COVID-19 has injected uncertainty into the financial system as well: Banks survive as citizens are finding it increasingly difficult to cope

The amount of loans on which businesses and citizens are late with repayment is growing. Interest rates remain high, bank profits have been cut in half, while citizens are making fewer and fewer term deposits. The crisis has strengthened electronic banking.

By Marija Mirjačić

Citizens and businesses are finding it increasingly difficult to repay loans, and high interest rates are hardly going down at all. Due to the crisis caused by the coronavirus, there are significantly fewer term savings, and mobile phones are increasingly replacing counters.

These are the key findings from an analysis of the impact of the pandemic on the economic and banking system recently published by the Central Bank of Montenegro (CBCG), which claims that its own measures and policies have largely preserved stability.

The total bank capital at the end of March 2021 was €600.4 million, which is a drop of 0.9 percent at the annual level.

Deposits at the end of March this year were €3.45 billion, having increased by €94 million in a year. Citizens had €1.77 billion on their accounts, or 51.28 percent, while businesses had €1.68 billion or 48.72 percent. In the comparable period last year, citizens’ deposits were €1.70 billion, and those of businesses were €1.66 billion.

According to the CBCG, at the end of March, total loans approved were €3.26 billion, €1.4 billion of which was provided to citizens and €1.85 billion to businesses. That is an increase of €104.6 million compared to the same period last year.

From March to the end of 2020, banks approved €789 million in new loans, more than 72% of which was granted to the business. In the first three months of this year, €238.08 million in loans were approved, up 22.95% on the comparable period of the previous year.

At the end of March, according to the CBCG data, loan arrears amounted to €177.9 million, which is an increase of €17.3 million or 10.76% compared to the same month last year. The share of these in total approved loans is 5.45 percent.

At the end of March this year, citizens were late in paying their loan instalments for a total amount of €63.5 million, while legal entities had overdue debts of €114.5 million.

“The data indicate that the banks have so far withstood the economic consequences of the pandemic and that their stability as the most important part of the financial system has been preserved,” CBCG told Vijesti.

However, economic analyst Predrag Drecun explains for Vijesti that it is logical for loans to grow, because in times of crisis, citizens and businesses use loans to protect themselves from illiquidity. However, he emphasizes that this growth alone is not a sufficient premise to draw any conclusions on the health of the economy.

“We need to see what’s behind the growth of loans– whether the level of security is of high quality, whether loans to residents or non-residents are growing, whether this a consequence of a rise in earnings or whether the base of borrowers has expanded. It is logical that increased borrowing is accompanied by employment growth. However, our credit growth is accompanied by unemployment growth. This means that we need to see who is borrowing, because it’s logical that a jobless citizen can’t easily take out a loan,” Drecun notes.

He pointed out that if you look at CBCG data, you can see that increased borrowing is predominantly caused by an increase in loans granted to the Government.

“The rise in loans in 2019/2020 amounts to €97.4 million, €45.5 million of which refers to the growth of loans given to the central government. It can be observed that loans are growing from year to year, but amounts are getting smaller. It is remarkable that there is a considerable rise in loans in the four months of 2021 compared to December 2020, taking into account the trend of the last four years. There has been an increase in loans totalling €136 million, but this growth was predominantly caused by the growth of loans granted to non-resident legal entities for a total amount of €112 million. Thus, the CBCG’s argument about credit growth is very questionable in respect of benefits for Montenegro’s economy. Residents were granted only 24 million euros more compared to the balance of loans at the end of December last year. The rise in loans to households is rather symbolic and amounts to barely €1.4 million,” Drecun explains.

He says that deposits reflect a dangerous trend for the stability of the system. In his opinion, the decline in the share of term deposits in total deposits is dramatic.

According to CBCG data, Drecun says, term deposits (whose terms and interest are known) accounted for 70.99 percent of total deposits in 2013, 39.46 percent in January last year, and 36.04 percent in April this year.

Demand deposits (with no fixed term) were at 28.79 percent in January 2013, 60.54 percent in January last year, and 63.96 percent at the end of April this year.

“The liquidity of banks is potentially at risk. Bank funds range mostly around 90 percent of the total amount of demand deposits. This means that term deposits are completely uncovered by liquid assets. Today, deposits are lower by about 40 million compared to the end of 2019. The CBCG is again consciously sugar-coating the reality by comparing growth with the worst months and years, and not with the best,” Drecun said, adding that low interest rates on savings is another cause of the change in the maturity of deposits.

The weighted average effective interest rate on savings, according to CBCG data, was 0.41 percent at the end of March this year, which is the same level as in March last year.

The CBCG, led by Governor Radoje Žugić, says that the minimal decline in total bank capital is largely due to the accounting treatment of the merger of two banks (Podgorička and CKB banks) in 2020. In addition, it did not affect the aggregate solvency ratio, which is significantly above the statutory minimum of 10 percent.

The bank’s liquidity is its ability to meet its overdue liabilities at any time. Insolvency occurs when the value of a company’s liabilities exceeds the value of its assets, i.e. when losses exceed its share capital.

“That ratio was 19.30 percent at the end of March this year. Its growth is 1.9 percentage points on an annual basis,” the CBCG explained.

The analysis has found that clients are experiencing falling revenues, reduced liquidity and more difficult settlement of liabilities, which further leads to more stringent bank conditions when granting loans, while the growing uncertainty when it comes to future settlement of loan commitments has been pointed out as a risk.

Erste Bank and NLB Bank told Vijesti that they expected a further growth of loans with late repayment of instalments, while Crnogorska komercijalna banka (CKB) did not answer this question.

“We expect a slight, but continued growth of non-performing loans, which rose from 3.2 percent to almost 4.5 percent last year, which is still substantially below the market average,” Erste Bank said. NLB pointed out that the significant decline in economic activity inevitably leads to an increase in the percentage of non-performing loans.

“Last year’s absence of tourists was felt mostly in the area of net commission income and through higher risk costs, due to the timely recognition of expected credit losses. The share of non-performing loands in the bank’s total loans at the end of March was 7.2 percent,” NLB said.

According to CBCG procedures, banks are required to set aside a reserve for each approved loan, which is used as security in case a borrower fails to repay their loan.

The total reserve requirements allocated by banks with CBCG were €182.2 million at the end of March 2021, an increase of €1.2 million or 0.7 percent on a monthly basis. Compared to March 2020, reserve requirements decreased by €74.2 million.

Drecun explains that reserve requirements have been reduced to about 70 percent of the 2019 level.

“CBCG announced that it has consciously reduced reserve requirements in order to help businesses with about €70 million. But, then we can’t talk about real borrowing growth, because that means that a substantial part of this growth was financed by reserve requirements,” Drecun explained.

Lower, but still unfavourable interest rates

Data from the Central Bank of Montenegro show that loans with a delay in repayment of more than 90 days have slightly decreased from 2.66 to 2.44 percent, which indicates that temporary measures introduced by this institution in respect of harmonization of repayment plans with expected cash flows of loan beneficiaries were appropriate.

“When it comes to future projections of trends in non-performing loans, regardless of their limited growth compared to the pre-crisis period, it can be expected that the withdrawal of temporary measures will lead to a rise in these loans, primarily for beneficiaries whose business has become unsustainable as a result of the crisis. Future trends in non-performing loans will depend on a number of factors, including the duration of the pandemic. The overall macroeconomic environment in the country is contingent on that. This primarily includes the effects of this year’s tourist season, which will have the greatest impact on macroeconomic indicators and trends in the coming period,” CBCG told Vijesti.

The Central Bank statistics show that last year there was a further decline in the weighted average effective interest rate on approved loans, which was 5.81 percent at the end of March this year, while it was 5.93 percent the year before. At the same time, the interest rate on loans granted to citizens at the end of March this year was 7.31 percent, and to businesses 4.35 percent.

Drecun points out that interest rates are unreasonably high and that they are a consequence of the ailing Montenegrin economy and the country’s high trade deficit.

“By taking certain measures in respect of the capital, the Central Bank could cause a reduction in interest rates, as it is well known that they are hefty partly due to the strict regulations it imposes on banks,” Drecun explained.

It is logical, he says, that if businesses find it difficult to repay loans due to poor results, this can also affect the loan repayment capacity of citizens who work in those companies.

One of the measures taken by CBCG to protect the banking system during the coronavirus crisis is a temporary ban on the payment of dividends to bank shareholders, except in the form of shares. This was done in order to increase bank capitalization levels. Banks reported profits of €22.7 million last year, which is significantly less compared to 2019, when they recorded a surplus of €48.6 million.

According to CBCG, the temporary ban on the payment of dividends to bank shareholders has led to an increase in the annual solvency ratio of banks from 17.40 to 19.30 percent.

Erste Bank said that the most noticeable effect of the crisis on banks’ operations was a decline in certain revenues, as well as a decline in profits of almost 60 percent in 2020.

“The major contributing factor was the growth of costs of loan loss provisions, which will remain high in this year as well. We have strengthened our financial position to meet the potentially more challenging situation, so the solvency ratio was 24.4 percent at the end of March, significantly more than the statutory 10 percent. In these circumstances, the bank’s focus is not on looking for opportunities to achieve additional business results, but on supporting clients affected by the crisis, while preserving the stability and health of the bank,” Erste Bank said.

Mobile banking

Erste Bank said that ever since the beginning of the pandemic they had been actively working to reduce the negative effects of the crisis on customers, implemented several moratoriums, suspended certain fees and charges and provided favourable loans in cooperation with international financial institutions.

“We continued to see a strong growth in the number of e-banking users, which was up 21.5 percent on the previous year, as well as a rise in the number of mobile banking users of almost 33 percent. The number of accounts was as much as 86 percent higher, while there were about nine percent more active cards,” Erste Bank added.

CKB Bank said that a decline in overall economic activity in the market had resulted in a drop in revenues, adding that the pandemic had caused new potential credit risks that were directly linked to those businesses that were most affected by the crisis.

“That is why we have set aside significant loan loss provisions”, a CKB representative pointed out.

The bank said that they had implemented all officially adopted mechanisms to help businesses and citizens (moratorium and restructuring). They also ran a “client protection programme”.

This programme, as they explained, means that they could analyse each case individually and offer a solution that best suits the client’s capabilities. Thanks to that programme, among other things, the bank avoided a significant increase in non-performing loans. CKB also recorded a growth of 25 percent in digitally active clients compared to the previous period.

NLB: We will see after the tourist season

NLB Bank said that they were satisfied with their results compared to those during the crisis. However, when it comes to regular targets, they were significantly below the planned ones.

“We expect to see the real effects of the crisis on our clients and our operation after the moratorium and rescheduling agreements end for most companies, and when we see the effects of the upcoming tourist season,” the bank said.

According to data from NLB, in 2020 they provided support citizens and businesses for a total amount of €165 million in the form of a moratorium on loan repayment, while the value of restructured loans to businesses (by means of defining more favourable repayment terms) was almost €20 million.

The bank says that they did not slow down the process of loan approval, as this segment saw a growth of 2.7 percent at the end of March compared to the end of 2020.

“Despite the negative effects of the pandemic in 2021, we have continued to have a stable performance this year with a net profit. The current circumstances have had the greatest impact on net non-interest income, which decreased compared to the comparable period of the previous year,” NLB said.

Since the outbreak of the pandemic, the bank has been trying to encourage the population to use digital banking service. To achieve this, the bank says, they have allowed customers to use those services free of charge on several occasions. When it comes to businesses, they focused on providing money for liquidity and loan restructuring.

Businesses are craving fresh money

Representatives of businesses and trade unions told Vijesti that interest rates are high and should be significantly lower to allow the effects of the economic crisis to be mitigated faster.

The Montenegrin Employers Federation (MEF) said that banks’ loan policies should take into account the present state of the economy, which is deeply affected by the current crisis.

“In these conditions, businesses have found themselves in a situation to “crave” fresh money in order to maintain their current liquidity and continue the investments which are under way. It would be logical for banks to support businesses by easing the conditions for granting new loans, particularly by reducing interest rates in order to give businesses impetus for growth again. But, since banks also want to make a profit, it is reasonable that they do not want to expose themselves to risks that are greater than the existing ones. Their loan policies remained at the 2019 level – in other words, there was no significant drop in interest rates. On the contrary, banks are even more cautious when granting loans to business, even though they have enough fresh money at their disposal,” the MEF said.

This organization says that the Montenegrin economy needs lower interest rates, but the question is how realistic this is given the current conditions.

The Chamber of Commerce believes that interest rates on loans are relatively high, adding that they still present a limiting factor for a more dynamic recovery of the economy. This body suggests that interest rates should be lower in order for business to enter a recovery phase as quickly and easily as possible.

“The current interest rate policy exhibits a significant discrepancy in the average interest rate for citizens and for businesses – of almost three percent. This can be explained by the greater risk of lending to the general population, taking into account the growing unemployment rate, the closure of small businesses, difficulties in paying wages, all of which resulting from the pandemic. Businesses are relatively well rehabilitated in terms of credit obligations with measures taken so far to delay loan repayments. A further drop in lending interest rates is necessary in order to enable stronger development of the real sector and more stable conditions for recovery and economic development,” the Chamber of Commerce said.

Union of Trade Unions: Citizens are low priority

The Union of Trade Unions says that it is not surprising that interest rates for businesses are significantly lower compared to the rate for citizens, as citizens have been low priority for years.

“Businesses are provided with numerous opportunities, both with banks and with the Investment and Development Fund. Over the last ten years, citizens have found it harder to get favourable loans than before. It is often the case now that the effective interest rate on housing loans exceeds eight percent, while the interest rate of 6.99 percent can be described as one of the most favourable. Not so long ago, it was not uncommon for citizens to take out housing loans on much more favourable terms, and with nominal and effective interest rates even below three percent. We believe that it is high time that the interest rate policy went back to the period of 10 or 20 years ago, when banks competed for each client and provided numerous benefits and relatively very low interest rates,” the trade union organization said, adding that banks took advantage of the last year’s moratorium to further increase customer indebtedness.