Trends in Lending - Fourth Quarter Report 2019

TRENDS IN LENDING

Fourth Quarter Report 2019

Belgrade, March 2020

Trends in Lending

National Bank of Serbia

ii

Trends in Lending

National Bank of Serbia

Introductory note

Trends in Lending is an in-depth analysis of the latest trends in lending, which aims to ensure better understanding of the conditions prevailing in the domestic lending market. It looks into lending developments, cost of borrowing by households and corporates and lending market conditions, by examining factors behind loan supply and demand.

Credit aggregates, as a quantified expression of movements in the lending market, are calculated based on banking sector balance sheet statistics as a source of data on the balance of domestic banks' loan receivables. Given the relatively high share of foreign currency-indexed loans in loan portfolios, the increment and growth rates are calculated excluding the effect of changes in the dinar exchange rate against other currencies in the loan portfolio.

The report also draws on the results of the bank lending survey conducted by the National Bank of Serbia since early 2014. Participation in the survey is voluntary. This survey has greatly improved the understanding of developments in the domestic lending market, allowing insight into bankers' perceptions of actual and expected changes with regard to loan supply and private sector loan demand.

The report also relies on the results of the survey developed by the European Investment Bank in the context of the Vienna Initiative 2 to monitor deleveraging by cross-border banking groups and the resultant constraints on lending activity. This survey, conducted since October 2012 on a semi-annual basis, monitors subsidiaries of international banking groups in Central and South-Eastern Europe, focusing on their strategies, market conditions and expectations. The purpose of the survey is to observe the effects of movement in supply and demand on lending activity, and to gauge the impact of domestic and international factors on supply and demand conditions. Ten Serbian banks participate in this survey, their assets making up around 50% of total assets of the Serbian banking sector.

iii

Trends in Lending

National Bank of Serbia

ABBREVIATIONS

GDP - gross domestic product rhs - right-hand scale

lhs - left-hand scale mn - million

bn - billion

y-o-y- year-on-year

NPL - non-performing loan

1. - percentage point Q - quarter

Other generally accepted abbreviations are not cited.

iv

Trends in Lending

National Bank of Serbia

Contents
Overview ....................................................................................................................................	6
I.	Corporate sector .................................................................................................................	8
1.	Corporate loans ..................................................................................................................	8
2.	Cost of corporate borrowing ............................................................................................	10
3.	Assessment of loan supply and demand - based on the results of bank lending surveys 11
II.	Household sector ..............................................................................................................	12
1.	Household loans ...............................................................................................................	12
2.	Cost of household borrowing ...........................................................................................	13
3.	Assessment of loan supply and demand - based on the results of bank lending surveys 14
III.	Regional comparison........................................................................................................	15
Methodological notes ...............................................................................................................	16

v

Trends in Lending

National Bank of Serbia

Overview

The trend of stable and sustainable growth in total domestic loans continued in 2019. Excluding the exchange rate effect, total domestic loans grew by 9.8%, with corporate loans rising by 9.5% and household loans by 10.0%. Lending activity growth rate was almost two-digitdespite a relatively high base from 2018. By contrast to 2018, growth in 2019 was led more by corporate (contribution of 4.9 pp) than by household loans (contribution of 4.6 pp). In addition, the entire growth in corporate lending in 2019 referred to investment loans and housing loans1 increased more than in 2018, which points to an improved composition of lending and its substantial support to economic growth. Though lending activity growth was relatively strong, among the highest in the region, the share of loans in GDP is still below its long-termtrend,2 which means that lending activity poses no risk to price or financial stability.

The strong uptake in lending activity was propped up by favourable terms of financing, resulting from the effects of past monetary easing, low interest rates in the international money market, reduced country risk premium and increased interbank competition, while interest rates on dinar loans fell to a new minimum late in the year. In addition, acceleration of economic activity and favourable trends in the labour market continued to contribute to lending activity growth.

In late 2019, the share of NPLs in total loans fell to its lowest level since this indicator of asset quality is monitored, which additionally strengthens financial stability and creates room for further growth in lending. In December, the NPL ratio was 4.1%, down by 1.6 pp from end-2018, and by 18.3 pp from July 2015, i.e. immediately before the start of implementation of the NPL Resolution Strategy. The decline in this ratio was due to rising economic and lending activity, on the one hand, and, on the other hand, to successful implementation of the NPL Resolution Strategy, owing to which the amounts of write-offs and sale of these loans were multiply lower in 2019 relative to prior years.

Led by investment lending, loans to corporates gained RSD 108.6 bn in 2019, of which RSD 40.5 bn in Q4. Growth was broadly dispersed across sectors, and the majority of lending was to corporates in transport, trade, real estate and construction.

1. Excluding the effects of the write-off of 38% of the value of CHF-indexed loans at conversion into EUR-indexed loans.
2. Calculated in line with the methodology for countercyclical capital buffer, including data for Q3 2019.

Robust growth in lending gives a significant contribution to economic growth

(y -o-y growth rates, in %)
15
10
5
0
-5
-10
12 3 6 912 3 6 912 3 6 912 3 6 912 3 6 912 3 6 912 3 6 912 3 6 912
2011	2012	2013	2014	2015	2016	2017	2018	2019

Total domestic loans*/**

Total domestic loans*

Real GDP

Sources: NBS and SORS.

• Excluding the exchange rate effect.
• Excluding the effect of NPL write-off and sale since early 2016.

Lending growth in Serbia was among the highest in the region

(nominal y -o-y growth rates, in %)
15
10
5
0
-5
-10
-15
2013	2014	2015	2016	2017	2018	2019
Bosnia and Herzegovina		Bulgaria
Croatia				Hungary
Romania			Albania

North MacedoniaMontenegro Sources: websites of central banks and NBS calculation.

Share of total loans* in GDP is still below the long-term trend

(in %)

105
90
75
60
45
30
15
0
-15
-30
2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
	Gap
	Long-term trend of the share of loans in GDP
	Share of total loans in GDP

Sources: NBS and SORS.

* Including cross-border corporate borrowing.

6

Trends in Lending

National Bank of Serbia

Financial support was mainly directed at the sector of micro, small and medium-sized enterprises, which accounted for over 60% of loans approved in Q4. These developments are consistent with the results of the bank lending survey, according to which SMEs were recognised as agents of growth in corporate sector demand for loans, which was mainly driven by the needs to finance capital investment and current assets.

Household loans gained RSD 29.9 bn in Q4, mostly led by cash and housing loans. Their growth in 2019 thus reached RSD 100.8 bn. Thanks to the NBS's measures aimed at limiting unsecured loans to households with unreasonably long maturities,3 the maturity of non-purposeloans intended for consumption, including primarily cash loans, shortened to below eight years during the year. Having in mind the further tightening of these requirements from early 2020, the maturity of unsecured loans is expected to shrink further this year. At the same time, positive trends in the labour market and the recovery of the real estate market also reflected on the disbursement of new housing loans whose amount, excluding loans refinanced with the same bank, was 23% higher y-o-yin 2019.

At end-December, in nominal terms, dinar receivables made up 33.1% of total corporate and household receivables, which is 0.1 pp higher than at end-2018. The dinarisation of household receivables has been stable since September at 55.4%, which is its maximum so far. The dinarisation of corporate receivables decreased somewhat due to a substantial rise in investment loans, which are mostly FX- indexed, and equalled 13.9% in late December. To encourage dinar lending to corporates, especially small and medium-sized enterprises, the NBS changed regulations relating to capital adequacy and risk management of banks in late 2019. The application of new rules for banks will begin on 1 July 2020.

3 Measures applied since early 2019.

7

Trends in Lending

National Bank of Serbia

1. Corporate sector

1. Corporate loans

Excluding the exchange rate effect, corporate loans rose by RSD 108.6 bn or 9.5% in 2019. The entire growth in corporate loans in 2019 can be attributed to investment loans, a significant source of investment financing since 2015, which

corresponds to the investment cycle. In nominal terms, the stock of corporate loans equalled RSD 1,245.2 bn in December and their share in annual GDP was 23.0%, up by 0.5 pp from end-2018.

Excluding the exchange rate effect, corporate loans gained RSD 40.5 bn or 3.3% in Q4, with almost three quarters of this growth pertaining to companies. As before, the Q4 rise in loans was broadly dispersed among sectors, with the majority of loans channelled to corporates in trade, transport, real estate and construction, and, to a lesser degree, to agriculture. By purpose, 95% of the increase in corporate loans in Q4 referred to investment loans. At the annual level, these loans gained 25.6%, and their share in total corporate loans reached 45.2%. Current assets loans also contributed to growth in Q4, though to a much smaller extent. Despite growing in Q4, current assets loans stagnated at annual level, while their share in total corporate loans fell to 39.1%. Such trends may indicate that in the conditions of improved liquidity and profitability, corporates have become increasingly focused on investment financing.

In Q4, the volume of new corporate loans was RSD

274.8 bn, of which over 60% was approved to micro, small and medium-sized enterprises. Current assets loans were the dominant category (RSD 129.7 bn), mostly to large and medium-sized enterprises, followed by investment loans (RSD 91.1 bn), which were mostly used by large, small and micro enterprises. At the level of the year, the amount of new investment loans (RSD 360.6 bn) was 48.6% higher than in 2018, while the amount of current assets loans (RSD 497.7 bn) was only 2.0% higher.

The dinarisation of corporate receivables decreased slightly in Q4 (by 0.1 pp) to 13.9% in December. The degree of dinarisation was lower due to pronounced growth in investment loans, which are mostly FX- indexed, but partly also to banks' activities aimed at resolving NPLs, i.e. write-offof receivables from companies in bankruptcy, which are mostly dinar- denominated. At the same time, the share of euro-

Despite the high base from end-2018, corporate loans posted high y-o-y growth in Q4

(y -o-y growth rates at the programme exchange rate, in %)

20
15
10
5
0
-5
-10
-15
1 5	9	1 5	9	1	5	9	1 5	9	1 5	9	1 5	9	1 5	9	1 5	9	1	5	9
2011	2012	2013	2014	2015	2016	2017	2018	2019

Corporates*		Total domestic loans*
Corporates		Total domestic loans

Source: NBS.

* Excluding the effect of NPL write-off and sale since early 2016.

Grow th in corporate loans in 2019 is entirely attributable to investment loans

(in pp, excluding the exchange rate ef f ect)

15
10
5
0
-5
-10
-15
2013	2014	2015	2016	2017	2018	2019

Import

Other

Investment

Export

Liquidity and current assets

Transaction accounts

Y-o-y lending growth rate, in %

Source: NBS.

The bulk of corporate receivables are loans to manufacturing industry and trade

(stock, in RSD bn)

1,400

1,200

1,000

800

600

400

200

0

I III	I III	I III	I III	I III	I III	I III	I III	I III
2011	2012	2013	2014	2015	2016	2017	2018	2019

Other

Real estate; scient. and serv. act.; arts, enter. and recr.

Transport and telecommunications

Trade

Construction

Mining, manufacturing, water management

Agriculture, forestry, fishing Source: NBS.

8

Trends in Lending

National Bank of Serbia

indexed and euro loans increased (by 0.2 pp to 85.6% in December), the share of USD loans decreased (by

0.1 pp to 0.3%), while the share of CHF loans (0.1%) remained broadly unchanged from end-Q3. A look at the dinarisation of new loans shows that 20.4% of new loans in Q4 were in dinars, with the highest degree of loan dinarisation recorded for micro enterprises (25.4%) and large enterprises (24.1%). In late 2019,

the NBS adopted amendments to regulations on capital adequacy and risk management by banks,4 to be applied from 1 July 2020. These amendments introduce maximum percentage shares for new FX- indexed non-purpose and non-investment loans and loans in a foreign currency approved to corporates. At the same time, banks will allocate less capital to cover risks for entirely dinar loans to small and medium- sized enterprises and entrepreneurs, than for non-dinar and FX-indexed loans. More favourable conditions provide additional support to dinar lending to this segment of the corporate sector.

The stock of corporate NPLs continued down in Q4,

on account of the successful implementation of the NPL Resolution Strategy5 and the Decision on the Accounting Write-off of Bank Balance Sheet Assets. Coupled with growth in lending, this resulted in the

share of NPLs in total loans to corporates reaching a new minimum of 3.2% in December, down by 0.5

1. from September, and 1.8 pp from end-2018.The share of corporate NPLs declined as much, to 3.4% in December. The NPL share in almost all sectors reached new historical lows in Q4, while relative to the start of implementation of the Strategy, the most pronounced decrease was recorded in construction, real estate business and trade.

Declining NPLs reduce the systemic risk, although from the aspect of financial stability it must be underlined that even the earlier higher level of NPLs did not jeopardise financial sector stability. Allowances for impairment of total loans relative to gross NPLs stood at 83.2% in December, while allowances for impairment of NPLs stood at 60.7%. The domestic banking sector is highly capitalised, as confirmed by the capital adequacy ratio, which at end- September6 stood at 23.6% (significantly above the prescribed minimum of 8%). After the introduction of

4https://www.nbs.rs/internet/english/scripts/showContent.html?id=15075&kon verzija=no

5 Activities envisaged by the NBS Action Plan

(http://www.nbs.rs/internet/english/55/npl/action_plan.pdf), aimed at strengthening banks' capacity to resolve the NPL issue and contributing to the development of the NPL market, have been fully implemented, some before the deadline. Their implementation was an important driver behind the vigorous fall in NPLs starting from 2016.

6 Latest available data.

The share of investment loans in new loans increased to one-third in 2019

(new loans, in RSD bn)

350

300

250

200

150

100

50

0

I III	I III	I III	I III	I III	I III	I III	I III	I III
2011	2012	2013	2014	2015	2016	2017	2018	2019

Current assets Export Investment Other Import Source: NBS.

Three-fifths of new loans in Q4 w as extended to micro, small and medium-sized enterprises

(in RSD bn)

350

300

250

200

150

100

50

0

II	III	IV	I	II	III	IV	I	II	III	IV
2017			2018				2019

Large Medium Small Micro

Source: NBS.

Dinarisation of corporate receivables declined mildly during Q4

(currency structure, in %)

100

80

60	85.6
40
20
0	13.9

I	III I III	I	III I	III I	III I III	I	III I	III I III
2011	2012	2013	2014	2015	2016	2017	2018	2019
RSD	EUR		USD	CHF	Other

Source: NBS.

The share of NPLs in most sectors decreased to new lowsin Q4

(gross principle, in %)

60
50
40
30
20
10
0
I	III	I	III	I	III	I	III	I	III	I	III	I	III	I	III	I	III
2011		2012		2013		2014		2015		2016		2017		2018		2019

NPL share in total corporate loans

Manufacturing, mining

Wholesale and retail trade

Construction

Real estate business

Transport, information, communications

Agriculture, forestry and fishing

Source: NBS.

9

Trends in Lending

National Bank of Serbia

Basel III standards7 into the domestic regulatory framework, this ratio has been at a higher level.

2. Cost of corporate borrowing

During Q4, interest rates on dinar loans dropped to a new minimum, while rates on euro loans continued to hover close to the lowest levels in the inflation targeting regime. Such movements reflect past NBS monetary policy easing, lower interest rates in the euro area money market, a lower country risk premium and stepped-upinterbank competition in the lending market. Owing to a decline in interest rates in the previous period, interest expenses of corporates decreased significantly, even though borrowing increased, which supported the rise in profitability of the Serbian economy.

The November cut in the NBS key policy rate (by

0.25 pp) spilled over onto the price of dinar corporate loans, hence the weighted average rate on new dinar loans to corporates dropped to a new minimum in December (4.0%) and was 0.4 pp lower than in September. Observed at the annual level, the rate was trimmed by 1.6 pp in 2019, while relative to May 2013, when the NBS embarked on monetary policy easing, it is 12.4 pp lower.

In terms of purpose, the reduction in rates on dinar corporate loans in Q4 is attributable to lower interest rates on investment (by 0.4 pp to 4.4%) and other unclassified loans (by 1.1 pp to 3.3%), whereas interest rates on current assets loans increased slightly relative to September, to 4.4% in December. In terms of company size, interest rates were lowered by 0.1 pp

• 0.6 pp, and in December they measured 5.1% for micro enterprises, 4.2% for small, 3.8% for medium- sized and 3.5% for large enterprises.

The weighted average interest rate on new euro and euro-indexed loans to corporates equalled 3.0% in December, up by 0.4 pp from September. This is 0.2 pp higher than at end-2018and 4.3 pp lower than in May 2013. Increase in the average rate in Q4 was determined by the rise in the rate on investment loans (3.4%), import loans (2.2%) and other unclassified loans (2.4%), while the rate on current assets loans (2.7%) remained unchanged relative to end-Q3.In terms of company size, the rise in the average rate was dictated by higher interest rates on loans to large enterprises (to 2.9%), and to a lesser degree to small enterprises (3.1%); the borrowing costs for medium-sizedenterprises were revised slightly down (to 2.4%), while for micro enterprises they remained unchanged (3.8%).

7 Basel III regulatory framework is applied as of 30 June 2017, when application of the Decision on Capital Adequacy of Banks (RS Official Gazette, Nos 103/2016, 103/2018 and 88/2019), introducing this standard in the domestic legislation, began.

Monetary policy accommodation reflected on interest rates on dinar loans

(weighted av erage v alues, per annum , in %)

21
18
15
12
9
6									4.0
3									2.25
0									1.9
								1.7
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2011	2012	2013	2014	2015	2016	2017	2018	2019

New dinar corporate loans

Key policy rate, period-average

BELIBOR 3M, period-average

New dinar corporate deposits

Source: NBS.

• Excluding revolving loans, current account overdrafts and credit card debt.

The cost of FX loans to corporatesremained favourable in Q4* as w ell

(weighted av erage v alues, per annum, in %)

10
8
6
4
2								3.0
0								0.9
-2								-0.4
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2011	2012	2013	2014	2015	2016	2017	2018	2019

New FX corporate loans**

New FX corporate deposits

EURIBOR 3M

Sources: NBS and European Banking Federation.

• Excluding revolving loans, current account overdrafts and credit ** Euro and euro-indexed.

Interest rates on all types of corporate loans are several times lower than six years ago

(weighted average values, per annum, in %)

20
18
16
14
12
10
8
6
4
2
0
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2011	2012	2013	2014	2015	2016	2017	2018	2019
	Investment*			Current assets*
	Other*				Current assets**
	Other**

Source: NBS.

• Euro and euro-indexed. ** Dinar.

10

Trends in Lending

National Bank of Serbia

3. Assessment of loan supply and demand - based on the results of bank lending surveys

The results of the January NBS Bank Lending Survey show that corporate credit standards were eased during Q4. Banking sector competition had the strongest impact on easing, while the accelerated economic growth, further decline in NPLs, greater risk propensity, and lower required collateral risk also contributed to this effect. Banks expect additional easing of standards for dinar loans in Q1 2020, under the influence of the majority of these factors.

According to the results of the survey, and in accordance with the expectations stated in the previous survey, during Q4 banks extended the maximum maturity for FX loans, and these favourable terms mostly pertained to the borrowing of SMEs. In contrast, loan price conditions and collateral requirements were tightened.

As expected by banks, loan demand of corporates continued to grow in Q4, mostly on account of SMEs. Demand growth was mainly driven by the need for financing current assets and capital investment, and to a lesser degree by activities in terms of acquisition/merging of other enterprises and debt restructuring. Further growth in demand, driven by current assets and investment financing, is expected in Q1 2020 as well.

The majority of factors acted towards easing credit standards for corporates in Q4

(in net %)

200
150
100
50
0
-50
-100
2014	2015	2016	2017	2018	2019

Risk propensity

Non-performing loans

Risk of required collateral

Expectations regarding general economic situation

Competition from other banks

Costs of funding Credit standards

Source: NBS.

Note: Growth indicates the tightening and decline indicates the easing of credit standards.

Loan maturity was extended in Q4, w hile price conditions and collateral requirements were tightened

(in net %)

150

100

50

0

-50

-100

-150
2014	2015	2016	2017	2018	2019

Risk propensity

Non-performing loans

Risk of required collateral

Expectations regarding general economic situation

Competition from other banks

Costs of funding

Source: NBS.

Note: Rising values indicate tightening, and declining values indicate the easing of credit conditions.

Corporate demand in Q4 w as in accordance w ith expectations from Q3

(in net percentage)

Dinar short-

Dinar

FX short-

FX long-

Large

To tal

term

long-term

term

term

SMEs

enterprises

Fa rmers

70%

60%

50%

40%

30%

20%

10%

0%

-10%

-20%

Q3

Q4

Q3

Q4

Q3

Q4

Q3

Q4

Q3

Q4

Q3

Q4

Q3

Q4

Q3

Q4

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1

Achieved

Expected

Source: NBS.

* Positive value indicates an increase in demand, and negative value indicates a decrease.

11

Trends in Lending

National Bank of Serbia

II. Household sector

1. Household loans

Excluding the exchange rate effect, household loans in 2019 increased by RSD 100.8 bn or 10.0%, on the back of the rise in cash and housing loans. At end- 2019, the stock of household loans equalled RSD 1,106.2 bn in nominal terms, accounting for around 46% of bank loan receivables from the non-monetary sector. Their share in annual GDP equalled 20.4%, up by 0.5 pp from a year ago.

In quarterly terms, excluding the exchange rate effect, household loans increased by RSD 29.9 bn or 2.8% in Q4. Cash and housing loans were the main contributors to this growth, and investment lending to entrepreneurs to a smaller extent. At the level of 2019, cash loans rose by RSD 75.4 bn, and with a 43.9% share in December they remained the dominant household loan category. During 2019, cash loans showed a tendency to shorten maturities - the share of loans with maturities exceeding eight years declined from more than 30% (early 2019) to 19.6% in December, confirming that the NBS measures adopted in December 20188 are yielding results. Considering the further tightening of loan maturities (to seven years) since the start of 2020, we expect that loan maturities for these loans will continue to shorten this year. At the same time, positive trends in the labour market and the recovery of the real estate market were mirrored by growth in housing loans which was higher than in 2018, excluding the effects of the 38% write- off during the conversion of CHF-indexedhousing loans to euro-indexedones, under the Law on the Conversion of Housing Loans Indexed to Swiss Francs.9 In December 2019, housing loans accounted for 36.2% of total loans to households. On the other hand, in Q4 and at the year level, receivables under consumer loans, current account overdrafts and credit card borrowing were on the decline.

The volume of new loans to households in Q4 (RSD

140.6 bn) was 20.5% higher than in the same period last year, with all loan categories (except consumer loans) recording two-digitgrowth. Cash loans were dominant (60.7%), and their increased realisation at end-2019can be associated with additional tightening of capital requirements in terms of the maturity of these loans starting from the beginning of 2020. Normally, these loans are almost

8

https://www.nbs.rs/internet/latinica/scripts/showContent.html?id=13706&kon

verzija=yes

9 Pursuant to the Law on the Conversion of Housing Loans Indexed to Swiss Francs (RS Official Gazette, No 31/2019).

Y-o-y rise in household loans accelerated slightly at end-2019

(y -o-y growth rates at the programme exchange rate, in %)

20
15
10
5
0
-5
-10
1 4 7101 4	7101 4	7101 4	7101 4	7101 4	7101 4	7101 4 7101 4	710
2011	2012	2013	2014	2015	2016	2017	2018	2019

Total domestic loans*		Households*
Households		Total domestic loans

Source: NBS.

* Excluding the effect of NPL write-off and sale since early 2016.

Dinar loans accounted for more than half of household lending growth in Q4

(increase, in RSD bn)

50
40
																	29.9
30
20
10
0
-10
I	III	I	III	I	III	I	III	I	III	I	III	I	III	I	III	I	III
2011		2012		2013		2014		2015		2016		2017		2018		2019
	FX and FX-indexed loans*			Dinar loans			Total

Source: NBS.

* Excluding the exchange rate effect.

The bulk of new lending w ere cash and housing loans

(new loans, in RSD bn)

180

160

140

120

100

80
60
40
20
0
I III	I III	I III	I III	I III	I III	I III	I III	I III
2011	2012	2013	2014	2015	2016	2017	2018	2019
Housing	Consumer	Cash loans	Other*

Source: NBS.

• Until December 2014, the 'other loans' category implied cash and other loans together.

Dinarisation of household receivables remained at its maximum in Q4

(currency structure, in %)

100

80	44.4
60
40
20	55.4
0

I III	I III	I III	I III	I III	I III	I III	I III	I III
2011	2012	2013	2014	2015	2016	2017	2018	2019
RSD	EUR	CHF

Source: NBS.

12

Trends in Lending

National Bank of Serbia

entirely in dinars (99.5%). As much as 17.3% of new household loans in Q4 were housing loans, and their amount was 19.2% higher than in the same period last year (by 26.5% excluding loans refinanced with the same bank), which is a result of the recovery of the real estate market, as well as positive labour market developments.

In Q4, 72.3% of new household loans were in dinars, while the dinarisation of household receivables has been stable since September, measuring 55.4%, which is its highest level on record. Further growth in housing loans drove the share of euro-indexedhousehold receivables slightly up during Q4 (by 0.1 pp) to 44.4% at year-end,while after the conversion of CHF-indexedhousing loans to euros, the share of CHF receivables declined, and measures 0.3% as of July.

In Q4, the share of NPLs in total loans contracted

by 0.2 pp and fell to a new minimum of 3.9% in December.10

2. Cost of household borrowing

The November cut in the key policy rate helped lower the cost of household dinar borrowing to a new minimum in Q4, while the cost of borrowing in euros remained low. In addition, the cost of the repayment of existing loans also decreased, reflecting positively on the disposable household income.

The weighted average rate on dinar household loans was 9.1% in November and December - its new lowest value. Relative to September, it is 0.5 pp lower, and relative to May 2013, when the cycle of NBS monetary policy easing began, it is 11.4 pp lower. Interest rates on all types of dinar loans decreased during Q4, and in December ranged from 3.4% for consumer loans to 9.4% for cash loans.

The weighted average interest rate on euro-indexed loans to households remained unchanged (3.8%) from September until the end of 2019. In terms of purpose, interest rate on euro-indexedhousing loans remained the same throughout Q4 (2.8%). The rate on other unclassified loans also had almost the same value as in September and equalled 5.9% in December, whereas the rate on consumer loans rose to 4.8%, and the rate on cash loans, which account for the lowest share, decreased to 2.6%.

10 With entrepreneurs and private households included, the share also decreased by 0.2 pp to 4.0% in December.

The share of NPLs in total household loans declined further in Q4

(gross principle, in %)

30
26
22
18
14
10
6
2
I	III	I	III	I	III	I	III	I	III	I	III	I	III	I	III	I	III
2011		2012		2013		2014		2015		2016		2017		2018		2019

NPL share in total household loans

Credit cards

Consumer

Cash

Current account overdraft

Housing

Source: NBS.

During Q4, the average price of dinar household loans dropped to a new low*

(weighted av erage values, per annum, in %)

25
20
15
10								9.1
5								3.0
								2.3
0								1.7
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2011	2012	2013	2014	2015	2016	2017	2018	2019

New dinar household loans

BELIBOR 3m, period average

Key policy rate, period average

New dinar household deposits

Source: NBS.

• Excluding revolving loans, current account overdrafts and credit card debt.

The price of FX borrowing remained favourable during Q4*

(weighted average values, per annum, in %)
12
10
8
6
4								3.8
2								1.1
0
							-0.4
-2
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2011	2012	2013	2014	2015	2016	2017	2018	2019

New FX household loans**

EURIBOR 3M

New FX household deposits

Sources: NBS and European Banking Federation.

• Excluding revolving loans, current account overdrafts and credit card debt.

Interest rates on all types of dinar loans recorded a sharp fall in Q4

(weighted av erage values, per annum, in %)

30
25
20
15
10
5
0
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2011	2012	2013	2014	2015	2016	2017	2018	2019
	Housing*		Consumer*		Cash*
	Housing**		Consumer**		Cash**

Source: NBS.

• Euro and euro-indexed.
• Dinar.

13

Trends in Lending

National Bank of Serbia

3. Assessment of loan supply and demand - based on the results of bank lending surveys

The results of the January bank lending survey suggest that, according to banks' estimate, credit standards for FX-indexedhousing loans were eased, while those for dinar cash loans were slightly tightened. Standards were relaxed in response to less expensive sources of funding, competition among banks and positive expectations in terms of the economic situation, while dampened risk propensity acted in the opposite direction. As for Q1 2020, banks expect tighter standards for dinar cash loans and refinancing loans, which is attributable to the implementation of stricter capital requirements in terms of the maturity of these loans (up to seven years) since the start of 2020. On the other hand, banking sector competition and bright economic prospects should continue to work towards easing the standards.

Banks estimated that household borrowing terms were more favourable in Q4 on account of improved price conditions and collateral requirements, and slightly unfavourable in terms of mortgage. Loan price conditions and collateral requirements will likely be eased further in Q1 2020, though expectations are that the maturities of unsecured dinar and FX loans will be tightened.

Banks estimate that household demand for housing, cash and refinancing loans continued to increase in Q4, and is expected to remain on the upward path in Q1 2020. This is facilitated by the need for purchasing real estate and refinancing current liabilities, together with rising wages, employment and positive developments in the real estate market.

The majority of factors continued to act towards the easing of credit standards

(in net %)

30
15
0
-15
-30
-45
-60
-75
-90
2014	2015	2016	2017	2018	2019

Risk propensity

Risk perception

Competition from other banks

Costs of funding Credit standards

Source: NBS.

Note: Growth indicates the tightening and decline indicates the easing of credit standards.

Banks additionally eased their price conditions and collateral requirements in Q4

(in net %)

40
20
0
-20
-40
-60
-80
-100
2014	2015	2016	2017	2018	2019

Other conditions	Fees and commissions
Maturity and grace period	Mortgage value
Downpayment and deposit	Collateral requirements
Interest rate margin

Source: NBS.

Note: Rising values indicate tightening, and declining values indicate the easing of credit conditions.

Q4 saw lower-than-expectedgrowth in cash loan demand, while housing loan demand rose as expected

(in net percentage)

Dinar

FX

Total

60%

Housing

Consumer

Cash

Refinancing Housing

Consumer

Cash

Refinancing

50%

40%

30%

20%

10%

0%

-10%

Q3 Q4

2020 2019

Q3 Q4

2020 2019

Q3 Q4

2020 2019

Q3 Q4

2020 2019

Q3 Q4

2020 2019

Q3 Q4

2020 2019

Q3 Q4

2020 2019

Q3 Q4

2020 2019

Q3 Q4

2019

2020

Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1 Q2

Q1

Achieved

Expected

Source: NBS.

* Positive value indicates an increase in demand, and negative value indicates a decrease.

14

Trends in Lending

III. Regional comparison11

Lending growth in Serbia in 2019 (9.8% excluding the exchange rate effect, or 9.2% in nominal terms) was among the highest in the region. Only Hungary recorded a higher increase in lending. Bulgaria posted a similar rise as Serbia, while in other countries in the region lending generally increased between 6% and 7%.

Such developments contributed to an increase in the share of domestic loans in GDP in almost all countries in 2019. In Serbia, this share amounted to 44.4% at end-2019, which is close to the regional average. The share of domestic loans in GDP in the region ranges from 27% (Romania) to 57% (Bosnia and Herzegovina).

In the majority of countries in the region, lending rose in 2019 mostly on account of household lending, and Serbia and Albania were the only countries where the rise was driven by corporate lending.

National Bank of Serbia

Unlike in most countries in the region, growth lending in Serbia was driven by corporate loans

(contribution to nominal y -o-y growth rate, in pp)

14

12

10

8

6

4

2

0

-2

Croatia

North Macedonia

Montenegro

Romania

Bosnia and Herzegovina

Albania

Bulgaria

Serbia

Hungary

Other sectors Households Corporates

Sources: websites of central banks and NBS calculation.

The share of loans in GDP increased in almost
all countries of the region in 2019
(in %)
60
50
40
30
20
10	Albania	Hungary	Montenegro	Serbia	North Macedonia	Bulgaria	Croatia		Herzegovina
Romania	Bosniaand
2019	2018
Sources: websites of central banks, Eurostat and NBS calculation.

11 According to NBS calculations, based on data available on the websites of central banks and Eurostat.

15

Trends in Lending

National Bank of Serbia

Methodological notes

• Loans imply bank receivables under the loan principal.
• Receivables imply receivables under loans, interests and charges, paid deposits, securities and shares of companies.
• All types of receivables are expressed according to the gross principle, i.e. not reduced by allowances for impairment.
• Dinar receivables are receivables extended in dinars without an FX-clause. The FX clause implies a currency clause that defines hedging against changes in the dinar exchange rate.
• When excluding the exchange rate effect, the calculation is based on the original currency composition and the exchange rate of the dinar against the euro, the US dollar and the Swiss franc as at 30 September 2014.
• New business includes all financial arrangements (credits and deposits) the terms of which are agreed for the first time during the reporting month, as well as all existing contracts the terms of which were re-agreed (through annexes), with the active participation of the client.

• The sectoral classification of monetary statistics is used. The corporate sector includes public enterprises, companies and the non-financial sector in bankruptcy, while the household sector includes citizens, entrepreneurs, private households with employed persons and registered farmers. By way of exception:
• • with newly-approved loans, the household sector includes non-profit institutions serving households (in accordance with the ECB methodology);
  • with non-performing loans, the sectors are presented separately, but are aggregated for the sake of comparison with the monetary statistics data.
• The term non-performingloans implies the stock of the total outstanding debt under individual loans (including the amount of arrears):
• • where the payment of principal or interest is past due (within the meaning of the decision on classification of balance sheet assets and off-balance sheet items) over 90 days,
  • where 90 days of interest payments have been attributed to the loan balance, capitalized, refinanced or delayed,
  • where payments are less than 90 days overdue, but the bank assessed that the borrower's repayment ability has deteriorated and doubts that the payments will be made in full.

16