’ currency was gradually changed, that led to the decrease in the share of foreign exchange component by 0.7 percentage points over 2016. As at January 1, 2017, the share of this component stood at 54.9%.

In 2016, the natural persons’ debt under credit in the national currency grew by 1.6% (in 2015 – by 9.2%), including due to: credits to finance real estate – by 2.1% (in 2015 – by 10.2%), consumer lending – by 3.1% (in 2015 – a decline by 2.6%). In the year under review, the growth in consumer lending was caused by the decrease of the interest rates under credits issued to natural persons.

In 2016, claims of banks and the Development Bank on the economy amounted to 0.8% in real terms, with real GDP declining by 2.6%, that is an evidence of satisfaction of the effective demand for credit resources by the banking sector.

4.3. INTERBANK CREDIT MARKET

In the year under review, interbank credits in the national currency (hereinafter – the “interbank credits”) continued to be one of the main instruments regulating banks’ liquidity. Both resident banks of the Republic of Belarus and non-resident banks were involved in the activities in this segment of the money market.

The volume of transactions conducted by banks in the interbank market in 2016 was higher than in 2015 and amounted to BYN23 billion (in 2015,

33 Edicts of the President of the Republic of Belarus No. 320 “On Developing Agricultural Production in the Vitebsk Region” dated August 25, 2016, No. 496 “On the Measures on Financial Sanation of the Legal Persons – Participants of the Holding Company “Myasomolprom” (Minsk Region) dated December 28, 2016, and Resolution of the Council of Ministers and National Bank of the Republic of Belarus No. 923/28 dated November 15, 2016 (pursuant to Edict of the President of the Republic of Belarus No. 268 “On Establishment of the Joint Stock Company “Asset Management Agency” dated July 14, 2016).


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BYN28 billion), that was due to a structural excess of ruble liquidity, which manifested itself in April 2016 and was growing up till the year-end.

The interbank market structure changed compared with 2015 towards shrinking terms of lending. Where in 2015 intraday interbank loans accounted for 66% of the interbank market volume, in 2016, their share totaled 73%. With that, the share of transactions concluded for the term of 2-7 days decreased to 26% of the total market volume (in 2015 – 32%).

In addition, in 2016 the banks continued to attract/place resources in the national currency in the interbank market through repo transactions. In the period under review, the share of such operations in the total volume of the interbank market totaled 29% of the balance of amounts owed (40% in 2015).

In the year under review, credit risk, interest rate risk, and liquidity risk remained the main types of risks in the interbank market.

In 2016, credit risk associated with transactions conducted in the interbank market was not high. There were no prolonged and outstanding debts under such transactions.

However, it is worth mentioning an increase in the concentration of demand and supply in the interbank market. The maximum share of one bank in the total amount of resources attracted totaled 47.5% (29.1% in 2015). On the side of resources supply the share of one lending bank did not exceed 45.2% (18.7% in 2015).

Such concentration of risk may influence the banking system functioning in a negative manner, as well as raises the level of interest rate risk and liquidity risk. In addition, sustainable liquidity surplus, short terms of the interbank credits and redistribution of liquidity in the interbank market by virtue of repo transactions were conducive to a decrease in these risks.

In 2016, with account of a stable macroeconomic situation, the National Bank was implementing the policy aimed at decreasing the interest rates under operations designed to regulate liquidity, as well as narrowing the interest rate corridor defined by the interest rates on the National Bank’s standing facilities. Over 2016, interest rates on standing facilities designed to provide liquidity (credit “overnight”, SWAP transactions), which form the upper limit of the interest rate corridor, and interest rates on standing


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facilities designed to withdraw liquidity (deposit overnight), forming its lower boundary, were reduced by 7 and 5 percentage points respectively.

These measures, as well as sustainable excess of liquidity of the banking system made it possible to decrease the average rate of the intraday interbank credit from 29.4% per annum in January to 10.5% per annum in December, 2016.

The dynamics of interest rate in the ruble intraday interbank market and its impact on the instruments designed to regulate the National Bank’s liquidity in the reporting period is represented in the following chart.

At the same time, the majority of transactions in the interbank market

was conducted at the average market interest rate. The following chart shows the distribution of deviations of the average daily interest rate in the interbank market from its average value in 2015–2016.

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01.01.2016 01.02.2016 01.03.2016 01.04.2016 01.05.2016 01.06.2016 01.07.2016 01.08.2016 01.09.2016 01.10.2016 01.11.2016 01.12.2016 01.01.20

Dynamics of interest rate in the intraday interbank market and rates on operations of the NBRB

Interest rates on standing facilities operations designed to maintain liquidity Interest rates on intraday interbank credits Interest rates on standing facilities designed to withdraw liquidity Refinance rate Weighted average rate on auctions designed to provide liquidity Weighted average rate on auctions designed to withdraw liquidity Source: the NBRB.


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In 2016, the volatility of the average daily rate in the interbank market

decreased compared with 2015. Thus, where in 2015 the share of days, during which the deviation of the average daily rate in the interbank market from its average monthly value did not exceed 1 percentage point, amounted to 48.6%, in 2016 this indicator stood at 55.6%, which indicates the decrease in the level of the interest rate risk.

In 2016, liquidity risk also reduced against 2015 due to sustainable liquidity surplus (было liquidity surface) at the majority of banks. Starting from 2016 Q2, the National Bank restrained this risk by conducting operations designed to regulate the banking system’s liquidity.

The National Bank’s impact on the banking system’s liquidity and the dynamics of interest rates in the money market was exerted through operations of three types: standing facilities, bilateral operations, and open market operations.

In 2016, the National Bank conducted operations involving standing facilities to provide liquidity in the form of SWAP overnight transactions, bilateral operations designed to support liquidity (lombard credit, SWAP transactions) and open market operations designed to support liquidity (lombard auction, SWAP auction).

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Deviation of the average daily interest rate in the interbank market from its average monthly value, percentage points

Distribution of number of days, during which the deviation of the average daily interest rate in the interbank market from its average monthly value meets a certain

range

2015 2016 Source: the NBRB


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An excess of liquidity was absorbed through standing deposit facilities and auctions on issuing the National Bank’s bonds in Belarusian rubles.

In 2016, the average daily balance of debt under operations designed to maintain the banking system’s current liquidity amounted to BYN134.1 million. Average daily balance of banks’ funds under the National Bank’s operations involving liquidity withdrawal was BYN962,5 million.

The interbank market performed the funds redistribution function in the banking system in a rather effective manner. With that, a dramatic decline in the volume of the interbank market credits in 2016 H2 was caused by the sustainable liquidity excess at the majority of banks, that led to their decreased need for borrowings in the interbank market. The dynamics of the average daily volume and the level of interest rate in the intraday interbank market in 2016 are given below.

The National Bank provided information on monetary instruments and the banking system liquidity factors, which contributed to the minimization of risks. This improved predictability of the financial market, making it possible for banks to forecast their own liquidity in a more efficient manner.

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Volume and interest rates on intraday credits in the interbank market

Volume of the intraday interbank market

Interest rate on the intraday interbank market

Source: the NBRB.


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4.4. SECURITIES MARKET

4.4.1. Bonds of the National Bank of the Republic of Belarus

In 2016, initial placement of the National Bank’s bonds was caused by the need to withdraw excess liquidity of the banking system in the national currency, attract banks’ temporarily free monetary funds in foreign exchange, as well as refinance the National Bank’ liabilities owed to banks to repay previously issued bonds, and those under forward transactions and transactions involving exchange of deposits.

In the year under review, the following situation developed in the securities market of the National Bank of the Republic of Belarus.

Primary market In the reporting year, short-term bonds of the National Bank

(hereinafter – “STB NB”) were placed in the amount of BYN28,712.4 million at the placement price and worth BYN28,850.5 million at face value. At that, the repayment totaled BYN27,033.8 million at nominal value. As of January 1, 2017, the volume of STB NB in circulation stood at BYN1,816.7 million at face value. As of January 1, 2016, STB NB were not circulated.

In 2016, the National Bank’s interest-bearing bonds denominated in foreign exchange for legal persons (hereinafter – “FEB NB”) were placed:

- in US dollars – worth USD2,330.3 million at actual cost or USD2,327.7 million at face value. At that, the repayment totaled USD2,130.8 million at face value. As of January 1, 2017, the volume of FEB NB in circulation accounted for USD1,701.3 million at face value, which is 13.1% more than the volume in circulation as of January 1, 2016 (USD1,504.3 million); and

in euro – worth USD1,022.2 million at actual cost or USD1,021.4 million at face value. At that, the repayment totaled USD680.7 million at face value. As of January 1, 2017, the volume of FEB NB in circulation accounted for EUR779.9 million at face value, which is 77.5% more than the volume in circulation as of January 1, 2016 (USD439.3 million).

In general, summarizing the situation in the primary market, the following can be noted:

- the increase in the volume of placement of STB NB is caused by the need to withdraw the banking system’s excess liquidity; and


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- placement of FEB NB was carried out in order to attract banks’ temporarily free monetary funds in foreign exchange and refinance the National Bank’s liabilities owed to banks to repay previously issued bonds, and those under forward transactions and transactions involving exchange of deposits.

Secondary market In 2016, the volume of exchange trades in the secondary securities

market amounted to BYN8,336.4 million, of which the volume of trading in the National Bank’s securities totaled BYN974.7 million, or 11.7%.

Compared to 2015 (BYN162.8 million), the volume of exchange trades in the National Bank’s securities grew by BYN811.9 million rubles as a result of:

- increase in the volume of trading in FEB NB by BYN799.5 million in equivalent; and

- increase in the volume of trading in STB NB by BYN12.4 million.

The National Bank repaid its obligations on time and to the full extent. In the over-the-counter securities market the volume of registered

purchase and sale transactions involving FEB NB accounted in 2016 for BYN160.1 million in equivalent (in 2015, transactions involving FEB NB in the over-the-counter market were not registered). 34

As of January 1, 2017, the volume of banks’ investments in debt and equity instruments of the securities market totaled BYN16,217.5 million35, of which BYN5,556.67 million or 34.3% accounted for the National Bank’s securities, including – FEB NB worth BYN3,749.5 million in equivalent or 67.5%.

The amount of banks’ investments in the National Bank’s securities against January 1, 2016 (BYN3,564.4 million) increased by BYN1,992.3 million or 55.9%. If changes in types of securities are considered, then the following took place:

- increase in banks’ investments in STB NB by BYN1,807.2 million; and

34 Transactions involving NB bonds in national currency are allowed only at JSC “BCSE”. 35 According to the balance sheet of banks excluding the interest income that is planned to be received.


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- growth of banks’ investments in FEB NB by BYN185.1 million in equivalent.

The events that occurred in the National Bank’s securities market in 2016 did not have a significant impact on the banking system’s stability.

At that, it should be taken into account that banks’ investments in securities denominated in foreign exchange, as well as an increase in the volume of transactions involving such securities in the secondary market may generate a serious financial burden on:

- the National Bank in 2017, as FEB NB are issued for a period of up to one year, and their amount in the banks’ portfolio as of January 1, 2017 totaled BYN2.0 billion in equivalent; and

- the entire financial system, as the dollarization of the securities market takes place, which leads to an increase in various risks and a reduction in investment in securities denominated in the national currency.

2016 didn’t witness any significant changes in the ratio of the main instruments traded in the securities market. Given the considerable volatility of foreign exchange rates, the growth in the share of bonds denominated in foreign exchange was indicative of the ongoing trend of growing foreign exchange risk and the degree of vulnerability of the securities market. A high share of securities with floating income indicates the continued inflation and devaluation expectations, as well as the availability of a high level of interest rate risk. 4.4.2. Market of corporate securities, government securities and bonds of local executive and regulatory authorities

In 2016, the share of the corporate segment of the securities market

continued to decline. Thus, the volume of issue of shares and corporate bonds decreased almost twofold and fell to BYN4,965.4 million from BYN8,283.3 million in 2015. The share of this segment in the total issue of shares and bonds reached 50.1%, reducing from 59.5% a year earlier. At that, the share of the corporate bond market declined to 20.4% from 32.7%.

The corporate segment shrank due to the growing share of the government segment of the market – the share of issue of government securities and bonds of local executive and regulatory authorities (“BLB”), as well as the National Bank’s bonds, which along with a limited market


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volume resulted in the reduction of the resources available for borrowing by corporate issuers.

The structure of the annual issue of main instruments of the securities market is represented in the following chart.

The total amount of annual registered issue totaled: - joint stock companies’ shares – BYN2,939.3 million, a drop by

21.3% against 2015 (BYN3,733.6 million); - corporate bonds – BYN2,026.1 million, which is below the volume

of issue in 2015 by more than half (BYN4,549.7 million), including banks’ bonds – BYN520.3 million, a drop by more than four times versus 2015 (BYN2,232.3 million); and

- bonds of local executive and regulatory authorities (hereinafter – “BLB”) – BYN1,124 million, which is almost five times higher than the value of issue in 2015 (BYN229.4 million).

In addition, in 2016, the following instruments were placed at face value:

- government securities worth BYN3,8360.1 million, of which denominated in Belarusian rubles – BYN543.7 million and in foreign exchange – USD1,311.8 million and EUR305.5 million. This segment of the market decreased by almost a third against 2015 (BYN5,410.6 million);

As of January 1, 2017, the following securities were in circulation:

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100%

2012 2013 2014 2015 2016

Structure of annual issue of main instruments in the securities market

Shares Corporate bonds BLB Government securities Source: the NBRB.


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- shares worth BYN29,168 million, a 11.2% growth compared with January 1, 2016 (BYN26,228.7 million). At that, the ratio of the volume of shares in circulation to GDP (preliminary data) increased to 30.9% (29.2% as of January 1, 2016);

- corporate bonds worth BYN13,072.1 million or 13.9% of GDP (BYN12,712.9 million or 14.1% of GDP as of January 1, 2016). Thus, the volume of corporate bonds in circulation increased by 2.8% over a year. The volume of banks’ bonds amounted to BYN6,569.1 million, 50.3% of the total volume of corporate bonds in circulation (BYN6,530.9 million, 51.4% as of January 1, 2016);

- government securities in circulation in the domestic market worth BYN10,234.2 million (10.9% of GDP36), including those denominated in Belarusian rubles – BYN1,594.1 million, in foreign exchange – USD2,416.7 million, EUR1,907.9 million, and RUB162 million. This market segment grew by 5.1% compared with January 1, 2016 (BYN9,744.3 million);

- eurobonds of the Republic of Belarus worth USD800 million, remaining at the level of last year;

- BLB worth BYN1, 899.8 million, a 99.2% growth against January 1, 2016 (BYN953.7 million) Changes in the ratio of the main instruments in circulation in the

securities market is shown in the following chart:

36 It is calculated based on the methodology in accordance with Resolution of the Council of Ministers and the National Bank No. 574/12 “On Approving the Concept of Managing Gross External Debt of the Republic of Belarus and Action Plan for its Implementation” dated May 6, 2011.

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100%

01.01.2013 01.01.2014 01.01.2015 01.01.2016 01.01.2017 Shares Corporate bonds BLB Government securities Source: NBRB

Structure of the main instruments in circulation in the securities market


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Thus, in 2016 there were no significant changes in the ratio of the main

instruments traded in the securities market. 2016 witnessed a further increase in issues of bonds denominated in

foreign exchange. The share of these bonds in the volume of annual issue grew to 79.7% compared with 65.1% in 2015, amounting as of January 1, 2017 to 63.9% of the total volume of bonds in circulation (as of January 1, 2016, 58.5%).

Given the considerable volatility of foreign exchange rates, the growth in the share of bonds denominated in foreign exchange indicates an ongoing trend of increasing foreign exchange risk and the degree of vulnerability of the securities market, as the risks associated with currencies conversion grow both when securities are redeemed and yield is repaid.

World experience shows that one of the main methods for managing foreign exchange risk is hedging using derivative financial instruments, such as futures, options, forwards and swaps.

The regulated market of derivative financial instruments is currently represented by non-deliverable (settlement) futures contracts for the exchange rate of the US dollar, euro, the Russian ruble, and exchange rate of the euro against the US dollar. However, in 2016, transactions involving derivative financial instruments in the stock market were not concluded.

At the same time, over-the-counter forward contracts for the purchase, sale or conversion of currency, as well as SWAP transactions involving foreign exchange offered by domestic banks, are of increasing interest for the purpose of hedging foreign exchange risks.

The market for derivative securities is lacking in Belarus. As of January 1, 2017, the share of securities with a floating interest

rate in the total amount of circulating corporate bonds in the national currency remained at the level of the previous year, totaling 87%. Their share in the total annual issue decreased from 60.5% in 2015 to 39.9%. A large share of bonds with floating income indicates that inflation and devaluation expectations in the economy of the country and high level of interest rate risk are still in place.

As at January 1, 2017, 60 professional participants were operating in the securities market (including 24 banks), which carried out the following professional and exchange activities involving securities:


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brokerage – 57; dealing – 57; depository activities – 32; securities trust management – 19; organization of securities trading – 1; and clearing – 1.

The volume of transactions in the primary securities stock market in 2016 raised to BYN1,291.3 million, an increase by 61.2% compared with the volume of issue in 2015 (BYN801.2 million). The growth of 84.4% was due to an increase in the primary placement in the government securities sector. The volumes grew more than fourfold, from BYN257.3 million in 2015 to BYN1,089.9 million. At that, the issue in the sector of corporate securities declined more than twice, from BYN543.9 million to BYN201.4 million. Open joint-stock companies didn’t make initial public offering in 2016.

In 2016, the total volume of secondary stock trading reduced, amounting to BYN8,336.4 million (BYN9,197.8 million in 2015). The bulk of transactions (almost 70%) was carried out with government securities and the National Bank’s securities. The volume of transactions involving shares amounted to BYN50.3 million, or 0.6%. Repo transactions totaled 44% of the total volume of transactions in the secondary market.

The shares market capitalization totaled: - as of January 1, 2015 – BYN684 million (0.8% of GDP); - as of January 1, 2016 – BYN991.6 million (1.1% of GDP); and - as of January 1, 2017 – BYN2,426.1 million (2.6% of GDP according

to preliminary data). The increase in the level of capitalization as of January 1, 2017 is related to the growth of the number of shares on the mentioned date based on which the market price was calculated.

In 2016, transactions worth BYN9,353.8 million or 9.9% of GDP (BYN9,281.1million or 10.3% of GDP in 2015) were concluded in the over-the-counter securities market, including purchase and sale transactions involving securities worth BYN7,768.4 million (BYN9,187 million in 2015), of which transactions involving bonds amounted to 99.2%, and transactions involving shares – 0.8%.

Insignificant volumes of transactions involving shares, both in the regulated and over-the-counter markets, indicate a high level of liquidity risk. Investors face significant difficulties in the sale of their shares at a certain price at a given time.


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4.5. BANK MANAGEMENT FUNDS Bank management fund is one of the collective trust management

forms, where a bank as a trust manager unifies monetary funds and/or natural and legal persons’ (obligees’) securities as a shared ownership for the purpose of investing in different financial assets permitted by legislation to obtain income.

The procedures for establishing bank management funds and functioning thereof are regulated by Instructions on Regulation of Relations Arising as a Result of Pooling Monetary Funds and/or Securities in the Bank Management Fund on the Basis of Agreement on Trust Management of the Bank Management Fund approved by Resolution of the Board of the National Bank No. 178 dated March 26, 2014 (National Legal Internet Portal of the Republic of Belarus, April 12, 2017, 8/28544).

As at January 1, 2017, two trust manager’s bank management funds of “Priorbank” JSC (“Raiffeisen - Assets Portfolio - USD” and “Raiffeisen - Assets Portfolio - EUR”) were in operation. The value of the funds’ net assets totaled USD902.6 thousand and EUR817.3 thousand (as at January 1, 2016 – USD1,804.2 thousand and EUR1,211.1 thousand).

201 natural persons, including three non-residents, were obligees of the above-mentioned funds.

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Dinamics of net assets and value of the bank management funds' nominal share of

"Raiffeisen - Asset Prtfolio - USD"

Value of net assets Value of nominal share (right-handed axis)

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Dinamics of net assets and value of the bank management funds' nominal share of

"Raiffeisen - Asset Prtfolio - EUR"

Value of net assets Value of nominal share (right-handed axis)


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As is evident from these charts, the value of two bank management funds’ nominal share, reflecting the return on investment, in 2016 showed a variety of trends. After a sharp fall at the beginning of the year, return on investment began an upward trend in March. According to the information of the trust manager of “Priorbank” JSC, the funds’ assets were placed in shares of stock and bond funds, the value of which fell below the market value on average, which led to the formation of losses.

During the year, the asset management strategy was revised, which gave a positive result in the form of an increase in the value of the nominal share of both funds in July and its stabilization by the end of the year.

In 2016, the yield of both bank management funds was negative: “Raiffeisen - Assets Portfolio – USD” – minus 4.2% and “Raiffeisen - Assets Portfolio - EUR” – minus 3.1%. This fact resulted in a decrease in the value of net assets of both bank management funds.


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CHAPTER 5. PAYMENT SYSTEM OF THE REPUBLIC OF BELARUS

In 2016, a sustainable and smooth functioning of the core

component of the payment system of the Republic of Belarus – automated system of interbank settlements (hereinafter – the “ASIS”) and its functional component – the BISS system – was ensured, the main risks were limited, as well as the threat of risks’ escalation into the systemic risk was prevented from happening.

Risk in the payment system were managed by the National Bank by means of activities aimed at meeting by the payment system of the Principles for Financial Market Infrastructures recommended by the Committee on Payment and Settlement Systems of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions (2012) (hereinafter – the “FMI Principles”) as international standards in the field of developing highly efficient payment systems. The National Bank organizes risk management processes in the payment system using the approaches provided for in the Strategy of Risk Management in the Payment System of the Republic of Belarus approved by Resolution of the Board of the National Bank No. 471 dated August 9, 2013, as well as adhering to a strategic line towards risk tolerance specified in this document.

In the year under review, as many as 70,118.3 thousand payment instructions worth BYN517.4 million were effected in the BISS. Compared with 2015, payment instructions effected in the BISS grew by 2.2% in terms of their number and increased by 18.4% in terms of their amount.

The average daily turnover amounted to 276.1 thousand in terms of their number and BYN2.04 million in terms of payments value, the average amount of a payment instruction totaled BYN74 rubles.

In the year under review, the share of payments processed in the BISS five minutes prior to the deadline for the acceptance of payments was 99.7% on average. Unfulfilled (canceled) payments were not recorded.

As of January 1, 2017, 34 direct participants, including 3 special participants (JSC “Delta Bank”, JSC “BIT-Bank”, CJSC “N.E.B. Bank”), and 36 indirect participants were the BISS system participants. In 2016, the total number of the payment system participants decreased due to the closure of


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JSC “InterPayBank” and JSC “Eurobank”, as well as the implementation of measures by JSC “JSSB Belarusbank” and JSC “Belagroprombank” aimed at optimizing the branch network. The number of branches of JSC “JSSB Belarusbank” decreased from 34 branches as of January 1, 2016 to 30 branches as of January 1, 2017. JSC “Belagroprombank” decided to close one branch in the reporting period, and the number of branches as of January 1, 2017 totaled six.

In 2016, new participants – OJSC “Non-bank financial institution “SSIS” and JSC “Belarusian Currency and Stock Exchange” – joined the BISS system. Payment systems of new participants are potentially significant.

The ratio of banks’ accessibility to the ASIS in 2016 was 100% of the daily production time, with the requirement being no less than 99.7% (the ratio is stipulated by Resolution of the Board of the National Bank No. 40 “On Implementing Monetary Policy Guidelines of the Republic of Belarus for 2014 and Tasks of the Banking System for their Implementation in 2015 and Annulling Certain Resolutions of the Board of the National Bank of the Republic of Belarus and a Separate Structural Element of Resolution of the Board of the National Bank” of January 30, 2015).

Unauthorized access to the ASIS was prevented from happening. One of the most important financial and economic aspects that affect

the efficiency of the ASIS functioning is the pricing policy of the National Bank in the field of payment for settlement services provided by the National Bank when carrying out interbank settlements through the BISS system. By virtue of the economic measures implemented using pricing instruments, the National Bank ensured an improvement in the balance of payment flows during the operational day of the BISS system, encouragement of banks to manage their own payment flows in the efficient manner and boost the turnover, and accelerate the turnover of monetary funds, etc. In addition, within the framework of the current pricing policy, one of the main tasks is to maintain the size of payment for settlement services at the level that covers the costs of the ASIS functioning with income, as well as gain profit in the amount ensuring a sufficient degree of investment in its development.

The National Bank’s income from settlement services provided in 2016 amounted to BYN12.6 million, growing by 30.9% against 2015 (BYN9.6 million in 2015). The main factor of revenue growth is the increase in the


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number of payment instructions conducted in the reporting period compared to 2015.

Regulatory legal base regulating the procedures for carrying out interbank settlements in the BISS, technical regulatory legal acts of the National Bank that set the requirements to the payment instructions and the ASIS software and hardware complexes, and contractual relations with the BISS participants, agreements concluded with related systems for the performance of the settlement bank’s functions by the National Bank and multilateral agreements on guaranteeing the completion of interbank settlements on transactions using bank payment cards (BPC) concluded between the National Bank, related settlement systems using BPC and participant banks of these systems were reviewed and maintained current that made it possible to limit the legal risk in the ASIS.

The improvement of the payment system’s regulatory legal framework was carried out within the implementation of activities related to the denomination of the official monetary unit of the Republic of Belarus, admission of the JSC “Belarusian Currency and Stock Exchange” and non-bank financial institutions to participation in the BISS system, introduction of changes related to the work with electronic documents in the central archive of interbank settlements of the National Bank of the Republic of Belarus and submission of information on non-cash payments to government agencies, as well as implementation of a new mechanism for guaranteeing the completion of interbank settlements on transactions using the MasterCard BPC. In 2016, in connection with the implementation of these measures, a number of regulatory legal acts of the National Bank of the Republic of Belarus was adopted.

For the purpose of preventing systemic risk, ensuring the continuity of settlements, and limiting credit risk and liquidity risk in the payment system, the National Bank provided banks with an opportunity to use a wide range of monetary regulation instruments

In the year under review, the BISS saw sufficient liquidity and was able to process all incoming payments (the average time of urgent electronic payment documents waiting in a queue – 32 seconds).

In 2016, for the purpose of limiting (reducing) operational risk, the National Bank focused its efforts on the procedures for ensuring the payment system smooth performance. With a view to practicing the maintenance of


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the ASIS backup resources in the workable condition the ASIS software and hardware complex was operated at the ASIS backup computer center in the industrial mode in January, March, May, July, September, and November (in line with the approved schedule – one time in two months for a week).

Contingency Plan for Business Continuity and Recovery Procedures for the ASIS (hereinafter – the “Contingency Plan”) and the list of the ASIS’s reserve personnel, as well as the documents “The ASIS. Contingency Plan. Instructions to the personnel of the Systemic and Technical Maintenance of the Central Computer Complex Department in the Event of an Emergency Situation at the Main Data Center”, “The ASIS. Contingency Plan. Instructions to the personnel of the Systemic and Technical Maintenance of the Central Computer Complex Department in the Event of an Emergency Situation at the Backup Computer Center”, “The ASIS. Contingency Plan. Instructions on the Procedures for Interaction between the Staff of the National Bank and Organizations Providing Services and Maintenance in the Event of a Failure or Crisis Situations within the Operation of the ASIS”, “The ASIS. Contingency Plan. The Procedures for Preparing and Verifying the Performance of the ASIS’s Software and Hardware Complex when Switching to an Industrial Operation Mode at the Backup Computer Center” were updated.

In 2016, tests of the ASIS Contingency Plan were conducted twice (on February 6, 2016 and October 8, 2016), during which various scenarios of the emergence and development of crisis situations in the ASIS functioning were modeled, as well as the schemes of notification and decision-making by the officials for resolving crisis situations were tested.

In the year under review, risk-based supervision of the BISS was carried out, working capacity of the software and hardware complexes and failures in the operation of the automated systems of its participants were monitored (by means of on-site inspections and off-site control), results of monitoring were analyzed on a regular basis, and recommendations to the banks aimed at eliminating disadvantages as part of ensuring smooth operation in the payment system were produced. Compliance of the software and hardware complexes of banks-participants of the BISS system was monitored by means of participating in the on-site inspections (five banks in 2016) as to ensuring a smooth functioning in the payment system thereby (reservation of critical resources: software and hardware complexes,


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communication channels, power supply, staff; availability of Contingency Plans for Business Continuity and Recovery Procedures, their actualization, and regular training based on these plans) and complying with ТКП 477-2013 (07040) “Banking Activities. Information Technologies. Processes to Ensure Continuous Performance and Emergency Recovery of Payment System Participant. General Requirements”.

For the purpose of improving and developing activities on ensuring efficient, reliable and safe functioning of the payment system, as well as sound management of risks inherent thereto, the National Bank will continue to take measures aimed at implementing the Principles for Financial Market Infrastructures. Thus, in 2016, the National Bank took measures on implementing the Principles for Financial Market Infrastructures in the payment system of the Republic of Belarus and in other financial market infrastructures (or acted as an initiator of such works):

- The National Bank (Letter No. 50-15/14 dated November 5, 2015 “On Conducting an Assessment of Compliance with International Standards in the Banks’ Payment Systems”) brought the information on assessing compliance with the Principles for Financial Market Infrastructures in intra-bank systems to the banking system’s notice and set a deadline for submitting assessment reports to the National Bank of the Republic of Belarus by December 25, 2016; and

- The National Bank (Letter No. 50-13/5 dated April 5, 2016) recommended to determine the list of systems composing the bank’s payment system and stipulate the bank’s payment system infrastructure with a help of a local regulatory document.

The National Bank continues to take measures aimed at implementing the methodology of ISO 20022 “Financial Services. Universal Financial Industry Message Scheme” in the payment system of the Republic of Belarus, which is intended to ensure the compatibility and integration of automated systems of various financial institutions, expand the electronic document management and straight-through processing of payment instructions and other financial messages. Implementation of ISO 20022 methodology in the payment system will ensure uniform technological rules and standards in the field of exchange of financial information, as well as efficient automated processing and, therefore, minimize the level of operational risk.


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CHAPTER 6. MACROPRUDENTIAL MEASURES

6.1. SYSTEMIC RISKS

In 2016, the peak of the financial cycle was passed, which indicates a more adequate assessment by the financial market participants of risks caused by an unfavorable macroeconomic environment.

With a view to defining the phases of a financial cycle the National Bank uses the composite indicator consisting of nine indicators, which are considered with different weight ratios37: the ratio of banks’ claims on the economy to GDP; the ratio of average price of a square meter of residential real estate in the city of Minsk to average wages; the ratio of ruble money supply M2* to gold and foreign exchange reserves; the ratio of foreign trade turnover to domestic foreign exchange market turnover; terms of lending (the indicator calculated as the ratio of the average term of lending to average interest rate); bank leverage; the ratio of value of shares issued by organizations to the revenues from sale of products produced thereby; the ratio of value of government securities circulating in the domestic market to the consolidated budget revenues; and the ratio of banks’ interest revenues under transactions with natural persons to households’ monetary incomes38.

37 The values of weight ratios were determined expertly 38 The correlation matrix with variables derived as exponentially weighted moving average was used in the formula of calculation of the financial cycle indicators. In view of this, the closer to 1 the mutual correlation of the financial cycles’ components is, the higher values it has. Thus, the signal on the change in the cycle phase is strengthening in the case of a unidirectional dynamics of components and is weakening if this is not the case

Financial cycles mean periodic fluctuations in the market participants’ ability to recognize the real level of financial risks and the changes in the volumes and value of the circulating assets related thereto. At that, both an unreasonable optimism (at the stage of risks accumulation) as well as undue pessimism (at the stage of risks materialization) carry a threat to the financial stability. Both phenomena bring about the so-called “procyclicality problem” – the financial sector’s capability to intensify the growth and decline phases in the economic cycles.

Hesitations in the assessment of risks levels manifest themselves through different qualitative indicators characterizing behavior of the market participants. For this reason, in the case of coordinated dynamics of these indicators (their correlation), aggregated indicators reflecting the general trend of development of the economy and giving a signal about the level of accumulation of distortions in the financial sphere, may be used to assess financial cycles.

http://www.multitran.ru/c/m.exe?t=2143421_1_2&s1=%FD%EA%F1%EF%EE%ED%E5%ED%F6%E8%E0%EB%FC%ED%EE%20%E2%E7%E2%E5%F8%E5%ED%ED%EE%E5%20%F1%EA%EE%EB%FC%E7%FF%F9%E5%E5%20%F1%F0%E5%E4%ED%E5%E5


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The indicator of financial cycles in 2016 as a whole assumed rather high values, which, however, were 4-5% lower than a year earlier. Such variables as the ratio of the value of shares of joint-stock companies to the revenues from sale of products produced thereby, the ratio of the volume of government securities in circulation to the consolidated budget revenues, and the indicator of bank leverage contributed at large to the formation of a high level of this indicator.

In 2016 H1, the indicator of financial cycles totaled on average 0.068 points, which is higher than the average value of this indicator for 2005-2016 by one standard deviation (the number of components indicating the upturn phase39 reached five, while the decline was indicated by not more than two components); in 2016 H2, the indicator of financial cycles fell to 0.049 points, which is only slightly more than the average value of the indicator for the last 12 years. This fact allows to state that in 2016 the peak of the financial cycle was passed and the financial market participants by the end of the period under review assessed the risks caused by the unfavorable

39 The values of the indicators which were higher than the 80th percentile were interpreted as the indicators of the phase of growth; the values below the 20th percentile – as the indicators of the phase of decline.

-5

-4

-3

-2

-1

0

1

2

3

4

5

0.00

0.01

0.02

0.04

0.05

0.06

0.07

0.08

0.10

0.11

0.12

01.01.2007 01.01.2008 01.01.2009 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.01.2015 01.01.2016 01.01.2017

poin

ts

Indicators of financial cycles in the Republic of Belarus

Number of indicators pointing to growth (+) / decline (right-hand axis) Indicator of financial cycles Average value Smoothed value of indicator Source: the NBRB.


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macroeconomic environment and the prospects for the development of the economy more adequately and adjusted their behavior accordingly. The level of systemic bank risk in 2016 reduced due to the shrinking of credit gap practically to zero by the end of the period under review, as well as certain improvements of the banking sector’s position versus other countries in 2016 Q4. At that, 2016 witnessed a certain reduction of the banking sector’s systemic risk concentration.

To get the quantitative assessment of the banking sector’s exposure to the temporary manifestation of systemic risk, the National Bank makes use of the aggregated index of systemic risk 40 (ISR) which accumulates such variables as the credit gap (the deviation of the current level of loans to the economy from a long-term equilibrium trend), the level of systemic liquidity (the ratio of the volume of interbank loans to customer deposits), the financial leverage, and the capital flows indicator (the ratio of funds attracted by banks from non-residents to current claims on non-residents).

40 The interpretation of the ISR value is as follows: the more it is a positive value, the more serious are accumulated imbalances in the economy and, respectively, the higher is the level of the banking sector’s systemic risk. The negative value of the calculated index is an indication of the absence of systemic banking risk in terms of time. Zero ISR value indicates that systemic risk factors are on average at their equilibrium trend level and the situation may be viewed as stable.

Systemic bank risk is a probability of a significant deterioration in the functional qualities of the banking sector caused by an adverse event which is able to spread across the entire system by using its vulnerabilities such as an exposure of individual banks to the same risks, high concentration of assets, as well as direct and indirect interbank ties.

The time aspect of systemic risk is associated with the accumulation of inconsistencies in the economy

and monetary sphere which provide the source of vulnerabilities of the banking system as a whole. More specifically, they are the development of imbalances in the foreign trade and in the domestic foreign currency market, as well as an excessive lending to the economy which is much higher than opportunities of the real sector entities to pay back borrowed funds.

The spatial aspect of systemic risk is inherent in the situation when risks materialize in the same way in all banks of the banking sector (for example, during liquidity crisis) or if banks’ balance sheets are closely interrelated (through counterpart risk). During the assessment thereof the National Bank focuses on the issues concerning the identification of banks’ systemic importance, i.e. identification of organizations whose activities have a significant impact on the standing (sustainability) of the country’s banking sector as a whole and termination of which may lead to the destabilization of the entire system.


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The ISR dynamics indicates that the systemic risk of the banking sector, which had been at a high level since the end of 2013, declined in 2016 H2. An imbalance in banks’ operations with external world had been its main source for a long time. The improvement of the Belarusian banking sector position versus non-residents in 2016 Q4 was the main driver of reducing systemic risk. The credit gap, which by the end of 2016 turned negative, as well as structural excess of liquidity in the banking sector, observed for most of the last year, had a significant downward impact on the value of the ISR. As a result, the ISR value in 2016 decreased by 2.7 points to 0.8 as of January 1, 2017, which is the lowest indicator since 2013. It should be noted that such dynamics of the ISR is quite consistent with the trajectory of financial cycles in the country.

The National Bank attributes banks to groups by the level of systemic risk based on the indicative approach developed in accordance with the recommendations of the Bank for International Settlements, which makes use of five groups of indicators showing the size of the bank, how closely related it is to other banks of the system, the importance of the bank for non-banking economy, bank’s involvement in international capital flows, and the complexity of its activities.

-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

01.01.2009 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.01.2015 01.01.2016 01.01.2017

poin

ts

Index of systemic risk of the banking sector of the Republic of Belarus

Capital flows Financial leverage Systemic liquidity Credit gap Index of systemic risk Safety threshold

Source: the NBRB.


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Group Banks The NBRB’s assessment (as of January 1, 2017)

I JSC “JSSB Belarusbank”, JSC

“Belagroprombank”, and BPS-Sberbank

Banks referred to as systemically important

II “Priorbank” JSC, Bank BelVEB OJSC,

Belgazprombank

III “Belinvestbank” JSC, Alfa-Bank, and JSC

“BNB”

IV JSC “MTBank”,

JSC “Technobank”, CJSC VTB Bank (Belarus)

V Other (12 banks) Banks that are not

referred to as systemically important

Ten most important for the national financial system banks which

account for 92.3% of the banking sector’s assets concentrate 89.7% of the system-wide risk (previous year – 91.6%).

It should be noted, that in 2016 the concentration of the systemic risk of the banking sector definitely decreased. The share of JSC “JSSB

1.9

5.4

3.9

9.7

4.2

4.2

7.8

2.6

30.8

19.1

0.0 10.0 20.0 30.0 40.0

JSC “MTBank”

Bank BelVEB OJSC

Alfa-Bank

BPS-Sberbank

“Belinvestbank” JSC

Belgazrombank

“Priorbank” JSC

JSC “BNB”

JSC “JSSB Belarusbank”

JSC “Belagroprombank”

Contribution to the level of systemic risk, %


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Belarusbank” reduced by 16 percentage points, while the shares of JSC “Belagroprombank”, BPS-Sberbank, “Priorbank” JSC and Bank BelVEB OJSC, on the contrary, grew by 8, 2, 2 and 0.5 percentage points respectively. At the same time, the first eight positions in the rank list for the year did not change, and OJSC BNB-Bank, a relatively small bank according to asset portfolio, moved to the 9th position (an increase by 6 positions). Accordingly, CJSC VTB Bank (Belarus) lost three positions and appeared in Group IV of systemically important banks, and “Bank Moscow–Minsk” JSC – two positions.

The probability of default in the banking sector for the year 2016 decreased, which is due to the improvement of the macroeconomic situation, the growth of bank leverage and a favorable liquidity situation.

At the year-end 2016, the average probability of a bank default41 (without taking into account the shares of banks in the sector’s assets) stood at 12.7%, a reduction by 4.2% against the beginning of the reporting period (20.6% in June – the maximum value for the year and 12.7% in December – the minimum value for the year). The decrease in the default probability occurred in the middle of Q3 (during the first eight months of the year it grew in whole), and it was caused by, to a certain extent, institutional changes, namely, the exit of several small banks characterized by increased risks from the banking services market. The transfer of part of the problem loans granted to agricultural organizations from JSC “Belagroprombank” to JSC “Asset Management Agency” had the impact on the default probability as well. Among the economic factors, primarily the slowdown in the decline rates of real GDP and inflation processes, the growth in the ratio of the banks’ own capital to assets thereof, and the improvement of the liquidity situation in the domestic banking sector influenced the decrease in the default probability.

41 For the purposes of the analysis a bank is deemed defaulted if the amount of its bad assets exposed to credit risk is in excess of the difference between own capital and authorized capital. Put it differently, the situation is viewed as default when the bank’s authorized capital begins to dwindle under the impact of significant credit risk.


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The possibility of materialization of the “contagion” effect through

the domestic interbank market was assessed as low. The risks caused by the relations of the banking sector with insurance and leasing organizations are another source of its spread.

Schematic structure of the open positions in the interbank market as at

January 1, 2017 is shown in the Figure below 42. The intensity of interbank financial interactions remained low, and it

even decreased compared to 2015. The most active lending bank provided its resources in the amount of 17.4% of interbank requirements to five other banks (also, two banks distributed funds to four banks, four – to three banks, the activity of others was even lower). The most active borrowing bank attracted funds from seven banks in the amount of 7.1% of interbank liabilities (in addition, two banks were funded from four banks, four from three, and the remaining banks used resources of not more than two counterparties). 42 The area of each “bubble” is proportional to the value of assets of the bank designated by it. The arrow from Bank A to Bank B means that Bank B has financial obligations to Bank A (credits, deposits, loans, repo transactions); the thicker the arrow, the larger commitments.

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5

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01.01.2014 01.04.2014 01.07.2014 01.10.2014 01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016 01.04.2016 01.07.2016 01.10.2016 01.01.2017

%

Sector average probability of a bank default

Probability of default Trend line Source: the NBRB.

“Contagion” effect is a possibility of spreading insolvency of one bank on other financial institutions due to significant quantity of open positions under interbank claims. “Contagion” effect estimation in the banking sector is conducted according to the methodics of stress-testing on the assumption of hypothetic default in obligations of one of the banks (if, as a result, the regulatory capital of one of the banks – counteragents will drop below the minimum permissible level, the chain of non-payments in the interbank market will continue).


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Due to the low intensity of transactions in the domestic interbank market and adequate coverage of financial risks in the event of payments suspension by any Belarusian bank, the regulatory capital adequacy of all other banks will remain at the level of more than 10.625% (the minimum capital adequacy reserve above the established prudential standard will amount to 2.1 percentage points). Maximum decline in the regulatory capital adequacy at one of the banks after the hypothetic default under the other bank’s obligations will amount to 13.6 percentage points (among ten largest banks in terms of assets the given indicator totals 2.8 percentage points). The spreading of the “contagion” effect becomes broader in case of materialization of the shock impact of the credit risk. There are scenarios according to which suspension of payments by one bank will lead to the insolvency of the other bank at the first stress - testing iteration, and another one – at the second iteration. After this, the influence of the “contagion” effect will be “extinguished” without further losses.

Another source of spreading of the “contagion” effect is the financial ties of Belarusian banks with the insurance sector, segment of leasing organizations, and JSC “Development Bank of the Republic of Belarus”. Thus, as of January 1, 2017, the insurance companies’ claims on banks (deposits, investments in securities of banks, participation in the banks’ capital, etc.) amounted to BYN794.1 million, which is equivalent to 28% of

13

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the insurance sector’s assets and almost 1.5% of the banking sector’s liabilities. At that, banks’ claims on insurance organizations are extremely insignificant on the scale of the economy, i.е. the latter are net creditors of the former ones (in addition, the concentration of the insurance sector funds in large banks controlled by the state is observed). The reverse situation is typical for leasing companies. As of January 1, 2017, their claims on banks totaled BYN251.5 million (about 8% of leasing organizations’ assets), liabilities to banks – BYN624.4 million (slightly more than 1% of banks’ assets). Thus, the segment of leasing organizations is a net borrower of the banking sector.

In the course of 2016, the cost of eurobonds of the Republic of Belarus to be redeemed in 2018 remained relatively stable, which indicated a sufficient degree of reliability of the bond issuer in the opinion of trades participants.

The dynamics of the value of Government debt securities circulating in the external financial markets reflects, to a certain extent, an assessment by foreign investors of the level of financial stability and country risk.

In the Luxemburg Stock Exchange trading at the beginning of 2017, market value of the Republic of Belarus eurobonds with redemption in 2018 stood at 104.1% of par value, a 0.8 percentage points increase on a year earlier. At the same time, the cost of these securities was relatively stable over the whole 2016, indicating a sufficient level of reliability of the bond issuer in the opinion of trades participants. This fact is probably related to

0

2

4

6

8

10

12

14

80

90

100

110

120

01.01.2014 01.07.2014 01.01.2015 01.07.2015 01.01.2016 01.07.2016 01.01.2017

%

Dynamics of the value of eurobonds of the Republic of Belarus

Market value of the Republic of Belarus eurobonds (Belarus-2018), % of par value Par value Republic of Belarus eurobonds yield (right-handed axis), %

Source: Luxembourg Stock Exchange.


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stable and timely servicing by the Republic of Belarus of its foreign debt in 2016, despite the continuing recession in the real sector and complicated foreign economic environment. In part, the growth in the value of Belarusian eurobonds is explained by the general positive dynamics in the global stock markets in the reporting period.

For the purpose of calculating the market risk of the Republic of Belarus eurobonds, a historical VaR (Value at Risk) approach was used43. The value of the 5-percent quantile for the normal distribution of the monthly change in the value of these securities totals -7.7%. This means that, in relatively stable economic conditions, the market value of eurobonds with a probability of 95% will not fall below 96.1% of the nominal value within one month and below 76.2 % of the nominal value within one year. However, in 5 percent of cases when the monthly change in the value of eurobonds may be below -7.7%, the mathematical expectation of losses (the most likely decline) will amount to -9.8% (CVaR estimation44).

VaR estimations may underestimate possible losses during a stress period. Therefore, a modified VaR approach was used additionally (statistically is different in that it is based not on the normal distribution but on the Cauchy distribution characterized by “heavy tails”), which shows that in a crisis situation in the stock market, the market value of the Republic of Belarus eurobonds with a probability of 95% will not fall below 88.3% of the nominal value within one month and below 49.3% of the nominal value within one year.

Assessments of international rating agencies indicate that significant changes in the level and profile of financial risks of the Republic of Belarus were lacking in 2016.

In October 2016, the rating agency Standard & Poor’s confirmed the long-term and short-term sovereign credit ratings of the Republic of Belarus at the level of “B- / B”, the outlook for the change in ratings is “stable”. Constraining influence on the rating level of Belarus has institutional system and weak foreign economic position, which is, from the point of view of agency experts, hardly predictable and low-efficient. At the same time, the ratings are supported by strong budgetary indicators and a continued history 43 VaR-approach, proposed in the 80s of the 20th century, makes it possible to comprehensively evaluate the possible cost losses in the future with a chosen probability and for a certain period of time. 44 CVaR (Conditional VaR) is the average expected loss (with a given level of risk, at this horizon), provided that it exceeds the corresponding VaR value.


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of providing financial support from the Russian Federation. A negative impact on the ratings is possible in case of materialization of significant conditional risks in the banking or public sectors. Accordingly, a well-considered reform program aimed at reducing external economic risks, increasing the commercial component of state enterprises’ activities, and maintaining a stable growth trend of the country’s GDP, may have a positive impact on the ratings.

In June 2016, the rating agency Moody’s Investors Service confirmed the credit rating of the Republic of Belarus at the level of Caa1. At the same time, the outlook for further rating movement was changed from “negative” to “stable” in view of the improved external liquidity assessment owing to the increased foreign support (according to agency experts, the probability of support from sources other than the Russian Federation and the EFSD raised), a reduction in the current account balance deficit (movements in the balance of foreign trade and decrease in government transfers to the Russian Federation) and a more flexible regime for the exchange rate formation (pegging the Belarusian ruble to the currencies basket of the Russian ruble, US dollar and euro). The beginning of the financial and structural reforms in Belarus as a condition for receiving the EFSD loan (in particular, pension reform, the planned decrease in subsidies to pay housing and utility services, the refusal of target indicators in production, and liberalization of the price policy for a larger number of goods) influenced the forecast improvement as well. However, the low rating of Caa1 is caused by the country’s weak external liquidity position, the shortcomings of the economic growth model, as well as high expenditures on supporting the public sector.

The rating agency Fitch Ratings confirmed sovereign long-term issuer default ratings in the national and foreign currencies at “B-” level with a “stable” outlook. At that, short-term ratings in the national and foreign currencies have been affirmed at “B” level, and the country ceiling rating at “B” level. Experts of the agency noted that the ratings assigned to the Republic of Belarus reflect, on the one hand, significant external factors of vulnerability and the history of frequent crises; on the other, relatively strong public finances and structural indicators (in particular, GDP per capita and human development indicators are significantly higher than those of comparable issuers). The banking sector risks, according to Fitch Ratings,


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remained high in 2016, which was due, primarily, to the recession in the real sector of economy.

6.2. FINANCIAL SECTOR ASSESMENT PROGRAM

The National Bank of the Republic of Belarus undertakes a number of initiatives to strengthen the stability of the country’s financial sector. Among them – the work with the joint mission of the IMF and the World Bank under the Financial Sector Assessment Program (hereinafter – the “FSAP”), which took place in April 2016. The financial sector assessment program is a joint initiative of the National Bank, the IMF and the World Bank aimed at strengthening the financial systems of member countries and based on a deep analysis of the sustainability of financial systems and their ability to withstand various risks. This program is intended to contribute to creating systems for early diagnosis of the financial systems’ vulnerabilities, working out efficient measures to prevent the development of possible problems of the financial sector, as well as seeking the directions for the development of financial systems in different countries.

In view of the results of the meetings with government authorities, banks, insurance organizations and other participants of the financial market, the IMF and the World Bank experts assessed the financial system sustainability and the compliance of international standards for supervising market participants’ activities, analyzed the financial protection system, as well as identified the main directions for further development of the financial sector and increase in its efficiency.

The experts of the FSAP mission noted a significant work done by the National Bank on the results of the previous FSAP assessment in 2010. A serious progress has been noted in ensuring compliance of the existing practice of banking supervision in the Republic of Belarus with the fundamental principles of the Basel banking supervision, insurance sphere and the financial market infrastructures. The experts mentioned that a significant progress has been achieved in Belarus in ensuring sustainable payment system functioning. The FSAP mission also assessed the development of corporate management in the state-owned financial institutions, financial reporting standards and audit practices, the measures aimed at securing creditors’ rights and legal basis of insolvency regulation, as


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well as designing the strategy of the digital banking development by the National Bank.

As part of the FSAP, the stress-testing of the banking sector’s stability was carried out independently by the experts of the National Bank, 11 largest banks and the IMF. The stress-tests were based on the same macroeconomic scenarios for 2016-2018, which reflect the main risks – longstanding slowing-down of the growth rates in Russia and in the world as a whole due to the low or falling-down prices on energy, depreciation of the national currency exchange rate, and increase in interest rates.

The results of stress-tests, which were obtained by the National Bank and banks, are, on the whole, in line with the IMF’s assessments and evidence the adequate sustainability of the Belarusian financial institutions. At the same time, in the case of the negative development of the macroeconomic situation, separate banks will be in need of additional capitalization.

Based on the results of the mission work, the recommendations to strengthen the National Bank’s operational independence, improve the powers in the field of corrective measures and usage of sanctions, improve the corporate governance, strengthen supervision of the systemically important banks, limit the risks associated with foreign exchange lending and debt restructuring, prevent the development of adverse situations in order to increase the Belarusian financial system sustainability against external and internal shocks were given.

Based on the results of assessments, the National Bank and the Government of the Republic of Belarus organized the work aimed at implementing the FSAP mission’s recommendations. The plan of actions designed to implement recommendations made in follow-up of the Program of assessment of the financial sector of the Republic of Belarus, the implementation of the majority of which is scheduled for the next 3-5 years, was developed in concert with the IMF experts. A number of recommendations of the FSAP mission aimed at improving measures to ensure financial stability, improve supervision and regulation of the financial sector, improve the efficiency of financial protection mechanisms, as well as resolve the problem of non-performing loans have already been implemented, including:

- the Financial Stability Council (Resolution of the Council of Ministers of the Republic of Belarus and the National Bank of the Republic of Belarus


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No. 454/16 dated June 13, 2016) was established with a view to organizing and coordinating interaction between government agencies in the course of monitoring financial stability, developing and implementing measures aimed at ensuring financial stability;

- the mechanism for providing emergency liquidity assistance to banks by the National Bank was improved and conditions for providing such assistance were determined in cooperation with the IMF experts;

- the collection of additional information necessary for assessing the financial stability of the Republic of Belarus commenced;

- the activities were carried out to improve corporate governance in state-owned banks, as well as in other banks, non-bank financial institutions and the JSC “Development Bank of the Republic of Belarus”;

- for the purpose of solving the problem of non-performing loans the JSC “Asset Management Agency” (Edict of the President of the Republic of Belarus No. 268 “On the Establishment and Activities of the Joint-stock Company “Agency for Asset Management” dated July 14, 2016) was established;

- with a view to increasing the level of availability of credit resources in the Republic of Belarus and the country’s rating in the World Bank’s annual survey “Doing Business”, since September 1, 2016, a register of movable property encumbered by a pledge began its functioning. The procedure for the formation, maintenance, and operation of the register, as well as access thereto, is determined by Resolution of the Council of Ministers of the Republic of Belarus and the National Bank of the Republic of Belarus No. 681/21 dated August 26, 2016;

- in order to gradually reduce directed lending the main parameters (values) of decrease in the total volumes of directed lending were stipulated by the Program of the Activities of the Government of the Republic of Belarus for 2016 - 2020 (approved by Resolution of the Council of Ministers of the Republic of Belarus No. 274 of April 5, 2016);

- for the purpose of increasing the efficiency of government support for the real sector of the economy the approaches to select economic entities of all forms of property, which implement investment projects and claim to receive the government support, were changed in line with Edict of the President of the Republic of Belarus No. 106 “On Government Programs and State Support” dated March 23, 2016; and


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- in accordance with Edict of the President of the Republic of Belarus No. 184 “On Introducing Changes in and Amendments to the Edicts of the President of the Republic of Belarus” of May 31, 2016, the National Bank of the Republic of Belarus exercises supervision over the activities of the JSC “Development Bank of the Republic of Belarus”.

Thus, along with further expansion of cooperation with the IMF and the World Bank, the participation of the Republic of Belarus in the Financial Sector Assessment Program made it possible to improve the tools for analyzing the state of the Belarusian financial sector, identify approaches to assessing the impact of potential financial crises on the macroeconomic situation in the country, as well as improve the stability of financial sector of the Republic of Belarus.

6.3. ASSET QUALITY REVIEW

In July 2016, asset quality review (hereinafter – the “AQR”) of the Belarusian banks initiated by the National Bank was completed.

The AQR procedure is a special diagnostic study, in which a specific scenario is applied to the bank’s loan portfolio and the consequences of its implementation for the bank are analyzed. The conduction of the AQR is a common international practice. Thus, in 2013 - 2014 in the EU countries the AQR was carried out in 130 major banks, the total assets of which account for 85% of the assets of the Euro zone banking system.

In the Republic of Belarus, the AQR covered nine largest banks, the share of assets of which amounts to more than 92% of the total assets of the entire banking system.

The most reputable international auditing companies having experience in the performance of the AQR in the European Union acted as executors of the AQR procedure. When carrying out the assessment the international methodology of the AQR performance was used, and the independence of evaluation was ensured by means of confirming the findings by foreign offices of the audit firms.

The main purpose of the AQR was to obtain by the National Bank an independent assessment of a credit risk accepted by banks and the possibility of its compensation at the expense of the available capital.


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The results of the AQR identified the need for potential additional capitalization of three banks - JSC “Belagroprombank”, “Belinvestbank” JSC, and Alfa-Bank. At that, it should be emphasized that the results of a special diagnostic study in no way are grounds for recognizing banks as problematic ones.

The remaining six banks have a sufficient additional stock of regulatory capital in case of a possible deterioration in the financial condition of borrowers, as well as worsening of the general external and internal economic conditions. At that, in the country’s largest bank JSC “JSSB Belarusbank”, the share of assets of which amounts to 42% of the total assets of the whole banking system, the capital adequacy ratio, given the AQR results, totaled 17.5%, with the National Bank’s requirement being at least 10.625% (as of August 1, 2016, the capital adequacy ratio calculated in accordance with the National Bank’s requirements stood at 18.8%). Based on the AQR results the capital adequacy ratio of the whole banking sector totaled 10.76% as of August 1, 2016 (as of August 1, 2016, the capital adequacy ratio calculated in accordance with the National Bank’s requirements stood at 17.13%). The potential decline in the capital adequacy is due to a more conservative approach to the assessment of the quality of loan collateral relative to that used by banks at present.

In addition, the AQR also included analysis and assessment of methodologies and procedures for identifying, monitoring and limiting risks, the system of assessing the borrower’s solvency used by banks, the quality and adequacy to ensure a timely fulfillment of obligations, including the methodology for estimating the collateral’s fair value and liquidity.

Banks, in which a potential lack of capital was identified following the AQR results, submitted to the National Bank plans on ensuring its adequacy to cover a credit risk. At that, capital adequacy provision does not necessarily mean a direct increase in the capital by the owner. First of all, these plans provide for the measures designed to reduce a credit risk accepted by banks, including by dint of improving the quality of collateral under loans granted, as well as to increase the capitalization at the expense of income, primarily by means of cost optimization and attraction of subordinated loans. Action plans were discussed at the meeting of the Board of the National Bank, and their implementation will be monitored by the regulator. The efficiency of the measures taken by these banks and their impact on the quality of assets will


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be estimated as of July 1, 2017 by means of carrying out reassessment of the quality of banks’ assets.

By October 1, 2016, one of three banks had developed the plan of measures to the full extent. Two banks continue implementing plans; the banks should complete the activities stipulated by the plans by July 1, 2017.

The AQR results were also considered at the meeting of the Financial Stability Council on September 12, 2016. During the meeting, the action plans aimed at minimizing the banks’ risks identified as a result of assessing the quality of assets, including, if necessary, additional capitalization of banks, in the authorized fund of which the share of state ownership accounts for more than 50%, at the expense of the state in sufficient volumes were approved.

In addition to the capital adequacy assessment, a conducted diagnostic study made it also possible to determine the directions towards further improvement of the National Bank’s approaches to credit risk evaluation. In particular, it is planned to adjust the requirements for the assessment of the collateral accepted by banks as a pledge. Along with this, the National Bank in concert with the Government will take measures aimed at protecting interests and rights of the collateral holders.

Moreover, the approaches to risk assessment with regard to the restructured debt will be improved. Adjusted approaches will require banks to implement debt restructuring based on the real opportunities of borrowers to perform their obligations, taking into account changes in the terms of and conditions for debt repayment.

The attention will be also paid to the improvement of risk assessment of the debt denominated in foreign currency. This does not mean the introduction of any restrictions on granting foreign exchange loans to economic entities. At the same time, it will encourage banks to make decisions on providing foreign exchange loans given the adequacy of the borrower’s foreign exchange earnings from the core activities to meet obligations to the full extent and on a timely basis. A more conservative approach to the assessment of borrowers’ foreign exchange risk will contribute to the processes of de-dollarization of the economy which are currently taking place in the country.

A transparent and independent evaluation of the Belarusian banks’ assets will contribute to strengthening the foreign investors’ confidence in the


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banking system and attracting foreign capital in the form of both direct investments and long-term loans. Taking into account the successful experience, the practice of carrying out the AQR procedures will continue.

The aggregate report on the results of the diagnostic study with respect to the AQR of nine major banks is posted on the official web-site of the National Bank of the Republic of Belarus in the Internet at the following address: http://www.nbrb.by/.

6.4. INSTITUTIONAL MEASURES

In 2016, the necessary level of financial stability was ensured in general, which enabled financial intermediaries to provide their services to economic agents in a continuous manner. The main indicators of financial stability during the reporting period had values within the safe ranges. At the same time, a number of institutional measures were aimed at strengthening the basis for ensuring financial stability in 2016.

The Financial Stability Council. By 2016, a situation had developed where the powers to monitor and ensure financial stability had been concentrated in various government agencies. The key role in these issues is exercised by the National Bank and the Government (primarily, the Ministry of Finance, the Ministry of Economy, and the Council of Ministers Office) 45. An important role within its competence is performed by the State Institution “Agency for Guaranteed Repayment of Natural Persons’ Bank Deposits”. At that, the need to coordinate efforts and increase concurrence of actions, intensify and improve the quality of information exchange between the government agencies charged with monitoring and ensuring financial stability required the creation of an interdepartmental agency that could undertake these functions.

For the purpose of coordinating actions aimed at ensuring the financial stability, the Financial Stability Council, which is a permanent collegial body, was established in line with Resolution of the Council of Ministers and the National Bank No. 454/16 dated June 13, 2016.

Its main tasks are the following: 45 According to Article 351 of the Banking Code of the Republic of Belarus, financial stability monitoring is performed by the National Bank in cooperation with the Government of the Republic of Belarus.

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- organization and coordination of interaction of government agencies in the course of implementation of financial stability monitoring, including a comprehensive analysis of the factors influencing the financial stability maintenance (state of the balance of payments, consolidated budget of the Republic of Belarus, legal persons, households, government debt of the Republic of Belarus, debt of local government and self-government agencies, debt guaranteed by the Republic of Belarus and local executive and administrative bodies, as well as the debt of the National Bank, banks, enterprises and households, other factors);

- development and coordination of implementing measures aimed at ensuring financial stability, within which banks and non-bank financial institutions and other financial intermediaries, the financial market and the payment system carry out their inherent activities in a proper manner and have the capacity to perform such activities in the event of destabilizing effects of internal and external factors;

- development of mechanisms for resolving crisis situations in the financial market; and

- coordination of activities of the authorized government agencies with regard to regulation and supervision in the financial market.

The Financial Stability Council functions under the co-chairmanship of the Chairman of the Board of the National Bank of the Republic of Belarus and the First Deputy Prime Minister of the Republic of Belarus. The Council consists of representatives of the National Bank, the Ministry of Finance, and the Ministry of Economy. Its meetings are held at least twice a year.

In 2016, two meetings of the Financial Stability Council were held, at which topical issues within its competence were considered and corresponding decisions were taken.

Improving the mechanisms for providing government financial assistance to the economy. The growing problems with servicing the debt owed to banks by enterprises and organizations increased the urgency of activities aimed at strengthening mechanisms to improve the quality of credit debt.

The deterioration in the quality of credit debt is typical first of all for state-owned enterprises: they accounted for 81% of the total growth of problem assets of the banking sector in 2016. The growth in the share of bad assets was to a considerable Edict caused by the growth in non-payments


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under loans issued earlier due to economic miscalculations, the lack of effective steps to reduce costs and search for new markets by state-owned enterprises.

The availability of significant amounts of bad debts and unsustainable financial position of enterprises in the real economy sector limit the possibilities of banks to expand lending.

Under these conditions the continuation of systematic work aimed at limiting directed lending and improving the mechanisms for providing government financial assistance to the economy was of a great importance.

With a view to increasing the efficiency of implementing government programs and improving the procedures for providing state assistance, Edict of the President of the Republic of Belarus No. 106 “On Government Programs and State Financial Assistance” dated 23 March 2016 (hereinafter – “Edict No. 106”) was adopted.

In accordance with Edict No. 106, the government financial support is provided to economic entities in the framework of the government programs for the implementation of investment projects ensuring the increase in the profitability of produced goods (works, services) and reduction of their prime cost in the following form:

- compensating the part of the expenditures on acquiring technological equipment and spare parts at the expense of the republican and (or) local budgets on the terms of the tender; and

- granting credits by the JSC “Development Bank of the Republic of Belarus” (hereinafter – the “Development Bank”) on the terms of a tender, unless otherwise prescribed by the Council of Ministers of the Republic of Belarus.

Resolution of the Council of Ministers of the Republic of Belarus No. 274 “On Approving the Program of Activities of the Government of the Republic of Belarus for 2016 - 2020” dated April 5, 2016 defines indicators for reducing directed lending under government programs and measures.

For the purpose of optimizing the crediting of government programs and measures under the decisions of the President of the Republic of Belarus and the Government of the Republic of Belarus, Resolution of the Council of Ministers of the Republic of Belarus No. 103 “On Financing Government Programs and Measures in 2016” dated February 8, 2016, which stipulates


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the maximum volume of soft lending worth BYN2800.0 million in 2016, was adopted.

In 2016, the following approaches to directed lending were used: - previously initiated (unfinished) projects are additionally credited by

banks and the Development Bank; - new projects are credited by the Development Bank on the terms of a

tender; - lending to the current activities of the agro-industrial complex is carried

out by banks; and - soft lending to housing remains with banks (JSC “Belagroprombank”

and JSC “JSSB Belarusbank”). Consecutive steps to transform the system of government financial

assistance will make it possible to remove the burden of servicing direct loans from banks in the long term. Government financial support will be reoriented from supporting economically inefficient enterprises towards stimulating the areas of activities, which are prospective from the state’s point of view, subject to efficient mechanisms for allocating funds (competitive nature and lack of discrimination in the ownership forms).

The Asset Management Agency was established in line with Edict of the President of the Republic of Belarus No. 268 “On the Establishment and Activities of the Joint-stock Company “Asset Management Agency” dated July 14, 2016. This Edict specified a mechanism for transferring banks’ bad debts under loans of permanently insolvent agricultural organizations to a specialized organization dealing with troubled debts of these enterprises – JSC “Asset Management Agency”. The agency is empowered to grant a grace period (installment) for repayment of the principal debt under the loans transferred thereto. The implementation of the corresponding mechanism will make it possible to “clear” the balance sheets of banks which provide credits and free up sources for crediting solvent agricultural organizations.

In accordance with the Resolution of the Council of Ministers of the Republic of Belarus and the National Bank of the Republic of Belarus No. 923/28 “On Measures Aimed at Implementing Edict of the President of the Republic of Belarus No. 268 dated July 14, 2016” of November 15, 2016 the Asset Management Agency (hereinafter – the “Agency”) acquired assets of JSC “Belagroprombank” and JSC “Development Bank of the Republic of Belarus” (hereinafter - the “Development Bank”) worth BYN566.8 million of

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192 organizations, including loans receivable, as well as interest accrued by the Development Bank for the use of credits before the date of the claim assignment.

Edict of the President of the Republic of Belarus No. 268 “On the Establishment and Activities of the Joint-stock Company “Asset Management Agency” dated July 14, 2016, the Agency took the following measures with respect to the assets from the date of their transfer:

- the interest rate for the use of loans is set at 3% per annum with a monthly payment of interest;

- the grace period for repayment of a principal debt under loans is granted for up to one year, followed by its subsequent repayment by installments during the period of up to seven years (according to the developed business plans); and

- the grace period for repayment of interest for the use of loans accrued by the Development Bank prior to the date of the claim assignment is granted for up to one year, followed by its subsequent repayment by installments during the period of up to seven years (according to the developed business plans).

At the same time, partial compensation of the part of the interest for the use of loans from the republican and local budgets is not performed, and the guarantees of the Government of the Republic of Belarus, local executive and administrative bodies granted to ensure the repayment of loans are being terminated.

Edict No. 268 also provides for the repayment in the form of grants to borrowers of the overdue debts of agricultural organizations on interest for using loans granted by the JSC “Belagroprombank”, at the expense of funds received from placement of the government long-term bonds by the Ministry of Finance. In line with Resolution of the Council of Ministers of the Republic of Belarus and the National Bank of the Republic of Belarus No. 967/30 “On Measures Designed to Implement Edict of the President of the Republic of Belarus No. 268 dated July 14, 2016” of November 24, 2016, this debt was repaid in the total amount of BYN215.9 million.


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APPENDICES

DYNAMICS

of financial performance of enterprises

BYN million

2015 2016 Growth

rate, %

For information: 2015 to 2014, %

Proceeds from sale of products, goods, works, and services 157,547.4 171,797.0 109.0 110.9

Taxes and fees accrued from proceeds 19,638.5 21,748.6 110.7 109.2

% of sales proceeds 12.5 12.7 х х

Cost of sold products, goods, works, and services 126,003.3 137,449.6 109.1 110.5

% of sales proceeds 80.0 80.0 х х

Profit/losses (-) from sales of products, goods, works, and services 11,905.6 12,598.8 105.8 118.3

Profit/losses (-) before tax 4,345.8 6,036.3 138.9 71.6

Net profit/losses (-) 2,780.3 4,304.3 154.8 57.8

Profitability of sales, % 7.6 7.3 х х

Profitability of sold products, goods, works, and services, % 9.4 9.2 х х

Share of loss-making enterprises in their total number, % 21.7 19.0 х х

Amount of losses 4,060.8 2,548.5 62.8 221.0

Donations from the budget for the compensation of losses 1,904.1 1,938.7 101.8 95.7

Source: the National Statistical Committee (hereinafter – the “Belstat”) data.


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GROWTH RATE

of profit by industry % of 2015

Profits and losses (-) from sales of products, goods,

works, and services

Profits and losses (-) before tax

Net profits and losses (-)

nominal real nominal real nominal real

Republic of Belarus 105.8 98.1 138.9 128.8 154.8 143.6

Agriculture, forestry and fisheries 369.8 343.0 x x x x

Industry 103.9 96.4 230.6 213.9 366.7 340.2

mining 115.1 106.8 329.8 305.9 332.9 308.8

processing 101.3 94.0 188.4 174.8 316.8 293.9

supply of power, gas, steam, hot water, and

conditioned air 112.9 104.7 722.5 670.2 1,171.6 1,086.8

water supply; collection, treatment and disposal of

waste, pollution control activities

151.8 140.8 132.6 123.0 130.5 121.1

Construction 63.2 58.6 42.5 39.4 29.4 27.3

Wholesale and retail trade; repair of cars and motorcycles

88.2 81.8 91.6 85.0 104.3 96.8

Transportation, warehousing, postal and courier activities 112.5 104.4 33.1 30.7 8.6 8.0

Source: the Belstat data.


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PROFITABILITY

of sold products, goods, works, and services and

profitability of sales

% Profitability of sold

products, goods, works, and services

Profitability of sales

2015 2016 2015 2016

Republic of Belarus 9.4 9.2 7.6 7.3

Agriculture, forestry and fisheries 1.3 4.6 1.2 4.0

Industry 11.1 10.2 8.7 8.0

mining 13.0 13.6 9.2 9.9

processing 12.2 10.8 9.7 8.7

supply of power, gas, steam, hot water, and conditioned air 7.0 7.2 5.3 5.3

water supply; collection, treatment and disposal of waste, pollution control activities 6.8 10.0 5.7 8.1

Construction 9.8 6.6 7.9 5.5

Wholesale and retail trade; repair of cars and motorcycles 4.6 3.9 3.8 3.2

Transportation, warehousing, postal and courier activities 12.1 12.0 9.8 9.6



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DYNAMICS

of payables and receivables

BYN million

01.01.2016 01.01.2017 Growth rate, %

For information: 01.01.2016 to 01.01.2015, %

Payables 35,309.9 39,594.6 112.1 124.3 of which: in arrears 5,797.9 6,854.3 118.2 151.4 % of total 16.4 17.3 х х

Receivables 26,982.2 29,943.5 111.0 123.3 of which: in arrears 6,041.7 6,857.5 113.5 149.3 % of total 22.4 22.9 х х

Share of organizations having arrears (% of the total number)

payables 64.6 64.4 х х receivables 74.4 75.2 х х

Debt under credits 46,121.8 45,745.7 99.2 145.0 of which: in arrears 1,121.7 1,743.7 155.5 245.8 % of debt under credits 2.4 3.8 х х

Total payables 92,100.1 98,921.3 107.4 139.0 of which: in arrears 7,278.5 9,491.0 130.4 162.2 % of the total arrears 7.9 9.6 х х



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DYNAMICS

of external payables and receivables

BYN million

01.01.2016 01.01.2017 Growth rate, %

For information: 01.01.2016 to 01.01.2015,

% External payables 8,938.9 9,014.7 100.8 141.1

of which: in arrears 1,189.1 1,118.8 94.1 154.8 % of total external payables 13.3 12.4 х х

External receivables 6,952.5 7,278.7 104.7 136.2 of which: in arrears 1,045.0 914.2 87.5 177.1 % of total external receivables 15.0 12.6 х х


DYNAMICS

of debt under banks’ loans and credits

BYN million

01.01.2016 01.01.2017 Growth rate, %

Republic of Belarus 56,790.1 59,326.6 104.5

Agriculture, forestry and fisheries 5,540.5 5,234.2 94.5

Industry 34,402.1 35,407.7 102.9

Construction 4,794.7 6,079.2 126.8

Wholesale and retail trade; repair of cars and motorcycles 5,110.2 5,333.9 104.4

Transportation, warehousing, postal and courier activities 684.2 743.8 108.7



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INDICATORS

of financial stability in accordance with the

IMF Compilation Guide (2007)

%

Indicators 2016 2017

01.01. 01.04. 01.07. 01.10. 01.01. Basic set

Ratio of regulatory capital to risk-weighted assets 18.7 16.3 17.2 18.0 18.6

Ratio of Tier 1 regulatory capital to risk-weighted assets 14.7 13.4 13.9 14.5 14.2 Ratio of non-performing loans and borrowings after deduction of established provisions to equity 21.2 43.3 48.8 48.9 38.9 Ratio of non-performing loans and credits to total gross loans and credits 6.8 11.5 13.4 14.3 12.8 Ratio of the distribution of loans by sector to total loans and credits: residents, 99.5 99.5 99.6 99.6 98.6

of which: Ratio of the distribution of loans by sector

to total loans and credits: depository institutions 1.5 1.6 1.3 1.1 2.0 Ratio of the distribution of loans by sector

to total loans and credits: central bank 0.0 0.0 0.0 0.0 0.0 Ratio of the distribution of loans by sector

to total loans and credits: other financial corporations 1.8 2.1 2.4 2.5 2.8

Ratio of the distribution of loans by sector to total loans and credits: general government sector 0.0 0.0 0.0 0.0 0.2

Ratio of the distribution of loans by sector to total loans and credits: non-financial corporations 79.0 79.5 79.2 78.2 75.0

Ratio of the distribution of loans by sector to total loans and credits: other internal sectors 17.2 16.4 16.7 17.6 18.5 Ratio of the distribution of loans by sector to total loans and credits: non-residents 0.5 0.5 0.4 0.4 1.4 Rate of return on assets 1.3 1.4 1.3 1.2 1.6 Rate of return on equity 10.4 11.4 10.4 9.4 12.6 Ratio of profit on interest to gross income 10.6 13.1 12.4 13.6 14.7 Ratio of non-interest expenses to gross income 96.2 95.4 96.2 96.3 95.1


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Table cont’d The ratio of liquid assets to total assets (liquid assets ratio) 26.0 23.4 20.4 24.5 24.6

Ratio of liquid assets to short-term liabilities 75.8 79.8 68.7 83.0 51.0

Ratio of net open currency position to capital 4.4 5.6 3.7 4.8 6.3 Recommended set Depository institutions Ratio of capital to assets 12.8 12.6 13.0 13.6 13.5 Ratio of large open positions to capital 193.8 203.7 198.0 191.6 176.5

Ratio of geographical distribution of loans and credits to total loans and credits: national economy 99.6 99.6 98.6 Ratio of geographical distribution of loans and credits to total loans and credits: developed countries 0.0 0.0 0.7 Ratio of geographical distribution of loans and credits to total loans and credits: regions excluding advanced economies 0.4 0.4 0.6

Of which: Africa 0.0 0.0 0.0

including countries in sub-Saharan Africa 0.0 0.0 0.0 Central and Eastern Europe 0.0 0.0 0.0 Countries of the former USSR and Mongolia 0.4 0.4 0.6 Asia 0.0 0.0 0.0 Middle East 0.0 0.0 0.0 Western hemisphere 0.0 0.0 0.0

Ratio of gross position on derivative financial instruments on the asset side to capital 7.1 0.9 0.1 0.0 0.0 Ratio of gross position on derivative financial instruments on the liabilities side to capital 0.5 0.1 0.0 0.0 0.1 Ratio of income from trading operations to total income 3.8 2.3 2.0 Ratio of staff costs to non-interest expenses 5.4 5.9 5.1 5.2 5.3 Spread between reference rates on loans and deposits, basis points 690.0 690.0 630.0 630.0 Spread between maximum and minimum interbank rates, basis points 1,170.0 740.0 1510.0 775.0 900.0 Ratio of customer deposits to total loans credits (without interbank loans) 87.6 85.3 85.0 89.4 96.4 Ratio of foreign exchange credits and loans to total loans and credits 58.1 60.4 59.9 58.5 57.5 Ratio of foreign exchange liabilities to total liabilities 74.1 75.8 75.0 73.1 72.6 Other financial corporations


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Table cont’d Ratio of assets to total assets of the financial system 8.3 8.3 Ratio of assets to GDP 12.4 12.8 13.0 13.2 Households Ratio of households’ debt to GDP 7.5 7.6 Ratio of households’ payments against debt servicing and repayment of its principal amount to income 7.3 7.4 Real estate markets Residential real estate prices 21.7 12.5 5.6 -0.6 Prices for commercial real estate 4.1 4.4 Ratio of loans and credits for residential property to total loans and credits 12.7 12.2 12.5 13.2 13.7 Ratio of loans and credits for commercial real estate to total loans and credits 2.3 3.7 3.3 3.4 3.1 Source: the Belstat data.

financial stability in the republic of belarus 2016

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