Transcript Factor: corporate indebtedness and lack of equity

THE ROLE OF BANKS IN THE
ECONOMIC RECOVERY
Tomaž Košak,
Banka Slovenije
UMAR
"Why Slovenia should embark on structural reform"
March 15, 2016
FINANČNA STABILNOST
Outline
•
How the financial crisis reflects in banking sector?
– Deleveraging
– Credit activity (credit supply)
– The quality of credit portfolio
•
How the financial crisis reflects in corporate sector?
– Deleveraging through the debt repayment.
– Corporate indebtedness and lack of equity
– Cross-border financing.
•
How to revive the credit market?
– Short-term activities
– Long-term activities / process
FINANČNA STABILNOST
Financial crisis in Slovenia
•
Slovenian economy went through the typical boom-bust financial cycle:
•
– High credit growth until 2008 and credit contraction since 2010.
– Double-dip recession in real economy.
That reflects in the savings - investment gap development.
Figure: GDP growth rate and credit growth rate to NFC and non-banking sector (L) Savings investment gap in Slovenian economy in % of GDP (R)
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
8
34
6
32
4
30
32,9
Savings ratio
32,7
Investments/GDP
30,2
Savings/GDP
28,4
2
28
0
26
26,4
28,5
28,9
29,7
27,4
26,7
28,4
26,3
NBS credit grosth
-2
24
NFC credit growth
-4
22
-6
20
-8
18
-10
16
SI GDP growth rate
29,0
26,8
22,6
23,4
27,2
23,2
21,7
22,2
21,6
26,6
20,9
21,7
21,3
18,8
23,2
22,1
23,7
19,4
19,8 20,1
22,0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 15 Q2
FINANČNA STABILNOST
Financial crisis in Slovenia
•
The banking intermediation prevailed in the structure of financial sector in 2008 and in
2015:
– Banking based financial intermediation (Bank's BS 76% and 73% of fin. sect. respectively).
– Financial sector achieved up to 170% GDP at the outbreak of financial crisis.
•
The real sector highly dependent on bank financing.
– After outbreak of crisis the consequences for SLO corporate sector were more sever than in
the economies with the developed capital markets.
Table: Structure of Slovenian financial sector
Balance sheet (mio EUR)
Structure (in %)
Proportion to GDP (%)
Growth r. (%)
2008
2014
2008
2014
2008
2014
2009
2014
Monetary f in. Institutions
47.948
38.724
76,3
72,7
128,5
104,0
8,5
-4,0
Non-monetari f in. Institutions
14.925
14.531
23,7
27,3
40,0
39,0
6,2
-11,8
Insurance com.
5.151
7.385
8,2
13,9
13,8
19,8
9,9
6,4
Pention f unds / f unds
1.041
1.530
1,7
2,9
2,8
4,1
23,6
6,9
Inv estment f unds
1.912
2.156
3,0
4,0
5,1
5,8
16,8
15,9
Lizing com.
6.146
3.461
9,8
6,5
16,5
9,3
-0,9
-9,5
1,1
0,0
1,8
0,0
-13,7
-100,0
100,0
100,0
168,5
143,0
7,9
-6,3
Ohter non-monet. Fin. Inst.
Total
675
62.873
53.255
FINANČNA STABILNOST
Deleveraging of banks
•
At the outbreak of crisis the banking sector was affected on the liability side:
–
–
–
–
High indebtedness of banks on wholesale market: >36% of total bank's liabilities.
The crisis affected the interbank confidence (depleting cross-border interbank financing)
From 2008 until 2015 the banks net repayment amounted to more than € 12 bn or 1/3 of GDP.
Deleveraging in banking sector was necessary, but it remains open:
•
what form the deleveraging should take and
• at what speed.
Figure : Net repayments of liabilities to wholesale market and
balance sheet shrinking in % GDP
Figure: Strukture of banking liabilities in %
100%
90%
5,2
5,0
4,4
4,8
4,7
3,6
2,5
2,9
2,8
8,4
8,4
8,3
8,0
8,1
9,1
10,8
11,8
2,3
2,6
2,7
4,1
8,2
1,2
8,9
7,5
80%
70%
6,6
3,5
8,7
4,7
40%
2,9
4,3
4,1
11,7
34,0
33,6
25,0
23,1
19,5
16,5
13,3
5000
2,4
3,0
3000
9,4
2000
4,3
43,6
5,6
45,9
6,8
47,0
6,7
3,3
1000
1.911
1,0
-1000
6,7
-2000
49,9
Non-banking sector deposits
Liabilities to foreign banks
Liabilities to ECB
Other
30%
12,6
4,3
5,9
3,6
46,1
5.349
4000
0
60%
50%
9,2
6000
51,7
55,9
63,1
67,2
-3000
Liabilities to domestic banks
Debt securities
Equity
-4000
-5000
-6000
20%
2008
2007
2008
2009
2010
2011
2012
2013
2014
16
14
12
Banking
system's
total
assets
4.061
10
8,5
Year-on-year growth in total assets, %
8
6
4
2
-241
-2.781
-799
0
-3,0
-2
-2,4
-908
-4,0
-1.301 -4
-1.249
-1.629
-1.517
-3,4
-6,3
-6
-1.548
-8
-2.911
-3.124
-10
-3.527
-12
-12,5
-14
-16
-5.776
2009
2010
2011
2012
2013
2014
2015
Liabilities for wholesale funding
2015
FINANČNA STABILNOST
Deleveraging of banks
•
Three types of deleveraging in banking sector (Banoit Coeure):
– Good deleveraging 
•
involves banks raising capital and getting rid of impaired assets in a rapid manner (among
Slovenian banks since 2013 large domestic banks).
– Bad deleveraging 
•
an indiscriminate reduction in balance sheet size, regardless of the quality of assets. Motivation is to
reduce indebtedness. The upshot is a potentially prolonged, across-the-board reduction of credit to
the real economy.
– Ugly deleveraging 
• comprises banks specifically discarding good assets while keeping distressed assets in the banking
book and recording them at close to nominal value (at certain Slovenian banks in the first phase of
crisis).
•
•
The "bad" and "ugly" deleveraging have real economy effects on liquidity, funding
access… Financially weak banks tend to roll over unprofitable loans that do not support
GDP growth.
"Wrong" type of deleveraging harms the transmission of monetary policy.
FINANČNA STABILNOST
Deleveraging of banks
•
Financial leverage of banks grew since 2008 until 2013, afterwards is it has been declining :
– At the beginning too slow recapitalization of banks  pressure on further decrease in total assets (and
capital request).
• Regulatory capital: -18% & capital request: -31%
– After 2013 "good" deleveraging.
• Regulatory capital: +12%
&
capital request: -24%
Figure: Net repayments of liabilities to wholesale market and
balance sheet shrinking in %
18%
14%
10%
Figure: Capital adequacy in % and the changes in CR and
recapitalization of banks in p.p.
16
Total assets (y-o-y growth)
11,0
14
Financial leverage (right)
12
8,5%
11,1
11,3
11,5
7,5%
6%
14,2%
Capital (y-o-y- growth)
12,6%
12,3%
11,4
10
10,0
5,5%
2%
8,2
-2,4%
-2%
-3,9%
-6%
7,5
-1,6%
-3,0%
-5,5%
-4,6%
-6,3%
8
6
-3,4%
-4,0%
4
2
-10%
-12,5%
0
-14%
2008
2009
2010
2011
2012
2013
2014
7,0
6,5
6,0
5,5
5,0
4,5
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
-0,5
-1,0
-1,5
-2,0
25
Contributon of own funds to the change of CA (in p.p.)
19,3
Contribution of RWA to the change in CA (in p.p.)
CA- system (in %, right)
11,6
20,9
1,2
15
14,0
11,3
11,6
20
10
11,9
5
3,6
0,4
-0,5
0,0
-0,2
0,7
-0,4
4,0
0,7
-0,4
0,5
0
1,0
-5
-10
-1,5
-15
2009
2010
2011
2012
2013
2014
2015
2015
FINANČNA STABILNOST
Deleveraging and CAR
•
After the rehabilitation of banks in 2013-2014 the CA ratio improved and cannot be
treated as a restriction factor:
– CAR in 2015 stood at 20,9% (on consolidated level at 18,6%, Tier 1 ratio grew to 17,9%)  both
exceeding EMU average.
• Moderate decrease of RWA (€ -57 mio): a) contraction of lending activity, b) restructuring the assets
(less risky)  ↑securities/ total assets & ↓loans / total assets.
• ↑ own funds (€ +103 mio): a) profit, b) recapitalizations.  "good" deleveraging.
– Internal generation of capital (credit growth) and optimization of existing capital (↓NPL  ↓ RWA)
efforts to keep sufficient capital adequacy and fulfilment of all regulatory requests (CRR).
Figure: Net repayments of liabilities to wholesale market and
balance sheet shrinking in %
20
19
18,1
17
CAR in SI- Banking system
16
15,5
14
12,8
13
11
16,2
15,6
15
12
18,6
17,9
CAR in EMU
18
14,3
13,1
13,7
13,1
11,7
11,5
11,7
11,3
11,8
11,4
10
9
8
2008
2009
2010
2011
2012
2013
2014 sep.15 2015
FINANČNA STABILNOST
Deleveraging and more sustainable funding
•
Through the deleveraging the LTD ratio lowered to 81% what reflects in more
sustainable funding than before the crisis.
– Increase in the share of "core funding" in the banks, however
• Increased share of demand deposits / total deposits of NBS, in 2015 +9,3 p.p. (55,4%).
• Growing gap between maturity of investments (lengthening) and funding (shortening) increases the
importance of secondary liquidity.
– Stable growth of HH deposits and sufficient liquidity are supportive factors for
potential credit supply.
Figure: The term-structure of NBS' deposits in %
Figure: Loan to deposit ratio in %
100
300
9,7
Banking system
12,2
90
22,8
Large domestic banks
250
31,8
80
Small domestic banks
Banks under majority foreign ownership
70
53,4
50
161,5
142,9
150
145,3
134,8
40
129,8
30,3
30,1
88,2
81,0
20
27,7
16,9
45,5
33,1
30,9
28,9
28,4
24,2
Long-term deposits
Short-term deposits
Sight deposits
30
107,9
100
32,3
54,7
60
200
33,4
55,4
36,9
33,1
31,7
35,1
35,8
38,7
41,4
2008
2009
2010
2011
2012
2013
45,7
10
50
0
2008
2009
2010
2011
2012
2013
2014
2015
2007
2014
FINANČNA STABILNOST
2015
Deleveraging and credit standards
•
Adequate CAR and sustainable funding reflect in expected turn in the dynamics of lending to NFC:
– The decline in corporate loans is slowing (-10% p.a. at the end of 2015).
– Increase of newly approved long-term loans (+1,9% p.a.) and lengthening of the average maturity of loans.
•
However some factors slow down credit recovery:
–
–
–
–
Tightened credit standards for corporate loans (but change in Q4-2015) & lack of bankable projects.
Commitments to EC for banks that received the state aid during rehabilitation (divestment, restriction on min RoE).
Regulatory uncertainty regarding capital (CRD & CRR,..) and debt requirements (MREL,..)
Still high level of NPL (in arrears >90 days), that hampers new credit supply and profitability.
Figure: Credit standards for corporate loans
Figure: Y-o-y growth of loans to NFCs by bank group in %
55
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
LOANS TO NFC
(y-o-y grow in %)
100
1000
80
800
60
600
40
400
20
200
0
0
-20
-40
Large domestic banks
-400
Raven kreditnih standardov v Sloveniji (desno)
Small domestic banks
-60
Neto sprememba kreditnih standardov - Slovenija (v %)
-600
Banks under maj.foreign.own.
-80
Neto sprememba kreditnih standardov - evro območje (v %)
-800
Total
2008
-200
2009
-100
2010
2011
2012
2013
2014
2015
-1000
q1q2q3q4q1q2q3q4q1q2q3q4q1q2q3q4q1q2q3q4q1q2q3q4q1q2q3q4q1q2q3q4
2008
2009
2010
2011
2012
2013
2014
2015
FINANČNA STABILNOST
Factor: Tightened credit standards & lack of bankable projects
•
Despite of low IR and adequate banks liquidity and funding condition, there is still slow recovery
in creditworthiness credit demands of corporate sector:
– In 2015 the IR for corporate loans up to € 1 mil converge to EA average value.
– However, the structure of credit demand was still modestly underpinned by private investments in 2015
(according to BLS).
Banks are competing for low volume of bankable projects, what can further affect banks'
profitability.
Figure: IR for loans to NFCs to 1 mil EUR in Slovenia and in EA
150
6
100
5
5
4
4
50
3
3
0
2
2
-50
1
1
0
0
-1
-1
FINANČNA STABILNOST
2015-Q4
2015-Q3
2015-Q2
2015-Q1
2014-Q3
2014-Q1
2015
2013-Q3
2014
2013-Q1
2013
2012-Q3
2012
2012-Q1
2011
2010-Q3
2010
2010-Q1
2009
2009-Q3
-150
2009-Q1
-100
2011-Q3
Euroarea
2008
Inventories and working capital
Gross fixed capital formation
The use of other sources of funding
Other funding needs
The general level of interest rates
Demand
7
Slovenia
6
200
2008-Q3
7
8
Diference (right)
IR FOR LOANS NFCs
to 1 mio EUR
2011-Q1
8
Figure: Factors of corporates credit demands according to BLS, index
2008-Q1
•
Factor: level of NPL
•
NPL levels (CC in arrears >90 days) remains elevated despite visible progress and accelerating
NPL resolution since 2013:
– The share of CC in arrears >90 days 9,9%; decreased by 1,9 p.p. or by € 966 mio in 2015.
• Contraction in CC by -5,6%.
• High volume of write-offs: € 880 mio.
– Segments of portfolio with high arrears >90 days: NFC: 15,4% (60% of CC in arrears), SME 24,6%.
• Manufacturing decreased most, by -3,6 p.p. to 8,8%.
• Construction decreasing, still represent 25% of CC in arrears >90 days in NFC.
Figure: CC in arrears more than 90 days in EIR million, proportion in CC (L) and proportion of CC in arrears over 90 days by client type (R)
10.000
9.000
8.000
7.000
Claims against SMEs more than 90 days in
arrears, EUR million (left scale)
Claims against large enterprises more than
90 days in arrears, EUR million (left scale)
Other claims more than 90 days in arrears,
EUR million (left scale)
Proportion of claims more than 90 days in
arrears (right scale)
Year-on-year growth in classified claims
(right scale)
25%
20%
15%
10%
6.000
5.000
5%
4.000
0%
3.000
35
NFCs
OFIs
30
Non-residents
Sole traders
25
Households
Overall
20
15
-5%
10
-10%
5
-15%
0
2.000
1.000
0
20082009
2010
2011
2012
2013
2014
2015
20082009
2010
2011
2012
2013
2014
FINANČNA STABILNOST
2015
Factor: level of NPL (2)
•
Coverage of CC in arrears >90 days by impairments increase by 3,8 p.p. to 64,5%, although
decrease in volume. Level of "NPL" and "sufficient coverage ratio" have two consequences 
– 1.) Robust balance sheet of banks but,
– 2.) High share of NPLs affects the bank profitability and increase risk aversion
of banks ( hampering new credit supply!).
Figure: Coverage of non-perfomring claims by impairments and provisions over 90 days in arrears in %
9.000
8.000
80%
Unimpaired claims more than 90 days in arrears
Impairments and provisions for claims more than 90 days in arrears
70%
Coverage of non-performing claims by impairments and provisions
7.000
65%
60%
61%
6.000
57%
50%
5.000
36%
4.000
38%
30%
3.000
2.000
40%
43%
29%
25%
20%
10%
1.000
0
0%
2008
2009
2010
2011
2012
2013
2014
2015
FINANČNA STABILNOST
Factor: Tighten credit standards and corp. deleveraging
•
Risk aversion of banks originates from funding structure of corporates and cause their
deleveraging:
– Corporates have reduced their indebtedness in the last four years. Debt-to-equity ratio is at a
pre-crisis level.
– Debt-to-equity ratio in Q3 2015: 119% (-27 p.p. from 2008)
– But decrease in leverage from 2008 mostly due to reduction of debt (-17%) and less to
increase of equity (+2%).
– Level of corporate indebtedness is not problematic, but the structure of funding is (growth of equity is too
slow and not sufficient). Debt / GDP(Q3-2015) 76%.
Figure: Corporate debt-to-equity ratio
60
55
50
146
200
Debt in EUR billion
Equity in EUR billion
Debt-to-equity ratio (right)
Proportion of equity (right)
142
136
143
131
45
53
52
53
41
41
51
42
50
41
160
140
139
123
40
180
46
48
42
43
120
119
80
44
45
100
46
60
40
35
36
37
38
2008
2009
2010
36
36
37
2011
2012
2013
37
37
30
20
0
2014 2015Q3
FINANČNA STABILNOST
Factor: corporate indebtedness and lack of equity
•
In deleveraging, corporates should put more emphasis on increasing equity and less to reduction
of debt:
– D/E of SI corporates in Q32015 stood at 119%.
– SI corporates would "need" addition € 2 billion of equity to get to the median value of debt-to-equity - D/E
113% in EA18 countries.
• Recapitalization, revaluation of capital, retained profits…  to improve creditworthiness of firms.
Figure: Comparison of corporate indebtedness in EA in 2014
250
Debt / GDP
Debt-to-equity ratio in corporate financing
200
EA 18
EA 18 - median (D/E)
150
100
50
0
BE CZ DE EE
IE GR ES FR
IT
CY NL
AT PT
SI
SK
FI
SE
FINANČNA STABILNOST
Factor: corporate indebtedness and lack of equity
•
The structure of corporate financial liabilities in Slovenia changed from 2008 up to Q32015:
the share of long-term loans increased (+3%), while the share of short-term loans decreased
(-7%) from 2008 to 2015Q3
•
In comparison to EA19,
– a substantially lower share of equity in SI (SI:46%, 51% EA19 in 2015Q3)
– a higher share of trade credits in SI (as in other).
Figure: The structure of corporate financial liabilities in Slovenia (L) and EA (R) by years
100
100
90
21
20
19
18
19
18
19
19
70
43
41
41
42
41
45
46
15
15
16
15
Equity
14
14
51
52
Debt securities
25
26
28
26
20
27
30
26
26
10
15
13
0
1
1
11
1
12
1
12
1
10
1
9
1
8
1
2008
2009
2010
2011
2012
2013
2014
2015Q3
Corporate financial liabilities - Slovenia
48
49
46
49
12
Equity
Loans: long-term
Loans: short-term
Debt securities
24
24
24
24
23
22
21
24
11
9
3
10
9
3
4
9
4
9
4
9
3
9
3
2008
2009
2010
2011
2012
2013
2014
2015Q3
20
10
0
51
Other
40
Loans: short-term
23
45
50
Loans: long-term
40
70
60
Other
42
50
30
17
80
80
60
90
Corporate financial liabilities - EA19
FINANČNA STABILNOST
4
Factor: corporate indebtedness and lack of equity
•
Compared with large enterprises, SMEs are more indebted, although their indebtedness
has fallen faster and to a greater extent since 2008 than that of large enterprises:
– Debt-to-equity of all firms stood at 123% in 2014, while debt-to-equity of SMEs stood at 168%.
•
SMEs’ leverage in 2014 fell below its level of 2004, while large enterprises’ leverage in
2014 was still a quarter higher than in 2004.
How to find alternative financing for SME?
•
Figure: Debt-to-equty of all firms and SMEs (L) and debt-to-capital of firms by size (R) by years
250
225
Leverage
220
229
300
209
202
200
186
Leverage 2004
224
199
185
192
Leverage 2008
250
179
168
175
153
150
139
151
150
145
138
103
200
133
123
122
125
Leverage 2014
109
100
150
75
50
Leverage of all firms
Leverage of SMEs
100
25
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
50
Micro
Small
Medium-sized
Large
All firms
FINANČNA STABILNOST
Factors: corporate indebtedness and lack of equity
•
Loans from the rest of the world account for a large proportion of corporate loan
financing, with 26% of all corporate loans at the end of Q3 2015
– The growth in the corporate loans from ROW in the last years was in greater extent
influenced by firms in ROW and less so by banks.
– Loans at banks have decreased in H2-2015, as well as loans at international institutions.
Corporate loans from ROW have increased in 2015.
Figure: Stock of corporate loans from the rest of the world by foreign creditor’s sector in EUR million
3,500
3,000
27
Proportion of loans to NFCs accounted for by
foreign loans (right scale)
NFCs
25
Banks
2,500
23
International institutions
2,000
21
1,500
19
1,000
17
500
15
0
13
2008
2009
2010
2011
2012
2013
2014
2015
FINANČNA STABILNOST
How to improve the conditions for credit reviving?
•
Current state of play: banks' pf' under pressure and coroprates deleveraging.
• Relative high solvency of banks due to recapitalizations 2013 – 2014.
• Still high level of NPL's
• Continues pressure on banks margins and capability to generate income due to deleveraging and
LIRE.
• Deleveraging in corporate with a lack of bankable projects.
• A) Measures on short-term to improve banks' capability to work-out NPLs:
– A strategy how to work-out is necessary due-to different stakeholders' interest and
complexities of process.
– a) Developments in corporate restructuring:
• "Slovenska nacela financnega prestrukturiranja dolgov v gospodarstvu" for large
corporates restructuring principles from 2014 ZBS, BS, MF (based on ZM form 2011).
– Result of MRA monitoring:
• Number of MRAs signed: app. 72 (mainly financial restructuring).
• Amount of restructured claims: > EUR 2 bn. (as of 31 Nov. 2015)
• Average number banks involved: 7
FINANČNA STABILNOST
How to improve the conditions for credit reviving?
– b) Regulatory activities for improving banks' capacity to reduce NPLs:
• Objectives:
– Improve the efficiency of restructuring process.
– Monitoring and supervision of banks' activity on the field of corporate restructuring
– Supporting the financial restructuring of SME.
• BS has implemented the objectives through the guidelines, requests… :
•
•
•
•
Guidelines for impairments of restructured loans (Dec. 2014).
Guidelines for NPE management (May 2015).
Guidelines for SME restructuring (Nov. 2015).
Requests for banks to prepare individual plans for NPE management for 3-years period (incl.
implementation of operational plans and describe measures to achieve NPL target).
– c) Other systemic activities for improvement of corporates restructuring:
• Setting up infrastructure to support financing SMEs (ie. factoring).
• Establishment of private SPV for NPLs restructuring….
FINANČNA STABILNOST
How to improve the conditions for credit reviving?
• B) Measures / process on long-term:
– Banks business plans adjustment to new long-lasting LIRE and to the bank
disintermediation.
• That reflects in pressure for banking sector consolidation:
• M&A.
• Specialization.
• Exit the market.
– A strategy how to build up financial infrastructure for equity and alternative debt
financing of corporates and particular SMEs:
• Developing alternative source of financing to cater for specific needs of smaller firms (crowdfunding, minibonds…).
• Developing Private Placement markets for medium-sized and unlisted companies.
• Enhancing the availability of SME credit and accounting info.
• Start-up companies VC-funded, should be able to become public through an IPO.
• Taxation creates incentives (e.g. reducing the preferential treatment of debt financing).
• ….
FINANČNA STABILNOST
Thank you for attention!
FINANČNA STABILNOST