Cross Section of the Financial Sector Developments in Bosnia and Herzegovina Radomir Božić. Ph.D. Sarajevo. October Fifth SASE International Conference

Macroeconomic indicators Gross domestic product (GDP) KM bill KM bill GDP per capita KM 6.233KM Real growth rate-3.2%0.7%3.2% (proj.) Industrial production growth rate -3.3% 1.6%7.7% (period till June) The average annual inflation0.0%3.1%3.8% (June) Unemployment rate at the state level24.1%27.1%27.1%27.6 % Average wage at the state level KM 790KM 798KM 820 (June) External debtKM 5.2 bill (21.7% GDP) KM 6.25 bill (25.4 % GDP) KM mill (June) Current account deficitKM 1.48 bill (6.2% GDP) KM 1.36 bill (5.5% GDP) KM mill Q1(16.7 % compared to 2010) Coverage of import by export44.8%52.1%58.1% DFI (estimate) KM millionsKM 93.7 millionsKM 131 mill in Q1 Foreign exchange reserves KM bill KM bill KM mill (Aug)

The structure of BH financial sector The banking sector dominates the financial system in Bosnia and Herzegovina. The share of this sector in the assets of the financial system amounted to 84.3% at the end of At the end of % of average equity was concentrated in banks with majority foreign ownership. A large percentage of foreign ownership is a potential risk due to the fact that the strategic decisions are made out of the scope of monetary authorities of Bosnia and Herzegovina. Table: The value of the assets of financial intermediaries Value. KM millions Share. % Value. KM millions Share. % Value. KM millions Share. % Value. KM millions Share. % Banks Investments Funds Leasing Companies Insurance and Reinsurance Companies Microcredit Organization Total

Profitability and the level of the non-performing loans. 4

The results of the banking sector of Bosnia and Herzegovina for Q Better business results compared to the same period last year – KM 82.9 millions of profit compared to KM 63.9 millions of loss The total income of banks in this period amounted to KM millions (increase by 5% compared to Q2 2010), while total expenditure amounted to KM millions (decrease by 13% compared to Q2 2010) 22 banks reported the positive financial result (profit) in the total amount of KM millions and 7 banks reported negative financial result (loss) in the total amount of KM 17.1 millions 5

The results of the banking sector of Bosnia and Herzegovina for Q The total of 29 commercial banks, two under provisional administration 25 banks had a licence for the deposit insurance The total of employees, being the increase of 0.4% compared to Q1 this year Total number of banks30 29 Private owned banks28 State owned banks2211

The structure of share capital At the end of the first quarter realized capital adequacy ratio amounted to 15.5 (at the end of 2010 it amounted to 16.1) amount Share amount Share amount Share amount Share TOTAL CAPITAL % % % % STATE CAPITAL493 %443 %543 %503 % PRIVATE CAPITAL % % % % Herein: -foreign capital % % % % -domestic capital19513 %20613 %24915 %25515 %

The banks assets The banks continue to keep significant funds in the accounts with depository institutions abroad amounting to KM 1.66 billions, which is 32% of total funds. Compared to the same period of 2010, this share decreased by three percentage points amount Share amount Share amount Share amount Share TOTAL ASSETS Out of which: % % % % -Funds % % % % -Placements to other banks %2031 %3882 % -Loans % % % % -Fixed assets and business premises6743 %7313 %7654 %7594 % -Securities %4312 %5682 % -Other3072 %4332 %3432 %3822 % In KM millions

The banks liabilities The share of obligations in total liabilities is 88% and the share of equity is 12% 9 In KM millions Amount Share Amount Share Amount Share Amount Share TOTAL LIABILITIES Out of which: % % % % -Deposits % % % % -Liabilities based on loans % % % % -Borrowing from other banks3372 -Reserves for potential loan losses Capital % % % % -Other liabilities9044 %8454 %8684 %9045 %

The structure of deposits by sectors The deposits in local currency increased by KM 143 millions or 8% and deposits in foreign currency decreased by KM 77 millions or 1%. The share of deposits in local currency in total deposits increased by one percentage point - from 44% to 45%. 10 In KM millions amount Share amount Share amount Share amount Share TOTAL DEPOSITS Out of which: % % % % -Government institutions % % % % -Public enterprises % % % % -Econ. comp. and associoations % % % % -Non-profit organizations3122 %5593 %4703 %4973 % -Banking institutions % % % % -Households % % % % -Other5343 %4813 %4943 %4893 %

The structure of deposits by currencies In period January – March 2011 there was a change in the maturity structure of deposits – the share of short-term deposits increased from 53% to 55% and the share of long-term deposits decreased from 47% to 45%. 11 In KM millions amount Share amount Share amount Share amount Share TOTAL DEPOSITS % % % % Out of which: -Deposits in KM % % % % -Deposits in foreign currency % % % %

Savings The savings in local currency increased by KM 135 millions or by 8% and the savings in foreign currencies increased by KM 108 millions or by 2%. 12 In KM millions amount Share amount Share amount Share amount Share TOTAL SAVINGS % % % % Out of it: -Savings in KM % % % % -Savings in foreign currencies % % % %

Loans 13 In KM millions amount Share amount Share amount Share amount Share TOTAL LOANS % % % % Out of which: -Private companies % % % % -Public enterprises2222 %2372 %3092 %3502 % -Government institutions2311 %3432 %4363 %4453 % -Households % % % % -Other sectors2672 %1501 %1451 %1141 % The loans to private companies increased by KM 354 millions or 5% and the loans to households increased by KM 98 millions or 1.5%.

Lending interest rates Year INTEREST RATES ON LOANS IN KM INTEREST RATES ON LOANS IN KM WITH CURRENCY CLAUSE INTEREST RATES ON LOANS BY CREDIT CARDS Short-term loans Long-term loans Short-term loans Long-term loans Short-term loans to households Long-term loans to households Private companies and associations Households Households Households Households The data on the average interest rate on loans to private companies and households in foreign currencies are provided by small number of banks and therefore not included in this review.

Deposit interest rates 15 Year INTEREST RATES ON DEPOSITS IN KM INTEREST RATES ON DEPOSITS IN FOREIGN CURRENCIES Demand Deposits Time and Saving Deposits Demand Deposits Time and Saving Deposits Private companies and associations Households Households Households Households The data on the average interest rate on deposits by private companies and households in KM with currency clause are provided by small number of banks and therefore not included in this review.

Microcredit sector in Bosnia and Herzegovina as of June 30, microcredit organizations operating on state level Federation of BHRepublika Srpska 16 microcredit foundations One microcredit association Four microcredit foundations Three microcredit associations employees in BH micorcredit sector Federation of BHRepublika Srpska emloyees367 employees There is a trend of reducing the number of employees, as well as the number of organizational units. Compared to December 31, number of employees decreased by 3.4% (total of 64 employees)

The organization of microcredit sector in Bosnia and Herzegovina The legal basis The Law on microcredit sector in the Federation of BH The Law on microcredit sector in RS Form of organization MC foundations as non-profit institutions (max. Loan up to KM ) MC associations as profit institutions (max. loan up to KM )

The structure of assets of the microcredit sector in Bosnia and Herzegovina The balance sum in first half of the year amounts to KM 774 millions and it decreased by KM 70 millions or 8.3% compared to the previous year.

The structure of the liabilities of microcredit sector in Bosnia and Herzegovina There is a downward trend in balance sum compared to the previous year in all entries of assets and liabilities

Profit and Loss Account for the microcredit sector in Bosnia and Herzegovina Profit and Loss Account Total income KM 70.1 millions Total expenditures KM 74.9 millions The excess of expenditures KM millions The income decreased by 22% compared to the same period in previous year, while the expenditures decreased by 31% in the same period. In the first six months of 2011, the MCO sector reported the profit amounted to KM 3.05 millions (in the same period of previous year the loss amounted to KM 16.8 millions)

The total loans portfolio of the microcredit sector The total loans portfolio amounts to KM millions

The structure of loans to legal entities.

The structure of loans to physical entities

The interest rates in the microcredit sector in Bosnia and Herzegovina.

Trends in the microcredit sector in Bosnia and Herzegovina Reduction of lending activities due to restrictive lending policy Increase in written off loans Increase in liquidity Improving of the business results Improving of internal control systems in most MCOs. the adjustment of lending policies to the demands of regulators.

Neccessary measures at the sectoral level Amendments to the Law on the MCOs in order to eliminate ambiguities of existing regulations Improving in corporate management and internal controls Limitation of transactions with connected persons Increasing the transparency of MCOs business through the exchange of information at the sectoral level through the CRC Consolidation of the sector

The situation in the leasing sector in Bosnia and Herzegovina The balance sum of the leasing companies in Bosnia and Herzegovina for the first six months of 2011 amounted to KM millions with the following structure and it decreased by 4% compared to 2010.

The organization and ownership structure of the leasing sector Legal framework The Law on Leasing in the Federation of BH The Law on Leasing in RS In Bosnia and Herzegovina there are nine leasing companies registered, as follows: In Federation of BH - seven In RS - two The ownership structure of leasing associations 100% foreign owned - three Majority foreign ownership - four Majority domestic ownership - two There are 245 employees in the leasing companies in Bosnia and Herzegovina

The structure of liabilities of the leasing sector The structure of liabilities as follows: obligations based on loans 101.1% Other obligations 2.7% equity * -3.8% *the total obligations are bigger than the total liabilities due to the negative value of equity

The situation in the leasing sector in Bosnia and Herzgovina The first half of the year ended with a loss of KM millions, which is by 54% less compared to the same period last year. Total income KM 59.3 millions Total expenditures KM 91.4 millions Profit before taxation KM millions Taxes KM 10 millions Loss after taxation KM 32 millions

Trends in the leasing sector The sector shows signs of recovery and the stopping of negative trends A slight increase in business activities The biggest negative impact on the financial indicators of leasing companies have loans being lended before the law on leasing entered into force The negative equity of the sector is the result of accumulated losses

Neccessary measures at the sectoral level Capital strengthening Improving the policies and procedures for management of loans, operational and market risks. Establishing the system of internal controls and the functions of the internal audit Increasing the transparency of business through the exchange of information at the sectoral level through the CRC.

33 Thank you for your attention 33