National Bank of the Republic of Belarus

FINANCIAL STABILITY

IN THE REPUBLIC OF BELARUS

2015

MINSK, 2016

2

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

CHAPTER 1. EXTERNAL AND INTERNAL MACROECONOMIC RISKS

CHAPTER 2. NON-FINANCIAL SECTOR

CHAPTER 3. FINANCIAL SECTOR

3.1. BANKING SECTOR

3.2. INSURANCE SECTOR

3.3 OTHER FINANCIAL INTERMEDIARIES’ SECTOR

CHAPTER 4. FINANCIAL MARKETS

4.1. FOREIGN EXCHANGE MARKET

4.2. CREDITS AND DEPOSITS MARKET

4.3. INTERBANK MARKET

4.4. SECURITIES MARKET

CHAPTER 5. PAYMENT SYSTEM OF THE REPUBLIC OF BELARUS

APPENDICES

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EXECUTIVE SUMMARY

The main external challenges for the Belarusian economy in 2015 were economic decline in the Russian Federation and considerable devaluation of its national currency due to low oil prices and foreign policy problems, as well as general slowdown in global economic growth. Decline in real GDP of the Republic of Belarus in 2015 was accompanied by improving structure of production of gross value added in the economy and growing share of net export of goods and services. The budgetary policy in 2015 was characterized by a good dynamics of filling-up the revenue side, with expenses being contained. Significant payments under foreign debt were made at the expense of attracting fresh government loans. On the whole, capital inflow under the financial account of the balance of payments was inadequate for ensuring well-balancing of the balance of payments. Investment attractiveness of the Republic of Belarus in 2015 was still at a low level. In the year under review financial indicators of the enterprises’ activities were worsening, that was indicated by the growing share of unprofitable and low-profit enterprises, increasing net losses of loss-making enterprises, and raising share of loss-making economic entities in the total number of organizations. As a result, the actual settlements discipline and the creditworthiness of the non-financial sector of the economy deteriorated. Decline in the households’ real money income was responsible for the shrinking of the households’ propensity to save in bank deposits in 2015 compared with 2014. In 2015, the real and financial sectors had differently directed dynamics – the first one shrank to a considerable degree as a result of recession, while the latter – preserved its scale and even grew up due to the impact of the national currency depreciation. It is evidencing the overoptimistic assessment of financial risks by the market participants that, in its turn, created a high risk operational environment for all categories of financial intermediaries. In 2015, the banking sector’s performance indicators slightly declined given the situation in the real sector of the economy. Credit risk continued to be the most significant risk to sustainable operation of the banking sector. The threats to sustainable functioning of the banking sector, which are associated with the accumulated potential of credit risk and are conditional on foreign currency lending to the organizations of the real sector of the economy, heavy debt load on enterprises, economic decline, and deterioration in financial performance of the corporate sector, partially materialized during the year.

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In 2015, banks maintained the bad assets share indicator at the adequate level, mainly, due to restructuring (prolongation) of the potentially bad debts and writing unrecoverable debts off balance sheet at the expense of special provisions established thereby. Problems related to the timely repayment of credits by banks’ clients were reflected in the high growth rates of prolonged debt and unrecoverable debt written off balance sheet, which outstripped the growth of the banks’ credit portfolio to a considerable extent. In 2015, the banking sector liquidity indicators values were in excess of secure functioning requirements prescribed for an individual bank. At that, the households’ and economic entities’ funds constituted the main sources of replenishing the Belarusian banks’ resource base. In the year under review, the indicators of the banking sector’s open foreign exchange position had a downward dynamics. At the same time, it was by reason of a strong dependence of the state of the main balance-sheet items on the exchange rate fluctuations that in the case of the national currency devaluation the banks might bear main losses as a result of materialization of the indirect credit risk (a growth in the share of bad assets), liquidity risk (a possible outflow of the depositors’ funds’), and a debt risk (worsening of conditions of foreign exchange debt servicing), rather than from revaluation of assets and liabilities. Despite a slight decline in the level of systemic bank risk in 2015 H2, its structure changed to a considerable degree and its concentration went up. On the background of declining exposure of banks to external debt risks, the threats related to the excessive credit load on the economy, grew up. The possibility of materialization of the “contagion” effect through the domestic interbank market was assessed as low. Under the conditions of unfavourable macroeconomic situation, one of the key tasks of the insurance institutions’ underwriting policy was preservation of the current approaches, which made it possible to adequately assess the size of risks assumed for insurance during the entire insurance period. This task was attained by means of improving the insurance terms and tariff policy. As a result, despite a considerable increase in the level of the insurance payments in 2015, the insurance sector continued to be resistant to the underwriting risk, credit and market risks, as well as the liquidity risk.

In the year under review, the position of the JSC “Development Bank of the Republic of Belarus” (hereinafter – the “Development Bank”) in the financial intermediation market of the country continued to strengthen. The credit risk, the level of which slightly decreased compared with 2014, was still the most important one for the stable functioning of this institution. The liquidity and foreign exchange risks were fairly low.

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In 2015, the leasing organizations’ segment, which made it possible to renew production facilities in a prompt manner, as well as to purchase property by natural persons on condition of lease was further developed. In 2015, the volumes of foreign exchange transactions dropped due to decrease in foreign exchange receipts from the foreign trade transactions. Volatility of the Belarusian ruble exchange rate in 2015 H1 increased under the impact of switching to a new exchange rate regime (managed floating). But, after changing in June of the previous year the regime of trading in the currency exchange from “fixing” to “continuous double auction” the volatility of exchange rates in the market slightly reduced. The most popular currency in the Republic of Belarus is still the US dollar, though its positions, as well as the positions of the Russian ruble, were slightly edged out by the euro. Under the conditions of high dollarization and short-term character of the households’ deposits attracted at high interest rates, the National Bank commenced to implement the strategy aimed at increasing the banks’ resource base stability by means of raising the share of long-term deposits. As part of this strategy, the measures in the area of interest rate policy, as well as of a structural character (splitting of agreements on term deposits into revocable and irrevocable), were implemented. On the background of continuing high devaluation expectations and decline in the households’ real income, the volume of the ruble deposit market shrank and the process of dedolarization of the natural persons’ deposits was underway. The prevailing level of interest rates on ruble credits was, to a great degree, caused by the continuing practice of financing implementation of government programs and activities at the expense of banks’ funds. Under the conditions of directed lending, the banks, while providing part of their resources at low interest rates, retained less funds designed for lending to the economy on market terms, that led to the maintenance of higher interest rates on such credits having regard to the current value of funding banks.

In 2015, the market of interbank lending was under the impact of considerable liquidity fluctuations and was characterized by the growing concentration of demand and decelerating concentration of supply. At the same time, the interbank market performed the funds redistribution function in the banking system rather effectively, while the transparent information policy of the National Bank led to the minimization of risks arising in the course of its functioning. Further growth of the bonds segment’s share and shrinkage of the equities segment’s share were the main trends in the securities market development in 2015. At that, high level of the liquidity risk is inherent in the stock market of the Republic of Belarus. Due to the low volumes of instruments circulating at the market, the investors faced considerable

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difficulties in selling the shares owned thereby at a definite moment and at a certain price. It is worse mentioning the underdevelopment of the derivative securities market and inadequate use of the mechanisms designed to insure the risks of investment in corporate securities in foreign exchange.

The National Bank’s consistent and planned efforts to maintain risks in the payment system at the acceptable level ensured that it was functioning in a sustainable and smooth manner.

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CHAPTER 1. EXTERNAL AND INTERNAL MACROECONOMIC RISKS

The main external challenges for the Belarusian economy in 2015 were economic decline in the Russian Federation and considerable devaluation of its national currency due to low oil prices and foreign policy problems.

The economy of Russia (main trade partner of the Republic of Belarus) slipped in 2015 into recession. Real GDP (according to the Rosstat’s first assessment) dropped by 3.7% in 2015 compared with 2014. In 2015, the global oil prices had the downward trend which began in 2014 (despite a slight deviation in January - May). Oil quotations (actual and expected ones) fell down due to weak demand on the background of oversupply. As regards the supply, low demand and a warm winter in the Northern hemisphere were the factors of its decline. As it pertains to demand, low demand of the main consumers (primarily, China) and a warm winter in the Northern hemisphere contributed to its decline to the utmost. A lack of the decision of the countries being oil exporters as to reduction of the crude oil production and an expected growth in oil supply after lifting of sanctions against Iran made a downward pressure on the oil prices. Prices for Urals oil in 2015 Q4 totaled USD42.2 per barrel, a 44.9% drop compared with 2014 Q4.

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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

2010 2011 2012 2013 2014 2015

- price per ton of oil imported in the Republic of Belarus (left-hand scale)

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

Oil prices, USD

Source: the NBRB .

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Prices in the global market of potash fertilizers has declined to a slight degree since August 2015. Decrease in demand of the countries being main importers (primarily, China) made a downward pressure on prices.

In 2015, the national currencies of Russia and Kazakhstan – main partners within the Single Economic Space (SES) – were further depreciated, that brought additional risks to the Belarusian economy and its financial system.

Continued depreciation of the Russian ruble exchange rate versus global currencies (in 2015, the Russian ruble depreciated versus the US dollar by 37.4% on a year earlier) led to the worsening of price competitiveness of the Belarusian exports and national goods and services for domestic consumption competing with imports in the short and long-term.

Inflationary processes accelerated in Russia due to the depreciation of the Russian ruble. Consumer prices grew in 2015 by 12.9%, having increased by 1.5 percentage points compared with the previous year.

In 2015, the growth of the global economy slowed down compared with 2014, that led to a decline in the general level of inflation in many market economies.

According to the assessments of the International Monetary Fund (hereinafter – the “IMF”), the global economy grew in 2015, on the whole, by 3.1% versus 3.4% a year earlier, with the growth rates in the industrialized countries going up by 1.9% (a 0.1 percentage point increase on the previous year) and in the developing countries – by 4% (a 0.6 percentage point drop on 2014). The following main factors contributed to the slowing down of the global economic growth: slowing down of the economic growth in China, decline in prices for exchange traded commodities, as well as decline in consumer and investment demand.

200

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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

2009 2010 2011 2012 2013 2014 2015

Dynamics of wold prices for potash fertilizers, USD per ton

Source: the NBRB .

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In 2015, the consumer price index (hereinafter – the CPI) totaled 100.3% (101.4% in 2014) in the industrialized countries and 105.5% in the developing countries (105.1%).

Macroeconomic situation in the Republic of Belarus in 2015 was characterized by the improved balancing of the domestic demand indicators.

In 2015, real GDP dropped in Belarus by 3.7% (in 2014, grew by 1.7%). At the same time, the structure of gross value added production in the economy further improved, with the share of net export of goods and services in the decomposition of GDP going up.

Retail turnover grew in comparable prices in 2015 by 0.2% (by 6% in 2014). Paid services to households went down by 2.3% (grew by 0.1% a year earlier). In 2015, investment in fixed capital dropped in comparable prices by 15.2% (in 2014, by 5.8%), leading to shrinking of domestic demand.

Despite a significant shrinking in foreign trade balance in 2015, a considerable improvement of the well-balancing of foreign trade took place.

Decline in economic activity in the countries which are major trade partners led to reduction in external turnover of goods and services of the Republic of Belarus by 24.8%. Imports of goods and services went down by 25.4% to USD32.7 billion under the influence of shrinkage of domestic and external demand; exports – by 24.2% to USD32.8 billion that was, mainly, due to decline in global prices for energy resources. A decline in investments in fixed capital by 14.8% in 2015 compared with 2014 resulted in the decreased investment imports (by USD1.5 billion, or by 30.4%) and intermediate imports (by USD6.7 billion, or by 27.5%). Imports of consumer goods dropped by USD2 billion, or by 21.7%.

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-1,6 -2,1

-5,7

1,2 4,5

0,1

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-3

-1

1

3

5

7

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2014 2015

Expenditures for final consumption Gross saving Net export of goods and services Statistical discrepancies

Decomposition of GDP, %

Source: the NBRB .

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The economic entities of the Republic of Belarus were able to increase the share of foreign exchange receipts from export in the US dollars by means of increasing the volumes of settlements for import in Russian rubles.

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

2014 2015

USD Euro Russian ruble USD Euro Russian

ruble

Receipts from export of goods and services, incomes and transfers

23.3 37.0 37.7 26.8 36.6 33.7

Payments under import of goods and services, incomes and transfers

33.5 28.2 36.8 27.8 25.6 45.0

An additional positive factor of growing foreign trade well-balancing in 2015 was increased flexibility of the Belarusian ruble exchange rate versus foreign currencies.

Over 2015, 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 weakening of the nominal effective exchange rate of the Belarusian ruble since early 2015 by 23%.

7,4 5,7

3,6 2,3

24,5

18,1

-9,2 -7,2

-4,9 -3,4

-25,9

-19,3

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0

10

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2014 2015

Structure of foreign trade in goods

Intermediate goods

Investment goods

Consumer goods

Exp

ort

Impo

rt

US

D b

n

Source: the NBRB .

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The budgetary policy in 2015 was characterized by a good dynamics of filling-up the revenue side, with expenses being contained. Significant payments under foreign debt were made at the expense of attracting fresh government loans.

In 2015, the Government agencies’ sector ran a consolidated budget surplus of 1.5% of GDP (in 2014, 1.1%). According to the preliminary data, the revenues of the Government agencies’ sector amounted in 2015 to BYR365.8 trillion (100.9% of the revised plan for 2015). The expenses of the Government agencies’ sector amounted in 2015 to BYR353.1 trillion (98.6% of the revised plan for 2015).

Consolidated and republican budgets also ran a surplus of 1.8% and 1.7% respectively (1% and 0.7% of GDP in 2014).

The Government external debt of the Republic of Belarus amounted as at January 1, 2016 to USD12.4 billion, having decreased over 2015 by USD133.9 million, or by 1.1%, adjusted for the currency translation differences. In 2015, the Government attracted external loans in the amount of USD2,172.9 million; repaid – USD2,016.4 million. On the whole, capital inflow under the financial account of the balance of payments was inadequate for ensuring well-balancing of the balance of payments. Investment attractiveness of the Republic of Belarus in 2015 was still at a low level.

Where in 2014 the net inflow of capital under the financial account totaled USD2.3 billion (3% of GDP), in 2015 it amounted to only USD0.7 billion (1.2% of GDP). In 2015, current account deficit totaled USD2.1 billion (3.8% of GDP), having dropped by 39.7% compared with 2014.

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2010 2011 2012 2013 2014 2015

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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Net inflow of Foreign Direct Investment (FDI) in 2015 stood at

USD1.5 billion, or 2.7% of GDP, compared with USD1.8 billion, or 2.4% of GDP in 2014, with the reinvested incomes worth USD1.1 billion accounting for its major part. In 2015, net inflow of direct investments to the non-financial sector of the economy, excluding the amount of reinvested incomes, totaled USD0.3 billion, being less than the 2014 level by USD0.3 billion.

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1,0

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3,0

2014 2015

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

US

D b

n

Source: the NBRB.

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CHAPTER 2. NON-FINANCIAL SECTOR

In the year under review financial indicators of the enterprises’ activities were worsening, that was indicated by the growing share of unprofitable and low-profit enterprises, increasing net losses of loss-making enterprises, and raising share of loss-making organizations in the total number of organizations.

The profit from the sale of products, goods, works, and services grew in real terms by 1.6%, with the pre-tax profit declining by 38.5%, and net profit – by 50.3%.

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 up in 2015 by 3.2 percentage points and totaled 60.2%.

In 2015, 20.6% of organizations were in the red compared with 14.3% in 2014. The amount of net losses grew 2.2 times. The amount of net losses per loss-making organization averaged BYR26.3 billion in 2015.

In 2015, the actual settlements discipline as well as the creditworthiness of the non-financial sector of the economy of the Republic of Belarus deteriorated. A decline in monetary receipts to the enterprises’ accounts led to an increase in 2015 in the shares of overdue accounts payable and receivable in their total amounts (from 13.5% as at January 1, 2015 to 16.4% as at January 1, 2016 and from 18.5% to 22.4% respectively).

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 47,7%

25.0%

20.3%

4.0% 3,0%

Grouping of organizations by return on sales in 2014

0-5

5-10

10-20

20-30

>30

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As at January 1, 2016, 74.4% of organizations had overdue accounts receivable (72% a year earlier) and 64.6% of organizations had overdue accounts payable (62.4% 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 coefficient1 of institutions grew in 2015 by 137.2 percentage points, amounting to 697.2% as at January 1, 2016.

The growth in overdue accounts payable and a decline in the balances on the enterprises’ accounts resulted in the worsening of current paying capacity of enterprises2 from 112.6% as at the beginning of the year to 92.3% as at the year-end.

The amount of withdrawn circulating funds in the stocks of finished goods was still high. As at January 1, 2016, the stocks of finished goods in

1 Ratio of total accounts payable to average monthly revenues from the sale of products. 2 Ratio of monetary funds to overdue accounts payable.

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01.01.2013 01.07.2013 01.01.2014 01.07.2014 01.01.2015 01.07.2015 01.01.2016

%

Share of overdue accounts receivable and payable in total amount thereof

Accounts receivable Accounts payable

Source: the Belstat .

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55

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85

90

01.01.2013 01.07.2013 01.01.2014 01.07.2014 01.01.2015 01.07.2015 01.01.2016

%

Ratio of finished stock and average monthly volume of production

Source: the Belstat .

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the industrial enterprises’ warehouses totaled BYR33.5 trillion, having grown over the year by 2.4%. Decline in the households’ real money income was responsible for decrease in the households’ propensity to save in bank deposits in 2015 compared with 2014.

Throughout 2015, the real money income was declining and over the year as a whole real money income dropped by 5.8% (in 2014, it didn’t change), real disposable money income went down by 5.9% (in 2014, grew by 0.1%). Real wages dropped by 3.1% (in 2014, went up by 0.3%) and real awarded pension – by 1% (in 2014, went up by 3.1%).

Debt under credit of population went down in real terms to a slight degree, with households’ debt burden slightly reducing compared with the previous year.

In 2015, the credit amounts in real terms (adjusted for the consumer

prices growth) owed by natural persons to banks were down by 2.5% (went up by 0.3% in 2014). Households’ debt burden3 slightly went up from 12.1% as at early 2015 to 12.2% as at early 2016.

Households’ bad debt under credits as at late 2015, as well as at late 2014, was insignificant, amounting to 0.1% in their monetary income per year.

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

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2014 2015

in the national currency in foreign exchange

Share of households' bank deposits growth in money income, %

Siurce: the NBRB .

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In 2015, 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 2015 to 35.7% of the volume of their deposits, as at year-end 2014 – 46.9%. At the same time, households’ debt in Belarusian rubles as at late 2015 exceeded the level of households’ ruble deposits by 71.1% (as at year-end 2014 – by 58.9%). 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 up.

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CHAPTER 3. FINANCIAL SECTOR In 2015, the banking sector continued to play the dominant role in

carrying out financial intermediation functions.

In 2015, the financial sector’s aggregate assets4 amounted to 84.7% of GDP, of which the share of banks accounted for 84.1%, Development Bank – 7.3%, leasing companies – 5.1%, and insurance organizations – 3.4%. The share of assets of microfinance institutions did not exceed 0.03% of the sector’s assets.

In 2015, the broad money supply-to-GDP ratio5, which characterizes

the overall level of development of the financial sector and the economy as a whole, stood at 34%, increasing 6.3 percentage points on 2014.

In 2015, financial circle was at the expansion stage, that, having

regard to the recession in the real sector of the economy, created a high risk operational environment for all categories of financial intermediaries.

4 Assets of the banking sector, Development Bank, as well as insurance, leasing, and microfinance organizations. 5 The average broad money supply over the year as a percentage of nominal GDP.

84,1

7,3 5,1

3,4

0,03

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

Banking sector Development Bank Leasing companies

Insurance sector Microfinance institutions

Source: the NBRB .

84,7

12,5 0

20

40

60

80

Assets/GDP Equity/GDP

Financial sector's capacity as at January 1, 2016, %

Source: the NBRB .

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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 ratios6: 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); financial 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 incomes7.

6 The values of weight ratios were determined on the basis of interviewing 10 experts of the National Bank. 7 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.

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Over 2015, there were four components of the financial cycles indicator which pointed to the phase of growth8, while no more than two indicators showed the phase of decline (the latter reflected the tightness of the implemented monetary policy). The financial cycles indicator in the year under review was higher than its average value by one standard deviation (growing ratio of credit to GDP, increase in financial leverage, and expansion of the volume of government bonds in circulation contributed to its growth to the utmost), that may be interpreted as financial expansion. In fact, it means the mutual growth of the economic entities’ obligations to each other on the background of decline in their real revenues, that raised the general level of the financial sector’s risks in 2015.

Foreign assessments highlight the complexity of operational

environment and high level of vulnerability of the country’s financial sector to external shocks.

As at the year-end 2015, British think tank Economist Intelligence Unit

assessed Belarus’ sovereign risk and the banking sector’s risks as CC. It is noted that inconsistent policy in combination with high inflation rate create highly volatile operating environment for banks. According to experts of the think tank, lack of confidence in the national currency led to the outflow of deposits in Belarusian rubles and caused dollarization, while the continuing recession will result, with great probability, in the further growth of bad credits.

8 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.

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01.01.2005 01.01.2006 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

poin

ts

Indicators of financial cycles in the Republic of Belarus

Number of indicators pointing to growth (+) / decline (right-hand axis) Indicators of financial cycles Average value

Source: the NBRB .

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In April 2015, rating agency Moody’s Investors Service downgraded the long-term sovereign rating of the Republic of Belarus from B3 to Caa1, outlook negative. The agency’s experts justify this decision by increased strains on the country’s external payments position and uncertainty about external financial support. In addition, Moody’s highlighted the issues related to the sustainability of Belarus’s economic model. Following the downgrade of the sovereign rating, Moody's also downgraded the ratings of five Belarusian banks (JSC “JSSB Belarusbank”, JSC “Belagroprombank”, “Belinvestbank” JSC, and “MTBank” – from B3 to Caa1; JSC BPS-Sberbank – from B1 to B3), due to rather complicated, in the agency’s opinion, operational environment for financial institutions, permanently high inflation, significant devaluation expectations, as well as vulnerability to external shocks, in particular, worsening of the Russian economy.

Rating agency Fitch Ratings evaluated the banking sector of the Republic of Belarus as “fundamentally weak” that reflected the experts’ expectations as to possible worsening of the banks’ assets quality on the background of recession in the real segment of the economy. Lending in foreign exchange to economic entities lacking sufficient foreign exchange proceeds from sale for meeting their obligations under credit agreements and tight connections with the government sector led to increase in credit risk. At the same time, Fitch Ratings recognized that the level of bad assets was at the acceptable level due to transferring credits under government programs with poor performance to the Development Bank and the Ministry of Finance.

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 trading on the Luxemburg Stock Exchange at the beginning of 2016, market value of the Republic of Belarus eurobonds with redemption in

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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

%

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

Source: Luxembourg Stock Exchange.

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2018 stood at 103.3% of par value, a 12.2 percentage points increase on a year earlier. At the same time, quotations for these securities were progressively growing over the whole 2015, indicating an increasing level of reliability of the bond issuer in the opinion of trades participants. This fact is probably related to stable and timely servicing by the Republic of Belarus of its foreign debt in 2015, despite the continuing recession in the real sector and complicated foreign economic environment.

3.1. BANKING SECTOR

As at January 1, 2016, the banking sector of the Republic of Belarus

comprised 26 operating banks, including 21 banks with the participation of foreign capital (more specifically, in 16 banks the share of foreign investors in the authorized capital exceeded 50%). At the same time, it was still dominated by state-owned banks9.

In 2015, the state’s share in the banking sector’s aggregate authorized capital grew from 74.8% to 82.0% and, at the same time, the share of foreign capital dropped from 21.3% to 15.0%. The share of other investments also decreased from 3.8% to 3.0%. In 2015, two banks changed ownership: one of them, which was previously controlled by foreign investors, passed into private ownership, another one passed from the category of private banks into the group of foreign banks. Thus, the number of state-owned and private banks was 5 and 5 respectively as of January 1, 2016.

In 2015, concentration of the banking sector’s assets and capital went up. In early 2016, five largest banks accounted for 79.5% of assets and 75.3% of capital of the banking sector (79.0% and 72.7% respectively in early 2015). As at January 1, 2016, the Herfindahl-Hirschman index10 calculated on the basis of assets and capital was 0.231 and 0.234 respectively (0.219 and 0.193 a year earlier). The distribution of the banking sector’s assets and

9Here 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; - private banks (PBs) – a group of banks that are not included into SOBs and FBs groups; - large banks (LBs) – a group of banks whose assets’ share in the aggregate assets of the banking sector

accounts for more than 5%; - medium-sized banks (MSBs) – a group of banks whose assets’ share in the assets of banks that are not

included into LBs group accounts for more than 5%; and - small banks (SBs) – a group of other banks that are not included into LBs and MSBs groups. 10 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.

23

capital became more even. The Gini index11 calculated on the basis of assets and capital was 0.767 and 0.729 (0.793 and 0.735 as at January 1, 2015).

In 2014, the banking sector’s performance indicators slightly

declined given the situation in the real sector of the economy.

In 2015, the banking sector earned profit of BYR7.4 trillion (before tax), a BYR1.6 trillion, or 18.1% drop on the previous year. Alongside with that, none of the operating banks made nominal loss as at the year-end 2015.

A downturn in the national economy sectors that are most closely related with the banking sector through financial flows, as well as an overall economic slowdown, had a negative impact on the banking performance in general. As a result, annual average assets and capital of the banking sector grew faster than the profit (before tax) generated by banks over 12 months – 30.7% and 20.2% respectively, which led to a decline in the return on assets (from 2.10% to 1.32%) and the return on equity (from 15.28% to 10.41%) of the banking sector.

Discrimination between constituent elements in the structure12 of the return on equity of the banking sector shows that an increase in the return on assets weighted for risk as well as in the financial leverage were the main factors behind an upward pressure on the return on equity in 2015. At the same time, a decline in the profit margin and risk level curbed the growth of

11 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. 12 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.

1,20 1,30 1,40 1,50 1,60 1,70 1,80 1,90 2,00 2,10 2,20 2,30 2,40 2,50

9

10

11

12

13

14

15

16

17

18

19

20

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

% %

Profitability of the banking sector (before tax)

Return on equity Return on assets (right-hand axis)

Source: the NBRB.

24

the return on equity and this indicator declined in 2015. Dynamics of change in the profitability indicators had a multidirectional character over the year.

Over 2015, the banking sector’s capital adequacy indicators were

higher than requirements set for an individual bank. The regulatory capital quality improved to a significant degree.

Over 2015, the amount of the banking sector’s risk-weighted assets13 was up by BYR61.5 trillion, or by 17.2% (in 2015 the growth accounted for BYR12.2 trillion, or 3.5%). In the reporting period, the regulatory capital increased to a greater extent than risk-weighted assets (by 26.3%), and in the year-end 2015 the banking sector’s regulatory capital adequacy ratio went up by 1.36 percentage points, from 17.38% to 18.74%, with the prescribed requirement for an individual bank being 10%.

In 2015 as a whole, the degree of protection of the banking sector against assumed risks, which is expressed by the capital adequacy ratio, improved. At the same time, the dynamics of this indicator varied in different groups of banks. For example, the capital adequacy ratio of state-owned banks increased from 18.4% in early 2015 to 19.7% as at January 1, 2016, despite a 25% growth of risk-weighted assets over the year. The capital adequacy ratio of foreign banks, the risk-weighted assets of which increased in 2015 by 3.5%, went up from 15.3% to 16.7%. As for the group of private banks, risk-weighted assets grew to the utmost – 2 times, that had a negative impact on the capital adequacy which decreased from 36.3% to 25.4% over 2015.

The dynamics of the capital-to-risks magnitude ratio calculated by banks in accordance with Basel III international standards suggests that the banking sector has certain reserves of strength for assumed risks. For example, the sector’s weighted average value of this indicator grew in 2015 from 17% to 18.4%, which is much higher than the recommended minimum level even taking into account a conservation capital buffer (10.625%). At the same time, the very fact of taking countercyclical measures reflects the need for channeling capital to cover losses resulting from risk materialization. Thus, it should be stated that the threats associated with the banking sector’s capital adequacy increased in 2015.

In 2015, along with the growth of the aggregate amount of the banking sector’s core capital (by BYR15.3 trillion, or 33%) banks were also raising their regulatory capital at the expense of the sources that generate additional capital. An increase in the registered authorized capital of banks and the

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

25

revaluation of fixed assets became the main sources of growth of the banking sector’s regulatory capital in 2015.

In 2015, banks’ additional capital grew by BYR1.1 trillion, or by 6.8%. As a result, the quality of the regulatory capital improved – the additional capital-to-the core capital ratio dropped by 6.8 percentage points to 27.6% compared with January 1, 2015.

In 2015, credit risk was the most significant risk to sustainable operation of the banking sector. The threats to sustainable functioning of the banking sector which are associated with the accumulated potential of credit risk and are conditional on foreign currency lending to the organizations of the real sector of the economy, heavy debt load on enterprises, economic decline, and deterioration in financial performance of the corporate sector partially materialized during the year.

In 2015, the banking sector’s assets exposed to credit risk grew by 22.5% (or by 4.2% excluding exchange rate fluctuations) and totaled BYR404.9 trillion in equivalent. This growth throughout the year was very uneven that was due to the fluctuation of the Belarusian ruble exchange rates versus foreign currencies. In 2015, assets in the national currency grew by 4.3%, while assets denominated in foreign exchange, vise versa, declined by BYR1,724.9 million in equivalent (by 11.6%). In 2015, the value of the indicator characterizing the overall level of the banking sector’s exposure to credit risk14 declined against the background of a significant deceleration in

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

8

10

12

14

16

18

20

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

%

Banking sector's capital adequacy indicators

Regulatory capital adequacy Core capital adequacy Capital-to-assets ratio

Source: the NBRB .

26

credit processes and amounted to 55% by the end of the year (60.5% as at year-end 2014).

A divergence of the growth rate of credit debt in real terms15 with the growth rate of the economy made a significant impact on the increase in the overall level of the banking sector’s exposure to credit risk in 2015. Whereas the growth of banks’ credit exposure in early 2015 was higher than the economic growth by 3.9 percentage points, in the end of the year the difference expanded to 13.3 percentage points.

In 2015, the credit risk profile (the structure of assets exposed to credit risk classified under risk groups) slightly changed. The share of assets classified under Group I dropped by 6.7 percentage points to 79.1%. Accordingly, the share of assets forming Group II increased by 4.3 percentage points and stood at 12.9%. The shares of assets classified under Groups III, IV, and V accounted for 4.9% (a 1.5 percentage points increase in

15 The time average of the debt under credits to clients over 12 months adjusted for GDP deflator.

5

15

25

35

45

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

%

Growth of assets exposed to credit risk

Total assets Extended to economic entities Extended to households

Source: the NBRB .

-20

-15

-10

-5

0

5

10

15

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

%

Change in the amount of cliebts' debt under credit

Growth rate of the amount of lending Growth rate of real GDP

Source: the NBRB.

27

2015), 1.3% (a 0.6 percentage points increase), and 0.6% (a 0.3 percentage points increase) respectively.

By the turn of 2016, the banking sector’s bad assets16 totaled BYR27.7 trillion, growing over 2015 nearly 2 times (by 91.5%), or by BYR13.2 trillion, whereas their growth in 2014 accounted for 17.8% only. Assets classified under Group V were responsible for the largest increase of 189.3%, while assets forming Group IV increased by 133.5%, and assets forming Group III grew by 76.1%.

The share of bad assets in the banking sector’s total assets exposed to credit risk went up from 4.37% as at January 1, 2015 to 6.83% at the turn of 2016. The share of bad assets denominated in the national currency grew over the year from 3.80% to 6.26%; in foreign currency (held by enterprises and households) from 4.88% to 7.22%.

It is worth mentioning that debt under credit owed by the majority of state-owned enterprises, which are major borrowers of separate banks, is classified under risk Group I and Group II largely due to the availability of government guarantees. At the same time, their financial stability indicators suggest that the debt owed by many of the above-mentioned enterprises may be classified under risk Group III, Group IV, and Group V. In other words, in the absence of government guarantees the share of the banking sector’s bad assets in the assets exposed to credit risk could be much larger.

In 2015, banks maintained the indicator of the share of bad assets at safe level, mainly, by means of refinancing and restructuring (prolonging) potentially bad debts and writing uncollectable debts off the balance sheet at the expense of special provisions established by banks. Problems with the timely repayment of loans by banks’ clients are reflected in high growth rates of prolonged debt (a 90.1% increase in 2015) as well as uncollectable debt

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

78.6

15.9

5.5

Structure od bad assets as at January 1, 2015, %

Group III Group IV Group V

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 .

28

written off the balance sheet (a 139.2% increase in 2015), which significantly outpaced the growth of the banking sector’s loan portfolio17. At the end of 2015, the debt service ratio (DSR)18 totaled 24%. It means that the economic entities (enterprises and households) of the Republic of Belarus were obliged to send to banks, nearly, a quarter of their current income, on average, while servicing accumulated debt.

The legal persons’ loan portfolio continued to be the main source of credit risk. The level of systemic risks that has been registered in the sphere of lending to households may be characterized as very low, however, trends that developed in 2015 indicate increasing threats to financial stability in this sphere of banking.

The dominating part of credit risk of the banking sector is still

concentrated in the legal persons’ loan portfolio. As at January 1, 2016, the corporate sector accounted for 72.7% of assets exposed to credit risk. The structure of assets by type of economic activity remained practically unchanged during the year. According to the data of banking statistics: the processing and mining industry – 52.3% of the banks’ total debt under credit, trade; repair of cars, household goods and articles of personal use – 15.3%; and agriculture, hunting and forestry – 11.4%.

Lending to economic entities of the construction industry and transactions involving real estate, lease and provision of services to households poses the highest risks: as at January 1, 2016, the share of bad

17 Legal persons account for the bulk of debt written off the balance sheet – 85.4%. 18 Debt service ratio is defined as a ratio of the flow of payments under accrued debt, including repayment of principal as well as interest, to the amount of current incomes (GDP in case of the economy as a whole). The international practice shows that the DSR values which exceed 20-25% are a strong signal of the onset of financial (banking) instability in the next 12 months.

10

15

20

25

30

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

%

Debt service ratio, calculated based on GDP

Debt service ratio Threshold 1 Threshold 2

Source: the NBRB.

29

assets in banks’ assets stood at 23.35% and 11.47% respectively (the share of bad assets in the industrial sector is equal to 8.53%).

Banks’ claims on natural persons grew over 2015 by BYR6.1 trillion, amounting to BYR70.2 trillion (a 9.6% growth) as at January 1, 2016. The share of bad assets in the assets loaned to natural persons totaled 1.01% as at late 2015.

It is necessary to note a decline in the volumes of consumer lending and the levels of corresponding risk at the year-end 2015: the share of non-performing consumer loans accounted for 3.95%, declining by 0.85 percentage points since the beginning of the year. Bad debt on the loans for construction and purchase of real estate is also growing, but its share is insignificant and accounted for only 0.27% as at January 1, 2016.

In addition, 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, 2016 state-owned banks accounted for 79% of retail lending and 11.3% of related bad assets, Belarusian banks with foreign and private capital accounted for only 21% of retail lending and 88.7% of bad assets.

A considerable share of assets exposed to credit risk was extended

by the banking sector to economic entities as part of funding 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 16% as at January 1, 2016 and did not exceed 20% during 2015 as a whole. The share of bad assets of this category grew almost twice over 2015 (5.56% as at the year-end).

In 2015, the fullness of setting up by the banking sector of special provisions for potential losses on assets and operations that are not reported on the balance sheet stood at 99.5% of estimated provisioning as at January 1, 2016. The coverage level of established special provisions on the assets exposed to credit risk was 4.73% Special provisions on bad assets were established in 2015 to the extent necessary. The level of coverage by actually established provisions on bad assets of such assets amounted to 39.8% as at the end of the year.

30

In 2015, the banking sector maintained liquidity indicators values that were in excess of secure functioning requirements prescribed for an individual bank.

As at January 1, 2016, the banking sector’s liquid-to-total assets ratio

stood at 32.05%, with the requirement for an individual bank being 20%, and the short-term liquidity ratio was 2.12, with the minimum requirement for an individual bank being equal to 1.

In 2015, 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 four banks (with their share of assets in total assets of the banking sector accounting for 18.0%) to comply with the regulatory capital requirements.

Furthermore, an additional capital of BYR0.7 trillion (BYR1.5 trillion as at January 1, 2015) would be needed in order that these banks comply with the prescribed requirement.

The banking sector would continue to incur significant losses if the above shock materializes – they would be 4 times as much as the profit earned by banks over 12 months (2.6 times as at January 1, 2015). With respect to capital the losses will reach nearly 30% (30.5% as at January 1, 2015).

Stress testing results

Indicators 01.01.2015 01.10.2015 01.01.2016

Change

over quarter

over 12 months

Capital adequacy ratio, %

Actual value 17.4 19.2 18.7 -0.5 1.3 Calculated value 12.6 13.8 13.9 0.1 1.3 Change -4.8 -5.4 -4.8 0.6 0.0

Losses in respect of profit over 12 months, times Ratio 2.56 3.44 3.97 0.53 1.41

Losses versus capital, %

Ratio 30.49 32.10 29.27 -2.83 -1.22 The amount of additional investments in capital, BYR billion

Sum 1,470.6 1,782.9 669.3 -1,113.6 -801.3

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 13.9%, with the prescribed requirement for an individual bank being 10%.

31

The liquidity coverage ratio19 calculated by banks in compliance with International Standards Basel III reflects the situation with liquidity in 2015 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 2015, the average weighted liquidity coverage ratio for the banking sector grew from 110.4% to 117.6%. The increase in the group of small banks totaled 104.2 percentage points; the annual growth of the indicator (by 33.4 percentage points) was also observed in the group of medium-sized banks.

19 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

01.01.2014 01.04.2014 01.07.2014 01.10.2014 01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016

%

Banking sector liquidity indicators

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

Source: the NBRB.

40

70

100

130

160

190

220

250

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

%

Liquidity coverage ratio by a group of banks

Banking sector Large banks Medium-sized banks Small banks Recommended value

Source: the NBRB .

32

In 2015, 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 2015 the gap between the banking sector’s long-term assets and liabilities in the national currency grew by BYR6.8 trillion.

Households’ and economic entities’ funds constituted the main

sources of replenishing the resource base of the banking sector in 2015. In 2015, funds attracted by natural persons grew by 45%, or BYR64.8

trillion, making this source of funds one of the main sources responsible for the growth of the banking sector’s liabilities. At the same time, the volume of funds attracted from economic entities increased to a lesser extent – by 25.7% (by BYR23.2 trillion), which led to a slight decline in the importance of this source of the banking sector’s resource base.

In 2015, the amount of resources provided by the National Bank to the banking sector went up by 0.6%, from BYR15.4 trillion to BYR16 trillion. The share of the National Bank’s resources in the structure of the banking sector’s liabilities went down and stood at 2.5% as at January 1, 2016. At the same time, the share of the Government’s resources declined by 3.1 percentage points to 8.3% (a decrease by BYR2.5 trillion to BYR52.1 trillion in absolute terms).

11,3 3,2

20,0

29,1

2,8

18,1

15,5

Liabilities structure as at January 1, 2015, %

Government NBRB Enterprises Households

Banks Non-residents Other sources

Source: the NBRB.

8,3

2,5

19,2

32,3

3,0

19,0

15,7

Liabilities structure as at January 1, 2016, %

Government NBRB Enterprises Households

Banks Non-residents Other sources

Source: the NBRB .

33

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.

In 2015, the amount of the banking sector’s external debt fell by 11.8%,

or USD0.9 billion in equivalent, and amounted to USD6.5 billion as at January 1, 2016. The volume of funds attracted from non-residents declined, to a great extent, due to changes in the euro and the Russian ruble exchange rates versus the US dollar. Actual decrease of the non-residents’ funds without regard to the changes in the cross-rates of foreign currencies by USD0.35 billion in equivalent was compensated by the growth in direct financing of the economic entities by the parent organizations of the Belarusian banks with foreign capital share.

In 2015, the degree of the banking sector’s resistance as a whole became lower 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, 10 banks whose assets account for 72.5% of the total amount of the banking sector’s assets would lack liquidity (in early 2015, there were 11 such banks, with their assets accounting for 72.9% of the total amount of assets). If the scenario in question is materialized:

- 4 banks (17.1% of the total amount of assets) would fail to comply with the liquid-to-total assets ratio;

- 5 banks (18% of the total amount of assets) would fail to comply with the short-term liquidity ratio; - 5 banks (26.2% of the total amount of assets) would fail to comply with the instant liquidity ratio; and - 4 banks (64.1% of the total amount of assets) would fail to comply with the current liquidity ratio.

Stress testing results

Indicators 01.01.2015 01.10.2015 01.01.2016 Change

over the quarter

over 12 months

Instant liquidity ratio, % Actual value 251.7 320.3 214.6 -105.7 -37.1 Calculated value 102.9 157.4 56.6 -100.8 -46.3 Change -148.8 -162.9 -158.0 4.9 -9.2

Current liquidity ratio, % Actual value 133.7 144.8 123.3 -21.5 -10.4 Calculated value 83.6 93.1 64.9 -28.2 -18.7 Change -50.1 -51.7 -58.4 -6.7 -8.3

Short-term liquidity ratio, times Actual value 1.9 1.8 2.1 0.3 0.2 Calculated value 1.1 1.3 1.4 0.1 0.3 Change -0.8 -0.5 -0.7 -0.2 0.1

Liquid-to-total assets ratio, % Actual value 27.2 31.7 32.0 0.3 4.8 Calculated value 17.9 22.7 23.1 0.4 5.2 Change -9.3 -9.0 -8.9 0.1 0.4

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 lower than the prescribed minimum requirements.

34

Long-term funds (the maturity of which exceeded one year) dominated the structure of external borrowings. As at January 1, 2016, their share in the total amount of foreign debt stood at 66.4%.

As at January 1, 2016, Russia and Germany continued to be the largest creditors to the banking sector of the Republic of Belarus. The Belarusian banks owe to the residents of this countries USD3.7 billion and USD0.8 billion in equivalent, respectively.

As at January 1, 2016, the Belarusian banks controlled by foreign capital attracted the bulk of non-residents’ funds – 56.07% of all the non-residents’ funds in the banking sector, including banks controlled by Russian capital – 47.92%. The share of funds attracted from non-residents in the Belarusian banks’ liabilities went up from 18.1% to 19.7%.

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, 2016, the ratio of the banking sector’s external debt to official international reserve assets totaled 155.9%.

Liabilities to non-residents by country, %

46,6

19,3

7,7

2,7 2,4

2,2 2,2

16,9

As at January 1, 2015

Russia

Germany

Austria

Poland

Switzerland

Italy

Great Britain

Other countries

Source: the NBRB .

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 .

35

In 2015, a decrease in indicators of the banking sector’s open foreign exchange position was responsible for a slight decline 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 grew up over the year.

2015 saw a decrease 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 decline in the overall level of the banking sector’s exposure to foreign 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 (since June 1, 2015 - not more than 10%;

In 2015, 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 13 banks lacking foreign

exchange liquidity, with the share of such banks’ assets standing at 90% of all assets of the banking sector. 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 57%) – would be violated. Stress testing results

Indicators 01.01.2015 01.10.2015 01.01.2016 Change

over the quarter

over 12 months

Instant liquidity ratio in foreign currency, % Actual value 215.3 270.8 176.5 -94.3 -38.8 Calculated value 74.0 126.9 55.5 -71.4 -18.5 Change -141.4 -143.9 -121.0 22.9 20.4

Current liquidity ratio in foreign currency, % Actual value 127.3 133.5 109.6 -23.9 -17.7 Calculated value 68.9 83.6 56.7 -26.9 -12.2 Change -58.4 -49.9 -52.9 -3.0 5.5

Short-term liquidity ratio in foreign currency, times Actual value 1.4 1.3 1.5 0.2 0.1 Calculated value 1.0 1.1 1.3 0.2 0.3 Change -0.4 -0.2 -0.2 0.0 0.2

Liquid-to-total assets ratio in foreign currency, % Actual value 32.5 36.8 39.8 3.0 7.3 Calculated value 22.8 28.7 32.4 3.7 9.6 Change -9.7 -8.1 -7.4 0.7 2.3

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

prescribed requirements: the current liquidity ratio at 8 banks (with the assets’ share of 82.5%), the short-term liquidity ratio at 9 banks (with the assets’ share of 35.4%), the instant liquidity ratio at 7 banks (with the assets’ share of 38.2%), and the liquid-to-total assets ratio at 3 banks (with the assets’ share of 7.5%).

36

earlier - not more than 20%), amounting to 4.47% as at January 1, 2016 (9.31% as at January 1, 2015).

In 2015, the overall majority of banks maintained long foreign exchange position. As at January 1, 2016, the indicator of the banking sector’s net open foreign exchange position accounted for 4.45% of the regulatory capital.

By the turn of 2016, the share of foreign currency claims in the total

amount of clients’ debt on lending and other asset-related operations rose to 57.8% (52.5% by the turn of 2015), which is solely due to the depreciation of the Belarusian ruble against major world currencies, while clients’ debt under credit in foreign exchange (in dollar terms) dropped by 8.4% over the year and in the national currency went up by only 4.78%. The share of attracted foreign currency resources in the total amount of the banking sector’s liabilities increased from 54.7% to 67.3%.

4

6

8

10

12

14

16

18

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

%

Banking sector's open foreign exhange position (OFEP)

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

40,0

50,0

60,0

70,0

80,0

90,0

30,0

40,0

50,0

60,0

70,0

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

%

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 .

37

In 2015, households preferred to place savings in foreign exchange deposits, which was, primarily, due to the significant excess of the yield on funds attracted in foreign exchange over funds in Belarusian rubles and high volatility of the foreign currencies exchange rates. Natural persons’ deposits in foreign exchange (in the US dollar terms) grew by 2.7%, deposits in Belarusian rubles – by 1.5%. The share of the foreign currency constituent in the total amount of natural persons’ deposits attracted by banks increased over the year from 70.5% to 79.1%.

The share of funds in foreign exchange in the total amount of deposits held by economic entities in 2015 went up from 52.8% to 65.4%, which was due to a 1.4% increase in the balance of deposits in foreign exchange (in US dollar terms), whereas the balance of enterprises’ funds in Belarusian rubles dropped by 6.0%.

In 2015, the overall level of the banking sector’s exposure to interest rate risk went down. Furthermore, 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 reduction in banks’ sensitivity to the changes in interest rates on claims and liabilities denominated both in the national currency and foreign exchange.

The banking sector’s vulnerability to the devaluation of the national currency against foreign currencies remained in 2015 at the previous level.

As at January 1, 2016, 3 banks had short foreign exchange position with their insignificant share in total assets of the banking sector. A 30% depreciation of the Belarusian ruble against foreign currencies would lead to additional profit of BYR1.6 trillion.

In the event of the shock materialization the capital adequacy ratio of the banking sector as a whole would decrease by 1.7 percentage points and would stand at 16.4%, which is an indication of the banking sector’s high capacity to withstand foreign exchange risk.

Stress testing results

Indicators 01.01.2015 01.10.2015 01.01.2016 Change

over the quarter

over 12 months

Capital adequacy ratio, % Actual value 17.4 19.2 18.7 -0.5 1.3 Calculated value 16.0 16.7 16.4 -0.3 0.4 Change -1.4 -2.5 -1.7 0.8 -0.3

Losses versus profit over 12 months, times Ratio -0.1 -0.2 -0.3 -0.10 -0.20

Losses versus capital, % Ratio -0.9 -1.4 -2.1 -0.70 -1.20

38

In 2015, the volumetric and temporal structure of assets and liabilities denominated in the national currency and sensitive to the changes in interest rates slightly improved: negative cumulative interest rate gap between assets and liabilities in the national currency went down by 73.8%, amounting to BYR2.1 trillion. Data for early 2016 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 0.12% (by 0.62% in early 2015). The potential relative change in the economic cost of the banking sector’s capital will be insignificant – 0.73% (0.69% in early 2015).

At the same time, the banking sector’s exposure to the interest rate risk associated with financial instruments denominated in foreign exchange decreased in 2015. The volumetric and temporal structure of assets and liabilities denominated in foreign exchange and sensitive to changes in interest rates slightly improved in 2015. The cumulative interest rate gap between claims and liabilities denominated in foreign exchange and with maturities of up to one year narrowed by BYR6.2 trillion in 2015 and amounted to BYR18.2 trillion as at January 1, 2016.

The relative change in the banking sector’s net interest income decreased from 2.71% as at January 1, 2015 to 1.22% as at January 1, 2016, given a 1% per annum change in interest rates on assets and liabilities denominated in foreign exchange. Such decline was due to an increase in 2015 in the net interest margin on financial instruments denominated in foreign exchange from 3.56% to 4.14%. A decline, compared with the beginning of the year, in the potential relative change of the economic cost of the banking sector’s capital by 0.64 percentage points from 1.41% to 0.77% is also an indication

-20

-15

-10

-5

0

5

10

15

20

25

30

Up to 30 days from 31 to 90 days From 91 to 180 days From 181 days to one year More than one year

%

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

01.01.2015 01.01.2016

01.01.2015- accumulation curve 01.01.2016 - accumulation curve Source: the NBRB.

39

of the decrease in the banking sector’s exposure to the risk of change in the yield on assets and liabilities denominated in foreign exchange.

-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 one year More than one year

%

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

01.01.2015 01.01.2016 01.01.2015 - accumulation curve 01.01.2016 - accumulation curve

Source: the NBRB.

As at January 1, 2016, the banking sector’s sensitivity to the upward movement of yield curves in the national currency didn’t change and in foreign exchange considerably decreased compared with January 1, 2015. 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 one bank would reduce lower than regulatory minimum (the share of which in the total amount of the banking sector’s assets is insignificant). The banking sector’s regulatory capital adequacy ratio would stand at 17.2%.

Stress testing results

Indicators 01.01.2015 01.10.2015 01.01.2016 Change

over the quarter

over 12 months

Capital adequacy ratio, % Actual value 17.4 19.2 18.7 -0.5 1.3 Calculated value 16.0 17.7 17.2 -0.5 1.2 Change -1.4 -1.5 -1.5 0.0 -0.1

Losses versus profit over 12 months, times Ratio 0.64 0.80 1.09 0.29 0.45

Losses versus capital, % Ratio 7.60 7.43 8.04 0.61 0.44

40

In 2015, the overall relative level of the banking sector’s exposure to financial risks slightly grew.

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.

As at January 1, 2016, given a 1,000 basis points upward movement of the yield curve in foreign exchange, the capital adequacy ratio would decline in 13 banks with their share of assets in the total amount of the banking sector’s assets accounting for 74.9% (in 20 banks accounting for 74.8% of assets as at January 1, 2015). However, the ability of the banking sector as a whole to withstand such shock would remain at high level.

Stress testing results

Indicators 01.01.2015 01.10.2015 01.01.2016 Change

over the quarter

over 12 months

Capital adequacy ratio, % Actual value 17.4 19.2 18.7 -0.5 1.3 Calculated value 16.2 18.2 18.7 0.5 2.5 Change -1.2 -1.0 0.0 1.0 1.2

Losses versus profit over 12 months, times Ratio 0.55 0.57 0.03 -0.54 -0.52

Losses versus profit over 12 months, % Ratio 6.59 5.29 0.23 -5.06 -6.36

41

A slight deterioration in indicators of credit risk and return rate was conducive to an increase in the level of the banking sector’s exposure to risks.

Dynamics of the banking sector’s level of risks

2014 2015 2016

01.01 01.04 01.07 01.10 01.01 01.04 01.07 01.10 01.01

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

In 2015, the majority of banks noted the deterioration in the financial standing of the borrowers and the change in the situation in the domestic foreign exchange market as the main sources of risk. Furthermore, such sources of risk as the change in the business activity in the economy and external economic factors made significant impact during the year.

0,0

0,4

0,8

1,2

1,6

2,0 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, 2016

01.01.2015

01.01.2016

Source: the NBRB

42

Sources of risk

Number of banks that noted corresponding source

2015 Q1

2015 Q2

2015 Q3 2015 Q4

Change in prices for goods and services 3 2 1 0 Change in the business activity in the economy 17 18 18 18 Deterioration in the financial standing of debtors 25 26 26 24 Change in interest rates in the domestic financial market 12 7 9 8 Insufficient liquidity 12 8 7 4 Change in the situation in the domestic foreign exchange market 18 15 15 21 Change in the situation in the domestic stock market 0 0 0 0 Change in the situation on the domestic real estate market 4 4 2 3 Change in approaches to the regulation of the economic activity 2 1 2 0 Change in approaches to the regulation of banking 8 8 17 14 External economic factors 16 17 15 18 Increased competition in the banking sector 2 3 2 0 Operating incidents 0 1 0 0 The Republic of Belarus’s country risk from a bank shareholder’s viewpoint 5 6 3 4

At the year-end 2015, the average probability of a bank default20 (without taking into account the shares of banks in the sector’s assets) stood at 16.9%, a twice increase on the beginning of the reporting period (21.6% in May – the maximum value for the year and 7.7% in January – the minimum value for the year). Such factors as a reduction in real GDP, decline in the return on assets of most banks (on an annualized basis), an increase in the ratio of prolonged and overdue clients’ debt on lending and other asset-related operations to balance-sheet assets, as well as a rise in the financial leverage contributed most significantly to the increase in the probability.

20 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.

0

5

10

15

20

25

01.01.2013 01.04.2013 01.07.2013 01.10.2013 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

%

Sector average probability of a bank default

Probability of default Source: the NBRB.

43

In 2015, the level and concentration of systemic banking risk slightly

decreased. At the same time, its structure changed significantly and its concentration grew up.

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 risk21 (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 claims on non-residents).

21 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 banking 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.

44

The ISR dynamics is indicative of the high level of the banking sector

systemic risk since the end of 2013. An imbalance in banks’ operations with external world had been its main source for a long time. In 2015 H2, the systemic risk value decreased insignificantly (over 2015, general value22 of the ISR-index dropped by 1.7 points, amounting to 3.6 as at the end of the period), though its structure saw significant changes. A decline in the volume of non-residents’ funds on the background of the growing claims on the external sector diminished the significance of the relevant risk factor; together with that, the threats associated with the excessive credit burden on economy increased (the estimate indicator of the credit gap used in the ISR-index grew up to 22% by the end of 2015). The common contribution of the two other factors to the systemic banking risk equals zero (the growth of the financial leverage and improvement of situation with systemic liquidity of the banking sector compensated each other as at the end of the reported period).

The National Bank groups banks 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.

22 Values above 5 should be viewed as undesirable.

-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

01.01.2008 01.01.2009 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.01.2015 01.01.2016

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.

45

Group Banks The NBRB’s assessment

I JSC “JSSB Belarusbank”, JSC “Belagroprombank”, and JSC

BPS-Sberbank

Banks referred to as systemically important

II “Priorbank” JSC, Bank BelVEB OJSC, Belgazprombank

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

(Belarus)

IV JSC “MTBank”, “Bank Moscow–Minsk” JSC, JSC “Technobank”

V Other (14 banks) Banks that are not

referred to as systemically important

Ten most important for the national financial system banks which account for 93.8% of the banking sector’s assets concentrate 91.6% of the system-wide risk (previous year – 88.4%).

It should be noted, that in 2015 the concentration of the systemic risk of the banking sector significantly increased. The share of JSC “JSSB Belarusbank” grew by 9.2 percentage points, JSC “Belagroprombank” – 2.6 percentage points, while the shares of BPS-Sberbank on the contrary, decreased by 1.4 percentage points. As a result, JSC “Belagroprombank” returned to the 2nd position in the ranked list of systemically important banks. Increased concentration of systemic risk in the two largest state-owned banks was, mainly, caused by significant contributions to their authorized capital made by main owners in July 2015, as well as by the growth in financial transactions of these banks with non-residents and in the interbank market. The most significant changes within the period under review were as follows: Bank BelVEB OJSC moved from 7th position to 5th

1,7

4,9

3,8

1,5

7,9

4,2

4,4

5,6

46,8

10,7

0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 45,0 50,0

CJSC VTB Bank (Belarus)

Bank BelVEB OJSC

Alfa-Bank

JSC “MTBank”

BPS-Sberbank

“Belinvestbank” JSC

Belgazrombank

“Priorbank” JSC

JSC “JSSB Belarusbank”

JSC “Belagroprombank”

Contribution to the level of systemic risk, % Source: the NBRB.

46

position in the ranked list of systemically important banks, while Belgazrombank moved in the opposite direction from 4th to 6th position. Also, according to the published estimations, “Belinvestbank” JSC lost one position in 2015 and appeared in the Group III of systemically important banks. The possibility of materialization of the “contagion” effect through the domestic interbank market was assessed as low. The most significant risks are those caused by availability of crossborder claims at the Belarusian banks.

Schematic structure of the open positions in the interbank market as at January 1, 2016 is shown in the Figure below3. Due to the low number of transactions in the domestic interbank market and adequate coverage of financial risks in case of suspension of payments from any Belarusian bank, the regulatory capital adequacy of the rest of the banks will be preserved at the level exceeding 10% (though the post shock value of the given indicator at one of the small banks will approach the required minimum).

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 6 percentage points (among ten largest banks in terms of assets the given indicator totals 2.7 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.

“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).

47

A more significant source of spreading the “contagion” effect is the Belarusian banks’ claims on non-resident banks, primarily, on the banks from the USA, Germany, and the Russian Federation. In case the US banks having obligations to the national banking sector in the amount of BYR10.5 trillion in equivalent fail to pay, the adequacy of the Belarusian banks regulatory capital will decrease by 2.4 percentage points to 16.3%; while one of the large banks will have it lower than the minimum permissible level, which will cause additional losses in the system through the domestic interbank market. If the banks from Germany which are counteragents face default, the adequacy of the Belarusian banking sector’s regulatory capital will decrease by 1.4 percentage points, from Russia – by 0.9 percentage points, but in the latter case, the capital adequacy of one of the middle-sized banks will decline below 10%.

It is also worth mentioning the high level of concentration of financial ties between the banking sector and the segment of other financial institutions (Development Bank; leasing, insurance, and microfinance organizations). For instance, 74% of banks’ claims on the given segment is concentrated in one large bank (that amounts to 3.8% of its assets), 39% and 36% of obligations of the banking sector to other financial intermediaries – in two large banks (2.9% and 7.9% of their liabilities). Thus, the latter bank has a certain dependence on funds attracted from the non-bank financial institutions (primarily, in the form of deposits and placed securities).

15

24

11

1 2

3

4

5

8

9

10

6

7

13

16

14

17

18

19

12

21

22

23

25

26

20

48

3.2. INSURANCE SECTOR

As at January 1, 2016, 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 activities. Three insurance companies conducted exclusively voluntary life insurance and supplementary pension insurance according to the legislation, one company was involved in reinsurance activity.

In 2015, two insurance companies underwent liquidation procedure (unitary enterprise “ZEPTER INSURANCE” – since April 20, 2015, Insurance Limited Liability Company “Rosgosstrakh” – since July 13, 2015), the decisions were taken on termination of special permits (licenses) for insurance activities of the three insurance organizations (Open Joint Stock Insurance Company “MEGA POLIS” – since October 17, 2014, Open Joint Stock Insurance Company “BAGACH” – since May 1, 2015, and Joint Stock Insurance Company “Delta Insurance” – since July 25, 2015).

Eight insurance companies were foreign-owned. The quote of foreign investors’ participation in the authorized capital of the insurance companies of the Republic of Belarus was established at the level of 30%. In 2015, the actual share of foreign capital in the aggregate authorized capital of the insurance companies of the Republic of Belarus totaled 3.1%.

Two insurance organizations (Belgosstrach and Beleximgarant) and an insurance organization which is involved, exclusively, in reinsurance (state enterprise “Belarusian National Reinsurance Organization”) had financial soundness rating assigned by international rating agencies.

In 2015, the bulk of insurance business was still concentrated in 10 insurance companies (mainly state-owned), which held leading positions in terms of assets values. In 2015, these 10 companies accounted for 92.4% of the insurance sector’s total assets.

In 2015, the insurers’ equity capital increased by 12% only, totaling BYR13.6 trillion as at January 1, 2016. The share of the authorized capital in the insurance sector’s equity capital declined by 3.7 percentage points over the reported period and amounted to 79.1%. The insurance organizations’ assets grew to a greater extent than their equity capital (by 19.2%), that led to the decrease in the ratio between the equity capital and the assets of the insurance sector – from 57.4% to 54.0%. Despite the observed nominal growth of the insurers’ own funds, as at early 2016 the overall equity capital of the insurance sector totaled EUR669.4 million, a 20.6% drop on the year earlier.

49

In 2015, an increase in the volume of both voluntary and compulsory insurance premiums was observed.

In the year under review, insurance premiums collected by insurance

companies of the Republic of Belarus amounted to BYR8.2 trillion, a 13.2% increase compared with 2014. In 2015, the rates of development of the state-owned insurance companies outstripped that of private insurers. The volume of state-owned companies’ insurance premiums amounted to BYR7.1 trillion in the period under review (a 21.2% increase compared with 2014), including premiums on voluntary insurance – BYR3.2 trillion (a 25.3% increase compared with 2014). In 2015, insurance premiums of non-state-owned insurance organizations amounted to BYR1.1 trillion, a 21.2% decrease compared with 2014.

In 2015, change in the macroeconomic situation in the country, decrease in effective demand for insurance services due to unstable financial condition of enterprises and organizations, as well as low level of households’ income, made a negative impact on the insurance market development. Besides, the achieved level of insurance premiums growth was conditioned by:

- decrease in consumer lending, as well as volumes of lending to economic entities;

- decrease in the volume of international carriages, including those from the European countries to the Russian Federation in connection with the sanctions imposed on Russia, and decline in production, as well as reduction in holiday travels abroad (by 30% on average) due to escalated political tension in the countries, which are traditionally visited by the Belarussians (Ukraine, Turkey, Egypt);

- an overall decrease in the cost of the motor vehicles park by 30%; - shrinking of vehicles flow at the crossing-points on the state border of

the Republic of Belarus, as well as redistribution of flow of the vehicles going abroad.

The volume of insurance premiums under the voluntary and compulsory insurance amounted to BYR4.3 trillion (the growth rate in 2015 – 9%) and BYR3.9 trillion (the growth rate over a year – 18.2%) respectively. As a result of the outstripping growth of the compulsory insurance premiums the share of the voluntary insurance premiums in the overall insurance portfolio stood at 52.1%, a 2 percentage points decrease compared with 2014.

In the segment of voluntary insurance premiums the highest growth was observed in voluntary medical expenses insurance (increment by 87.2%), supplementary pension insurance (29.9%), insurance of export risks with state support (51.3%), insurance from accidents and diseases for the period of staying abroad (32.9%), insurance of civil liability of air vehicles owners (71.8%), insurance of liability for non-performance (improper performance)

50

of bonds issuer’s obligations (35.4%), and insurance of construction and installation risks (282.1%).

Compulsory insurance of the civil liability of vehicle owners (23.2%), compulsory industrial-accident and occupational diseases insurance (18.2%), and voluntary natural persons’ property insurance (12.9%) and business property insurance (12.5%) 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 BYR582.3 billion, the annual growth rate – 23.6%. The share of the mentioned kinds of cumulative insurance in the overall amount of the insurance premiums grew by 0.6 percentage point compared with 2014 and amounted to 7.1% (the share of the Republican Affiliate Unitary Joint Enterprise “Stravita”, the affiliate company of Belgosstrakh, accounts for 87.5% 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 0.95% and BYR866.1 thousand in 2015 against 0.93% and BYR766.5 thousand in 2014. Insurers’ assets/GDP ratio totaled 2.9%.

The outpacing growth of insurance payments against the amount of

insurance premiums brought about an increase in the level of payments of the insurance companies. In 2015, the indicators of the insurance sector’s effectiveness significantly improved.

According to the results of the activities in 2015, the insurance

organizations did not ensure the outpacing growth of insurance premiums (13.2%) over the growth of the insurance payments. Over the year under review, the volume of the insurance payments totaled BYR4.7 trillion, having grown by 44% compared with 2014. As a result, the share of insurance payments in the amount of insurance premiums totaled 57.4%, a 12.2 percentage points increase against the 2014 level. At the same time, the rate of increase in insurance payments in 2015 dropped by 10.2 percentage points compared with 2012 and by 22.4 percentage points compared with 2011.

In 2015, insurance activities were developing under difficult economic situation. Against the background of inflation and devaluation processes one of the key tasks of the underwriting policy implemented by the insurance companies was to preserve earlier adopted approaches, which made it possible to adequately assess the amount of risks accepted for insurance during the entire insurance period. This task was accomplished by insurers by

51

means of improving conditions for insurance and tariff policy. In the year under review, the combined loss ratio23 of the non-life insurance companies stood at 93% (80% in 2014).

According to the results of the financial and economic activities in 2015, profit earned by insurers totaled BYR2,124.1 billion, a double increase on the 2014 level. The share of state-owned insurance companies accounted for 73.4% of the total profit earned. Net profit generated by the insurance sector as a whole grew by 78.5% and amounted to BYR1,469.7 billion.

The return on equity24 of the insurance sector increased over 2015 from 8.9% to 16.5% due to the outpacing growth of profit over insurance companies’ equity growth. The indicator of the return on assets of the insurance sector also grew up to a significant degree – from 5.4% to 9.0%.

The dynamics of indicators characterizing the level of the underwriting risk25 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, 2016, the amount of insurance reserves established by the insurers of the Republic of Belarus totaled BYR8.7 trillion (a 23.7% growth compared with the 2014), of which the mathematical reserves accounted for BYR2.6 trillion and the technical reserves – BYR6.1 trillion, with the annual growth rates being 50.0% and 15.2% 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, 2016, the ratio of the reserves established by the insurance companies to the average amount of insurance payments over the past three years stood at 237.0%, having declined over the year by 17 percentage points. Despite a slight decrease of this indicator, its value

23 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. 24 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. 25 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.

52

confirms that the Belarusian insurers reserved sufficient funds to pay the claims upon the occurrence of the insured events.

In 2015, the total amount of large claims paid by the country’s insurance companies totaled BYR236billion, or 2.9% of the average annual amount of the established insurance reserves (BYR77.8 billion and 1.3% respectively in 2014). 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 ratio stood at 156%. 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 2015, 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 2015, the insurance sector’s exposure to stock market risk declined and was at the low level. In 2015, the total sum of insurance companies’ investments in business entities’ and banks’ securities decreased by 0.7%, amounting to BYR2.05 trillion, or 8.1% of the insurance sector’s assets as at January 1, 2016 (BYR2.06 trillion, or 9.8%, as at early 2015). The insurance sector invested significant monetary funds in the securities of state-owned banks – 44.3% of the total amount of assets.

The insurance sector’s exposure to potential fluctuations in exchange rates of foreign currencies may be assessed as low. In the course of 2015, the insurers’ assets in foreign currency exceeded relevant liabilities, resulting in a predominantly long foreign exchange position. As at January 1, 2016, the insurance sector’s net open foreign exchange position accounted for 31.5% of the aggregate amount of the equity capital (as at January 1, 2016 – 16.3%). 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

53

structure of insurance premiums (as at January 1, 2016 – 7.1%) is conducive to a low degree of the insurance sector’s, as a whole, exposure to interest rate risk.

In 2015, 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, 2016, total receivables of the insurance sector (excluding accounts receivable under payments of installment premiums) amounted to BYR1,243.1 billion, including the receivables in arrears over 30 days – BYR105.3 billion (as at January 1, 2015, BYR503.3 billion and BYR51.3 billion respectively), or 15.1% of the total amount of insurance premiums (6.9% in 2014).

In 2015, 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, 2016, the country’s insurance companies placed 69.8% 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, 2016, the current liquidity26 ratio in the country’s insurance sector as a whole stood at 111% (160% as at January 1, 2015). The decline in this indicator was due to significant increase in short-term financial investments (4.7 times) and growth in short-term liabilities (2.8 times), outpacing growth of the most liquid part of assets – monetary funds (32%).

26 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.

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3.3. OTHER FINANCIAL INTERMEDIARIES’ SECTOR

In 2015, 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 2014, continued to be the most significant one for sustainable functioning of the institution. The foreign exchange and liquidity risks were insignificant.

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 2015, the Development Bank broadened the variety of its operations with both assets and liabilities. In addition to traditional lending to business entities, the volumes of export support and infrastructure objects construction financing were extensively increased, and the program of small and medium enterprises support, introduced in 2014, was broadened.

In the year under review, the Development Bank began 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 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 BYR14 trillion.

Within 2015, the assets of the Development Bank went up by 33%, totaling BYR53.8 trillion as at January 1, 2016. In the year under review, the Development Bank’s revenues totaled BYR1.8 trillion, a 7% increase compared with 2014. The positive factor that influenced the revenues dynamics was the increase by 14% of net interest income against the 16% 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 at the end of 2015 to 3.1%, having dropped by 0.2 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

55

establishment of reserves) from 4.9% to 4.4%. In 2015, the Development Bank’s return on assets amounted to 3.9%, having fallen by 0.6 percentage point over 12 months as a result of the outpacing growth rate of assets over that of profit.

In 2015, the regulatory capital of the Development Bank went up by 31% and amounted to BYR12.0 trillion. At the same time, risk-weighted assets grew by 23%. This was responsible for the growth of the regulatory capital adequacy ratio from 32.6% to 35.0% 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 2015, the total volume of credits provided to the customers grew by 34%, amounting to BYR32.5 trillion. Due to the restructuring of the debt under credit with respect to certain debtors, which was held in 2015, the balance of bad and prolonged debt accounts increased by 18% (with the balance of prolonged debt decreasing by 22%), while the share of bad debt in the total value of the credit portfolio dropped from 6.5% to 5.8%.

As at early 2016, 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 58%. As at January 1, 2016, the share of assets classified under Risk Group III totaled almost 50% 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 70% 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 2015, the share of foreign exchange component in the obligations of the Development Bank grew from 19% to 34%. 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 did not exceed 9% of the regulatory capital.

In 2015, the leasing organizations’ segment, which made it possible

to renew production facilities in a prompt manner, as well as to purchase property by natural persons on condition of lease was further developed.27

As at January 1, 2016, the register included 99 leasing organizations, 24 of which were established with foreign capital participation.

27 The data is provided taking into account the specified reporting made by leasing organizations.

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As at January 1, 2016, aggregate authorized capital of the leasing organizations that provided reports totaled BYR3.2 trillion. Deposits of commercial organizations accounted for the main share in the aggregate authorized capital of the leasing organizations (84.3%). The share of banks’ participation in the aggregate authorized fund of leasing organizations amounts to 11.6%. With that, 11 leasing organizations were established with participation of bank capital. The share of natural persons participation totaled 2.1%.

The major share of leasing organization included in the register was registered in Minsk – 63 leasing organizations; 12 – in Minsk Region, 9 – in Brest Region, 5 – in Vitebsk Region, 5 – in Grodno Region, 4 – in Gomel Region, and 1 – in Mogilev Region. Leasing organizations opened 11 branches in the regions of the Republic of Belarus, 4 of which are located in Grodno Region and 2 – in Brest Region. Ten affiliate companies are registered abroad, 8 of which were established by OSC “Promagroleasing”.

As at January 1, 2016, the share of lessees’ obligations in the aggregate volume of assets of the leasing organizations, which provided reports, amounted to 67.4%.

The volume of the leasing portfolio28 increased by BYR6.4 trillion or by 35% over 2015 and amounted to BYR24.5trillion, or USD1.3 billion (at the exchange rate as at January 1, 2016). Thus, as at January 1, 2016, the volume of the leasing organizations’ leasing portfolio totaled 8.9% of the banks’ long-term credit investments. As at January 1, 2016, the volume of the banks’ leasing portfolio totaled BYR1.4 trillion.

Financial leasing operations with the condition of repurchase of the leasing item accounted for 99.95% of the leasing organizations’ leasing portfolio. Liabilities under agreements entered into in the national currency amounted to 64.7% of the leasing portfolio. Six leasing organizations established with participation of banks’ capital (”АSB Leasing“ LLC, OJSC ”Promagroleasing“, ”VTB Leasing“ JLLC, ”Raiffeisen - Leasing“ JLLC, OJSC ”Agroleasing“, and CJSC ”BPS-Leasing“) accounted for about 73% (BYR17.8 trillion) of the aggregate leasing portfolio.

Leaseback agreements dominated the leasing portfolio (22.6%). As at January 1, 2016, 657 leaseback agreements were signed with the volume of liabilities worth BYR5.5 trillion. At that, the number of such agreements increased by 48 since the beginning of 2015, while the debt grew by BYR1.4 trillion, or 34.5%.

As at January 1, 2016, the export leasing operations29 accounted for 3.3% of the total leasing portfolio. As at January 1, 2016, 87 export

28 The amount of lessees’ debt owed to lessors under leasing payments as at the reporting date. 29 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.

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agreements worth BYR0.8 trillion were concluded with participation of six leasing organizations. The majority of export operations (99.7%) was carried out with the participation of three organizations: OJSC “Promagroleasing” (89.2%), JSC “ASB Leasing” (5.4%), and Unitary Enterprise “Irridio Motors” (5.1%).

As at January 1, 2016, the volume of new business (the value of the financial lease (leasing) agreements entered into over 2015) stood at BYR10.5 trillion, having dropped over the year by BYR2.2 trillion, compared with 2014. The volumes of leasing activities declined in 2015 as a result of the deteriorated financial condition of the enterprises of the real sector of the economy, which were the key lessees.

At late 2015, the volume of the new business totaled 9.6% of the volume of the long-term credits issued by banks, or 1.21% of GDP. Liabilities under agreements concluded in the national currency account for 89.2% of the volume of new business. Agreements worth BYR9.9 trillion (94.1% of the volume of new business) were entered into with legal persons and independent entrepreneurs; worth BYR0.6 trillion (5.9%) – with natural persons.

The share of the lessors’ fees (income) in the volume of leasing payments accrued over 2015 totaled 17.6%. As at January 1, 2016, the amount of the aggregate unallocated profit of the leasing organizations totaled BYR1.2 trillion.

Over 2015, more than 57 thousand items of leasing, the total value of which amounted to BYR6.5 trillion, were passed to lessees. Vehicles accounted for the major share in the overall cost of the leased out items (39.8%, or BYR2.6 trillion). Those that were purchased from the residents of the Republic of Belarus comprised their largest part (95.2% worth BYR2.5 trillion); vehicles manufactured in the Republic of Belarus accounted for 35.9% (BYR0.9 trillion) of the leased out vehicles. A significant share in the structure of the leased out items (34.6%, or BYR2.3 trillion) was formed by the machines and equipment.

Machines and equipment purchased from the residents of the Republic of Belarus accounted for 73.4% (worth BYR1.7 trillion) thereof. 33.1% (worth BYR0.8 trillion) of the leased out machines and equipment were manufactured in the Republic of Belarus. Buildings and constructions were leased out under financial rent (leasing) agreements in the amount of BYR1.4 trillion, totaling 22.0% of the overall amount of leased out items.

More than 38% of value of the leased out items (with account of lessees’ advance payments) was paid at the expense of leasing organizations’ own funds.

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As at January 1, 2016, leasing organizations attracted credits and loans from non-residents worth BYR5.3 trillion, or USD287.7 million (at the BYR1/USD1 exchange rate as at January 1, 2016), that amounted to 28% of the total volume of attracted credits and loans.

In 2015, the segment of microfinance organizations represented, for

the most part, by lombards, did not bear any threats to the financial stability due to the insignificant volume of operations carried out thereby.

As at January 1, 2016, 106 microfinance organizations (five consumer cooperatives, two funds, and 99 lombards) were on the Register of Microfinance Organizations. Assets of microfinance organizations amounted to BYR195.4 billion, equity capital – BYR125.6 billion, liabilities – BYR69.8 billion, and net profit – BYR43.1 billion, including:

- consumer cooperatives’ assets amounted to BYR4.2 billion, equity capital – BYR1.8 billion, liabilities – BYR2.4 billion, and net profit – BYR1.4 billion;

- funds’ assets amounted to BYR1.9 billion, equity capital – BYR0.3 billion, liabilities – BYR1.6 billion, and net profit – BYR0.3 billion; and

- lombards’ assets amounted to BYR189.3 billion, equity capital – BYR123.5 billion (including statutory fund – BYR26.8 billion, or 21.7%), liabilities – BYR65.8 billion, and net profit – BYR41.4 billion (as at the end of 2015, aggregate net loss of 21 lombards totaled BYR2.6 billion).

In 2015, the overall amount of the monetary funds attracted by microfinance organizations totaled BYR65.9 billion, including:

- consumer cooperatives attracted BYR3.0 billion (from natural persons being promoters – BYR1.4 billion or 46.7%, from other persons – BYR1.6 billion, or 53.3%);

80

85

90

95

100

105

110

0

50

100

150

200

250

01.07.2015 01.10.2015 01.01.2016

Num

ber o

f org

aniz

atio

ns

BY

R b

n

Dynamics of the microfinance organizations’ main indicators

Активы Собственный капитал Обязательства

Чистая прибыль Количество МФО Source: the NBRB.

Assets

Net profit

Own capital Liabilities

Number of microfinance organizations

59

- funds attracted BYR1.8 billion (from promoters – BYR1.3 billion, or 72.2%, from other persons – BYR0.5 billion, or 27.8%); and

- lombards attracted BYR61.1 billion (from property owners, promoters (participants) – BYR42.0 billion, or 68.7%, from other persons – BYR19.1 billion, or 31.1%).

In 2015, the amount of the microloans granted by microfinance organizations totaled BYR584.5 billion, including:

- consumer cooperatives granted BYR8.8 billion. Granting microloans to natural persons for the purposes of carrying out craft activities accounted for the major share – BYR5.0 billion, or 56.8%;

- funds granted BYR6.5 billion. Granting microloans to natural persons for the purposes of the business and entrepreneur initiative comprised the major share – BYR5.1 billion, or 78.5%; and

- lombards granted BYR569.2 billion. Granting of microloans against the pledged goods made of precious metals and stones accounts for the major share – 80.7% (BYR459.3 billion), against the pledge of other movable property – 10.1% (BYR57.7 billion), against the pledged vehicles – 9.2% (BYR52.2 billion).

With a view to improving the procedures for taking recourse upon and selling the pledged movable property intended for personal, family, and household use and pledged with commercial microfinance organization (lombard), the National Bank initiated enactment of Decree of the President of the Republic of Belarus No. 1 “On Amending and Modifying Decree of the President of the Republic of Belarus” (hereinafter – Decree No. 1) dated January 21, 2016.

Decree No. 1 entitles a lombard to take the following actions at its discretion:

- to take recourse upon the movable property pledged thereby under the microloans issued to natural persons, if the assessed amount of such microloan does not exceed 100 base units. Enforced collection is only possible upon expiry of one month following the day of microloan repayment specified by the contract; and

- to sell such property. The procedures for the work of lombards with goods made of precious

stones remained unchanged. The rules of recourse upon the movable property held by a lombard as

a collateral for granted microloans and its sale thereby, should be defined by the Government and the National Bank of the Republic of Belarus within three months from the day of the official publication of Decree No.1.

In 2015, the National Bank continued to develop the market of

over-the-counter financial instruments in the country.

60

With a view to building up a system of state regulation of activities of forex companies and executing control thereof, Decree 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 which has wide-ranging powers in this sphere.

According to paragraph 1 of Decree 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 Decree No. 231 in the amount of at least BYR2 billion, and included by the National Bank in the Register of Forex Companies;

- National Forex Center; and - banks and non-bank financial institutions. Entry into force of Decree No. 231 will promote the creation of an

economic incentive for registering forex companies in the Republic of Belarus, attracting foreign capital, improving legal protection of citizens when carrying out operations in the OTC forex market, improving transparency of this financial market segment, reducing the risk of fraud and financial pyramids occurrence, as well as raising capacity of the financial market at the expense of funds of the citizens being customers of forex companies.

In 2015, the indicators characterizing financial stability of the State

Institution “Agency for Guaranteed Repayment of Natural Persons’ Bank Deposits” (hereinafter – the “Agency”) had positive dynamics, despite repayment of significant amounts under compensation of natural persons’ bank deposits of the banks, the banking licenses of which had been revoked.

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).

61

The Law of the Republic of Belarus “On Amending and Modifying the Law of the Republic of Belarus “On the Guaranteed Repayment of Natural Persons’ Bank Deposits”” dated January 10, 2015 introduced a number of amendments and modifications into the Law, thus continuing improvement of the current system of deposits repayment. The above-mentioned amendments and modifications entered into force on April 16, 2015.

The amendments and modifications to the Law are aimed at streamlining the procedures for repayment of natural persons’ bank deposits and ensuring compliance of the order of bank deposits repayment stipulated by the Law with the main principles of conducting administrative procedures.

As before, the Law guarantees a repayment in full of a bank deposit in the currency of the deposit, or, at the natural person’s option, in the Belarusian rubles irrespective of the currency of the deposit.

In 2015, the number of banks registered with the Agency changed. Two banks were removed from the list:

- JSC “Delta Bank” – due to revocation of the banking license in line with Resolution of the Board of the National Bank No. 165 dated March 17, 2015; and

- “InterPayBank” JSC – due to revocation of the banking license in line with Resolution of the Board of the National Bank No. 281 dated May 6, 2015.

One bank – CJSC “Absolutbank” – was registered with the Agency in connection with amendment of the banking license by the following bank operations: attracting natural persons’ monetary funds to the accounts and opening and maintaining natural persons’ bank accounts.

As at January 1, 2016, 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.

For the purpose of executing control over discharging by the banks registered with the Agency of their obligations resulting from the need to ensure the deposits repayment system, the Agency is authorized to participate in the audits of banks conducted by the National Bank of the Republic of Belarus within its supervisory functions. In 2015, the Agency’s employees conducted inspections at five banks.

As at January 1, 2016, the Agency’s property totaled BYR12,277,821 million in ruble terms. Monetary funds of the Agency’s property amounted to BYR1,399,374 million, USD465 million, and EUR61.1 million.

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

62

As at the end of 2015, the amount of the reserve totaled BYR10,903,031 million in ruble terms, having increased by BYR4,254,313 million over the year. Monetary funds of the Agency’s reserve amounted to BYR714,862 million, USD465 million, and EUR61.1 million.

Over 2015, special-purpose contributions worth BYR1,619,845 million, positive difference resulted from the change in the national currency exchange rate in the amount of BYR3,068,136 million, and income from investments worth BYR75,697 million were responsible for the main growth of the amount of the Agency’s reserve in ruble terms.

Over the reported period, reserve funds worth BYR1,673,453 million were repaid as compensation of the natural persons’ deposits with banks, the banking licenses of which had been revoked.

As a result of the reserve growth, the Agency’s reserve amount/natural persons’ deposits volume ratio grew from 4.84% as at the beginning of the year to 5.59% as at the year-end.

For the purposes of ensuring protection from inflation, as well as replenishing reserve and other property, the Agency invests temporary free monetary funds on the principles of repayment, profitability, and liquidity. As at January 1, 2016, the Agency’s monetary funds were placed in full into:

- deposits of the National Bank of the Republic of Belarus – BYR337,814 million, USD465.0 million, and EUR61.1 million; and

- long-term government bonds – BYR377,048 million. The Agency was constantly involved in the work aimed at expanding its

role in the system of maintaining financial stability in the country and building-up the public confidence in the efficient fulfillment by the Agency of the functions assigned thereto.

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CHAPTER 4. FINANCIAL MARKETS

4.1. FOREIGN EXCHANGE MARKET

In 2015, domestic foreign exchange market was influenced by external market shocks and slowdown in business activity in the countries which are major trade partners, as well as measures aimed at improving the flexibility of the exchange rate policy taken in conjunction with the implementation of weighted monetary and fiscal policies.

2015 witnessed the decrease in the volume of foreign exchange transactions. Thus, the volume of foreign exchange sale in all market’s segments amounted in the year under review to USD48.7 billion (USD56.6 billion in 2014), the volume of purchase totaled USD48.2 billion (USD57.4 billion in 2014).

The volume of foreign exchange transactions reduced, mainly, due to a decrease in foreign exchange earnings from foreign trade transactions for a number of reasons, including as a result of general decline in the prices for goods in foreign markets30, as well as the economic slowdown in the countries - main trade partners.

The exchange rate, the volatility of which increased due to the implementation of the new exchange rate policy regime, served as a compensator of negative external shocks. Retreat from the de facto pegging to the US dollar at the beginning of 2015 and switching to a managed float, within which a basket of currencies was chosen as the operational target of the exchange rate policy (the Russian ruble, the US dollar, and the euro with the weights of 40%, 30%, and 30% respectively), resulted in a more even volatility of the Belarusian ruble exchange rates against these currencies. At that, after changing in June of the previous year the regime of trading in the currency exchange from “fixing” to “continuous double auction” the volatility of exchange rates in the market slightly reduced.

30 In 2015, the average prices for exports of goods decreased compared with 2014 by 27.8%; the average import prices fell down by 15.6%.

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Information on implemented volatility of the Belarusian ruble exchange rate,%

Trading mode Period Implemented volatility in annual terms

US dollar Euro Russian ruble

Fixing 2014 0.8 6.2 23.1

January - May 2015 13.2 13.5 20.5 Continuous

double auction (CDA)

June - December 2015 8.5 12.0 16.0

2015 11.4 14.4 18.1

In 2015, the US dollar was still the most popular currency in the Republic of Belarus, though its positions, as well as the positions of the Russian ruble, were slightly edged out by the euro.

In 2015, the share of transactions involving the US dollar decreased by

1.7 percentage points in the total volume of operations in the domestic foreign exchange market, involving the Russian ruble – by 0.4 percentage points, and involving the euro increased by 2.3 percentage points.

4.2. CREDIT AND DEPOSIT MARKET

In early 2015, the deposit market was characterized by a high level of dollarization. At that, the bulk of ruble deposits was formed at the expense of short-term deposits attracted at high interest rates.

As at January 1, 2015, the share of deposits in foreign exchange

amounted to 76.6% in the structure of the households’ term deposits, increasing over the year by 7.9%.

62.4

20.5

16.7

Shares of main foreign currencies in operations in foreign exchange market in 2014

Доллар США Евро Российский рубль

Source: the NBRB.

US dollar Euro Russian ruble

60.7 22.8

16.3

Shares of main foreign currencies in operations in foreign exchange market in 2015

Доллар США Евро Российский рубль

Source: the NBRB.

US dollar Euro Russian ruble

65

Structure of natural persons’ term deposits in 2015, %

01.01.2015 01.04.2015 01.07.2015 01.10.2015 01.01.2016

Deposits in the national currency 23.4 22.7 22.6 17.4 15.5

Deposits in foreign exchange 76.6 77.3 77.4 82.6 84.5

At that, natural persons gave preference to deposits with short terms when placing new deposits in Belarusian rubles. Thus, in January - March 2015, the share of deposits placed for a term of up to three months accounted for 75.5 - 80.4% of the total volume of newly attracted deposits.

Structure of natural persons’ newly attracted deposits in the national currency, %

January March June September December

on demand 0.7 2.9 4.6 2.6 7.7 up to 1 month

inclusive 14.4 8.4 11.1 7.0 8.5 from 1 to 3

months inclusive 61.1 72.0 44.5 47.7 42.8 from 3 to 6 months

inclusive 2.5 1.4 10.9 2.0 6.2 6-12 months 5.4 3.3 5.7 14.9 17.0 1-3 years 15.8 12.0 23.1 24.5 17.7 over 3 years 0.1 0.0 0.0 1.2 0.0 Total 100 100 100 100 100 on terms up to 1

year 84.0 87.6 75.7 73.6 80.8 on terms over 1

year 16.0 12.4 24.3 26.4 19.2 Total, time

deposits 100 100 100 100 100 The high interest rates offered by banks on short-term deposits were one of the factors that led to formation of such structure of ruble deposits.

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Under these conditions the National Bank began to implement the

strategy aimed at improving the banks’ resource base by dint of minimizing the share of short-term deposits in the deposit market.

As part of this strategy, measures in the sphere of interest rate policy, as

well as actions of structural character were implemented (the enacted Decree of the President of the Republic of Belarus No. 7 “On Attracting Monetary Funds in Deposits” dated November 11, 2015 (hereinafter – the “Decree No. 7”) and the National Bank’s recommendations related thereto).

For information: On November 12, 2015 classification of bank deposits was changed in

the Republic of Belarus. In accordance with Decree No. 7, since November 12, 2015, the agreements on time bank deposit and deposit in escrow have been divided into irrevocable and revocable ones.

The document extends its effect only to the newly concluded agreements on bank deposits, as well as in case of prolongation of corresponding agreements executed before this document entered into force.

The main feature of these two types of agreements are the terms for the early repayment of a deposit.

When concluding a revocable agreement the possibility of early repayment of the deposit on the initiative of the depositor is provided for. At that, specific terms and conditions for the repayment of deposits should be specified in the agreement between a bank and a depositor.

An irrevocable agreement does not provide for an early repayment of a deposit on the initiative of the depositor. It is possible to repay the deposit prior to the expiration of an agreement only with the bank consent.

Along with the change in the classification of bank deposits in the Republic of Belarus, Decree No. 7 also provides for the changes in

44,6 44,9

20,4

33,6

46,4

32,8

15

20

25

30

35

40

45

50

до 1 месяца от 1 до 3 месяцев от 3 до 6 месяцев 6-12 месяцев 1-3 лет свыше 3 лет

Average interest rates on natural persons' fresh deposits in the national currency in January 2015

Source: the NBRB.

up to 1 month from 1 to 3 month from 3 to 6 month from 6 to 12 month 1-3 years over 3 years

67

approaches to preferential taxation of income received by natural persons in the form of interest on bank accounts and deposits with banks and non-bank financial institutions.

Since April 1, 2016, interest incomes received as a result of the actual placement of funds on current (settlement) bank accounts and in deposits for a period of less than one year – in Belarusian rubles, and less than two years – in foreign currency are not subject to the exemption from income tax on natural persons. At that, an income tax is charged only in the case when the interest rate at which the interest income was received, exceeds the amount of the current bank interest rate on the demand deposit.

The enactment of Decree No. 7 is aimed at facilitating formation of a long-term resource base by the Belarusian banks and using it in a more efficient manner, including by means of improving the availability of credits to clients.

Thus, in the year under review, interest rates on the banks’ liquidity provision instruments were gradually decreased: from 50% per annum at the beginning of 2015 to 30% per annum on July 1, 2015.

On June 1, 2015, additional contributions to the required reserves fund

were established with respect to banks that conduct speculative transactions at the overstated rates within the deposit transactions.

As a result, in 2015 the average interest rates on natural persons’ new fresh ruble deposits in the national currency decreased from 35.6% to 24.6% per annum.

On the background of continuing high devaluation expectations and decline in the households’ real income, the volume of the ruble deposit market shrank and the process of dedolarization of the natural persons’ deposits was underway.

35,6

43,9 47,2 44,8

36,5

28 26,5 25,5 25,5 25,5 25,7 25,1 24,6

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-4 000

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-2 000

-1 000

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December 2014

January 2015

February 2015

March 2015

April 2015

May 2015

June 2015

July 2015

August 2015

September 2015

October 2015

November 2015

December 2015

BY

R b

n %

Dynamics of growth of deposits in the national currency and average interest rates

Growth in the amount of deposits in the national currency, BYR trn. Interest rate on natural persons’ fresh deposits in the national currency

Source: the NBRB.

68

Time deposits in Belarusian rubles (including the capitalization of interest on deposits) decreased by 4%, or BYR1.1 trillion, amounting to BYR26.1 trillion as at January 1, 2016.

In 2015, households’ time deposits in foreign exchange increased by USD170.3 million in the US dollar terms (in 2014 – by USD 665.3 million; in 2013 – by USD1,001.9 million).

In the reporting period, a gradual improvement in the structure of new deposits as to the terms of attraction, as well as formation of the yield curve with more attractive conditions for long-term deposits, commenced.

The prevailing level of interest rates on ruble credits was, to a great

degree, caused by the continuing practice of financing implementation of government programs and activities at the expense of banks’ funds.

A high share of funds allocated to finance preferential projects had an

impact on the value and rate of decline in market interest rates on credits. At

28 509.3 26 144.6

7 401.2

7 486.1 7 433.1

7 538.2 7 525.0

7 662.6 7 699.7

7 843.6 7 805.3

7 839.6 7 774.9

7 691.5

7 000

7 200

7 400

7 600

7 800

8 000

10 000

15 000

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25 000

30 000

35 000

40 000

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

USD

mln

BYR

bn

Dynamics of natural persons' time deposits in 2015

Growth in the amount of deposits in the national currency, BYR trn. Volume of tine deposits in foreign exchange (left-handed axis)

Source: the NBRB.

21,7 22,6

25,6

28,8

26,8 28,0

15

17

19

21

23

25

27

29

31

up to 1 month inclusive from 1 to 3 months inclusive

from 3 to 6 months inclusive

6-12 months 1-3 years over 3 years

Average interest rates on natural persons' fresh deposits in the national currency in December 2015

Source: the NBRB.

69

the end of 2015, about 40% of banks’ loan portfolio was formed at the expense of soft loans, the interest rates on which were significantly lower than the market ones (in December 2015, 8.1% per annum). The average value of all loans issued to enterprises and households totaled slightly above 17% at the end of 2015.

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.

In the year under review, the interbank market was under the influence of significant liquidity fluctuations. The volume of transactions conducted by banks in the interbank market in 2015 was higher than in 2014 and amounted to BYR280 trillion (in 2014, BYR128 trillion). At the same time, the interbank market structure changed compared with 2014 towards expanding the duration of lending due to the extension of the terms of borrowing of resources by banks. Where in 2014 intraday interbank loans accounted for 89.9%, in 2015 this type of loans stood at 66% of the total market volume. At the same time, the share of transactions concluded for up to 7 days increased to 32% of the total market volume (in 2014, 7%).

In addition, in 2015 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 averaged 40.4% of the balance of amounts owed (46.1% in 2014).

43.5

45.1 45.6 44.3

43.4

40.8

37.6 36.3 35.9

35.2 35 34.3

30

32

34

36

38

40

42

44

46

48

I II III IV V VI VII VIII IX X XI XII

Average interest rate on banks' fresh credits granted to legal persons in the national currency on market conditions (without ICM) in 2015

Source: the NBRB.

70

In the year under review, credit risk, interest rate risk, and

liquidity risk remained the main types of risks in the interbank market.

In 2015, credit risk associated with transactions conducted in the interbank market was not high. There were no prolonged and outstanding debts under such operations.

However, a certain increase in the concentration of demand and reduction in the concentration of supply in the interbank market should be noted. The maximum share of one bank in the total amount of resources attracted totaled 29.1% (19.5% in 2014). On the side of resources supply the share of one lending bank did not exceed 18.7% (24.6% in 2014).

This situation raised the risk to a slight degree due to the increased dependence of the state of interbank payments on the situation in separate banks being the largest borrowers. But, in general, with regard to the relatively low concentration of supply and demand, the credit risk level changed insignificantly compared with 2014. In addition, the redistribution of liquidity in the interbank market by virtue of repo transactions was conducive to maintaining the low level of credit risk.

In January-August 2015, interest rate risk was decreasing owing to the slowdown in inflation processes and stabilization in the domestic foreign exchange market. The National Bank gradually reduced interest rates on operations designed to regulate liquidity. Interest rates on standing facilities designed to provide liquidity (credit “overnight”, SWAP transactions), which form the upper limit of the interest rate corridor, were reduced from 50% to 30% per annum in January-July. Interest rates on standing facilities designed to withdraw liquidity, forming its lower boundary (deposit overnight), after the increase in January from 17% to 20% per annum as a reaction to the devaluation pressure, also dropped from 20% to 16% per annum in July based on the financial market stabilization.

This made it possible to decrease the average rate of the intraday interbank credit from 45.2% per annum in January to 29.6% per annum in December.

At the end of August 2015, the situation in the foreign exchange market changed dramatically. A drastic growth in the households’ demand for foreign exchange contributed, to a large extent, to the increased sale of foreign exchange by the National Bank and, accordingly, the reduction of the banking system’s ruble liquidity. A decrease in the liquidity, including its negative value in September, resulted in the growth of interest rates in the interbank market.

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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 2014-2015.

As the chart shows, in 2015 the volatility of the average daily rate in the interbank market changed insignificantly compared with 2014. Thus, where in 2014 the share of days, during which the deviation of the average daily rate in the interbank market from its average monthly value did not

10

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01.01.2015 01.02.2015 01.03.2015 01.04.2015 01.05.2015 01.06.2015 01.07.2015 01.08.2015 01.09.2015 01.10.2015 01.11.2015 01.12.2015 01.01.2016

% p

er a

nnum

Dynamics of interest rate in the intraday interbank market and interest rates on the National Bank's operations

Ставка по двусторонним операциям поддержки Ставка привлечения 1-дн. МБК

Ставка рефинансирования Ставка по постоянно доступным операциям изъятия

Аукцион КО (средневзвешенная ставка) Ставка по ломбардным аукционам

Ставка по аукционам СВОП

Source: the NBRB.

Interest rates on bilateral transactions designed to maintain liquidity

Refinance rate

Short-term bonds auction (average weighted interest rate)

Interest rate on swap auction

Interest rate on attraction in the intraday interbank market

Interest rates on standing facilities designed to withdraw

liquidity

Interest rates on lombard auction

0%

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60%

< -9 от -9 до -7 от -7 до -5 от -5 до -3 от -3 до -1 от -1 до 1 от 1 до 3 от 3 до 5 от 5 до 7 от 7 до 9 >= 9

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

2014 2015 Source: the NBRB.

72

exceed 1 percentage point, amounted to 53.8%, in 2015 this indicator stood at 48.6%. This indicates that the low level of interest rate risk is still in place.

Liquidity risk in 2015 had the same trend as the interest rate risk – its level, which was gradually reducing during the year, increased at the end of 2015 Q4. 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 2015, the National Bank conducted bilateral operations to provide liquidity (lombard credit, SWAP transactions) and open market operations to support liquidity (lombard auction, SWAP auction). On May 2015, standing facilities designed to support liquidity in the form of SWAP overnight transactions were renewed.

An excess of liquidity was absorbed through standing deposit facilities and auctions on issuing short-term bonds.

In 2015, the average daily balance of debt under operations designed to maintain the banking system’s current liquidity amounted to BYR2,010 billion. Average daily balance of banks’ funds under the National Bank’s operations involving liquidity withdrawal was BYR1,968 billion.

The interbank market performed the funds redistribution function in the banking system in a rather effective manner. The dynamics of the average daily volume and the level of interest rate in the intraday interbank market in 2015 are given below. The dynamics of the volume of interbank market credits was caused by the decreased need for borrowings by the majority of banks due to the excess liquidity in the first three quarters of the year, as well as dramatic deterioration of liquidity state at the end of 2015.

0

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BY

Rbn

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

73

The National Bank’s information policy contributed to the

minimization of risks. At the beginning of each business day information about actual operations designed to regulate the banking system’s liquidity was published and the data on the planned auctions, results thereof, and rates on transactions was promptly updated at the official website of the National Bank. With a view to improving the transparency of the monetary targeting mechanism, beginning on May 2015 the National Bank has been publishing on its official website on the day before carrying out auction transactions the data on the planned volume thereof. Expansion of information on monetary instruments and liquidity factors of the banking system improved predictability of the financial market, making it possible for banks to forecast their own liquidity in a more efficient manner.

4.4. SECURITIES MARKET

Further growth of the debt segment’s share (bonds market) and shrinkage of the equity segment’s share (equity market) were the main trends in the securities market development in 2015. Where the share of the bonds market in 2014 stood at 62.7% of the total volume of shares and bonds issue, in 2015 it rose to 73.2%. Consequently, the share of stock market declined from 37.3% to 26.8%.

The main factor of the growing share of debt market was a sharp

increase in the issue of government bonds. Their share increased from 9.3% in 2014 to 38.9% in 2015. Reduction of the market’s corporate segment was due to the expiry of preferential taxation of incomes from operations involving bonds issued from April 1, 2008 to January 1, 2015. However, this tax allowance was restored on July 1, 2015 in line with Decree of the President of Belarus No. 279 dated June 29, 2015.

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

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The total amount of annual registered issue totaled: - joint stock companies’ shares – BYR37.3 trillion, dropping by 4%

against 2014 (BYR38.9 trillion); - corporate bonds – BYR45.5 trillion, a 13.9% decrease compared with

the volume of registered issue in 2014 (BYR52.9 trillion), including banks’ bonds – BYR22.3 trillion, which is by one third lower than the level in 2014 (BYR34.0 trillion); and

- bonds of local executive and regulatory authorities (hereinafter – “BLB”) – BYR2.3 trillion, that is slightly lower than the value of issue in 2014 (BYR2.8 trillion);

In addition, in 2015, the following instruments were placed at face value:

- government securities worth BYR54.1 trillion, of which denominated in Belarusian rubles – BYR14.2 trillion and in foreign exchange – USD952.4 million, EUR1,357.4 million and RUB162 million. This segment of the market grew 5.5 times against 2014 (BYR9.8 trillion);

- the National Bank’s short-term bonds – BYR68.3 trillion, increasing by BYR25.5 trillion compared with 2014; and

- the National Bank’s interest-bearing bonds denominated in foreign exchange for legal persons – USD1,504.3 million and EUR354.0 million.

As of January 1, 2016, the following securities were in circulation: - shares worth BYR262.3 trillion, a 16.6% growth compared with

January 1, 2015 (BYR225.0 trillion). At that, the ratio of the volume of shares in circulation to GDP increased to 30.2% (28.9% as of January 1, 2015);

- corporate bonds worth BYR127.1 trillion (14.6% of GDP). As of January 1, 2015, this indicator accounted for BYR98.8 trillion (12.7% of GDP). The volume of banks’ bonds totaled BYR65.3 trillion, or 51.4% of the total amount of corporate bonds in circulation (BYR52.9 trillion, or 53.6%, as at January 1, 2015);

0%

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2010 2011 2012 2013 2014 2015

Structure of annual issue of main instruments in the securities market

акции корпоративные облигации ОМЗ ГЦБ Source: the NBRB. Shares Corporate bonds BLB Government securities

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- government securities in circulation in the domestic market worth BYR97.4 trillion (9.8% of GDP31), including those denominated in Belarusian rubles – BYR16.5 trillion, in foreign exchange – USD2,473.7 million, EUR1,722.6 million, and RUB162 million. This market segment grew more than twice compared with January 1, 2015 (BYR48.4 trillion);

- eurobonds of the Republic of Belarus worth USD0.8 billion; - bonds of local executive and regulatory authorities worth BYR13.1

trillion, a 18.1% growth against January 1, 2015 (BYR11.1 trillion); and - the National Bank’s interest-bearing bonds denominated in foreign

exchange for legal persons – USD1,504.3 million and EUR439.3 million (at face value).

Thus, in 2015, a further growth of the debt securities (bonds) market due to a sharp increase in the volumes of issue of government bonds, which accounted as of January 1, 2016 for 47.5% of the total amount of securities in circulation (as at January 1, 2015, 41.3%), took place.

Changes in the ratio of the main instruments in circulation in the securities market is shown in the following chart.

It should be noted that 2015 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 65.1% compared with 50.6% in 2014, amounting as of January 1, 2016 to 58.5% of the total volume of bonds in circulation (as of January 1, 2015, 43.3%).

Under the considerable fluctuations of foreign exchange rates (in 2015, depreciation of the Belarusian ruble against US dollar totaled 56.7%, euro – 41.2%) a large share of bonds denominated in foreign exchange significantly increases foreign exchange risk and the securities market’s vulnerability. As

31 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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01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.01.2015 01.01.2016

акции корпоративные облигации ОМЗ ГЦБ

Structure of the main instruments in circulation in the securities market

Source: the NBRB . Shares Corporate bonds BLB Government

securities

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the redemption of these bonds, as well as the repayment of yield thereon, are carried out in foreign exchange, it is worth mentioning that both issuers and investors run growing risks related to the conversion of currencies.

In addition, the immaturity of the derivative securities market, as well as insufficient use of the mechanisms for insuring against the risks of investment in corporate securities denominated in foreign exchange should be noted.

At present, the derivative securities market is represented by foreign exchange futures. In 2015, only 10 transactions worth BYR16.6 billion were conducted in this market. For comparison, 22 foreign exchange futures contracts worth BYR60.2 billion were entered into in 2014. Thus, due to the low liquidity and lack of opportunities to make a profit from price fluctuations on underlying assets the derivative securities market remains an underdeveloped segment of the securities market.

As of January 1, 2016, 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 87.5%. Their share in the total annual issue decreased from 78% in the previous year to 60.5%. 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, 2016, 65 professional participants were acting in the securities market, including 27 banks and 38 non-bank institutions, which carried out the following professional and exchange activities involving securities: brokerage – 63; dealing – 62; depository activities – 33; securities trust management – 19; organization of securities trading– 1; and clearing – 1.

The volume of transactions in the primary securities stock market in 2015 raised to BYR8.0 trillion, a decrease by 13% compared with the volume of issue in 2014 (BYR9.2 trillion). At that, the issue in the sector of government securities declined from BYR5.9 trillion in 2014 to BYR2.6 trillion; on the other hand, the corporate bonds sector witnessed an increase from BYR3.3 trillion to BYR5.4 trillion. Initial public offering of open joint-stock companies didn’t take place in 2015.

In 2015, the total volume of secondary stock trading significantly increased, amounting to BYR92.0 trillion (BYR57.2 billion in 2014). The bulk of transactions (60%) was carried out with government securities. The volume of transactions involving shares amounted to BYR201 billion, or 0.2%. Repo transactions totaled 47.6% of the total volume of transactions in the secondary market.

Since 2008, the market prices of shares have been calculated based on the results of trading, that made it possible to carry out the calculation of

77

capitalization of these securities. As at January 1, 2014, the shares market capitalization totaled BYR35.1 trillion (5.4% of GDP), as of January 1, 2015 – BYR6.8 trillion (0.9% of GDP), and as at January 1, 2016 – BYR9.9 trillion (1.1% of GDP). A sharp drop in the level of capitalization as of January 1, 2015 was due to a decrease in the number of shares in circulation based on which the market price was calculated.

In 2015, transactions worth BYR95.0 trillion (BYR50.6 trillion in 2014) were concluded in the over-the-counter securities market, including purchase and sale transactions involving securities worth BYR93.4 trillion (BYR49.1 trillion in 2014), of which transactions involving bonds amounted to BYR91.2 trillion.

These data indicate a high level of liquidity risk in the stock market of the Republic of Belarus, particularly in the shares market. Due to the low volume of instruments in circulation, investors face significant difficulties in the sale of their shares at a certain price at a given time.

We also consider it necessary to note that currently the availability of pre-emptive right to purchase shares by the regional executive committees and Minsk City Executive Committee in accordance with Decree of the President of the Republic of Belarus No. 677 “On Certain Issues of Disposal of Property, Which is in the Municipal Property, and the Acquisition of Property to the Ownership of Administrative-territorial Units” dated November 16, 2006 is a factor which slows down the process of shares circulation.

An important stage in developing investment and banking services was the extension of the list of banking operations and inclusion of operations on trust management of bank management funds therein based on the agreement on trust management of bank management fund.

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 was approved for the purpose of regulating the procedures for establishing bank management funds and functioning thereof (Resolution of the Board of the National Bank No. 178 dated March 26, 2014).

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 first bank management funds were registered and started their operation in the Republic of Belarus in June 2014. “Priorbank” JSC, which announced about establishment of three bank management funds, became the first trust manager.

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In 2015, new bank management funds were not established. As at January 1, 2016, two bank management funds (“Raiffeisen -

Assets Portfolio - USD” and “Raiffeisen - Assets Portfolio - EUR”) were in operation. The value of the funds’ net assets totaled USD1,804.2 thousand and EUR1,211.1 thousand (as at January 1, 2015 – USD1,849.6 thousand and EUR970.3 thousand).

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

As is evident from these charts, at early 2015 the value of the bank

management funds’ nominal share, reflecting the return on investment, went up, that contributed to the growth of the funds’ net assets up to USD2,569.4 thousand and EUR1,298.3 thousand. However, due to the unfavourable situation in the global stock markets and the decline in stock indexes in March 2015, the value of the nominal share changed the direction of its movement for an opposite one.

In 2015, the level of yield of the bank management funds’ was negative: “Raiffeisen - Assets Portfolio – USD” – minus 4.4% and “Raiffeisen - Assets Portfolio - EUR” – minus 8%). At the same time, since early October 2015 the positive trend in the dynamics of the funds’ level of yield has been observed.

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Стоимость номинального пая (правая ось)

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"

Стоимость чистых активов Стоимость номинального пая (правая ось)

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

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CHAPTER 5. PAYMENT SYSTEM OF THE REPUBLIC OF BELARUS

In 2015, 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 management in the payment system was carried out 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 68,579.9 thousand payments worth BYR4,367.8 trillion were effected in the BISS. Compared with 2014, payment instructions effected in the BISS reduced by 4.5% in terms of their number and increased by 21.3% in terms of their amount. The reduction in the number of payment instructions carried out in the reporting period was caused by the introduction on October 1, 2014 of the clearing mechanism for payments made via the SSIS AIS “Settlement”, which contributed to the redistribution of payments flow, as well as a decrease in the economic activity of the banks’ clients. Both the growth in the volume of operations designed to regulate the banking system’s liquidity and the amount of the ruble equivalent of operations involving purchase and sale of foreign exchange contributed to the growth in the interbank turnover amount.

The average daily turnover amounted to 268.9 thousand in terms of their number and BYR17.1 trillion in terms of payments value, the average amount of a payment instruction totaled BYR63.7 million.

In 2015, 2,527 payment instructions of JSC “Delta Bank” worth BYR112.5 billion and 85 payment instructions worth BYR5.7 billion of JSC “Eurobank” were canceled due to the lack of funds on the correspondent account.

80

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 99.95% on average.

As of January 1, 2016, 30 direct participants, 41 indirect participants, and 4 special participants (JSC “Delta Bank”, JSC “BIT-Bank”, JSC “InterPayBank”, JSC “Eurobank”) were the BISS system participants. In 2015, JSC “Bank BBSB” joined JSC “Idea Bank”, a new participant – JSC “NCFI “INKASS.EXPERT” came into being.

Implementation of the measures on operational risk management in the BISS made it possible to establish in 2015 the ratio of banks’ accessibility to the ASIS in the amount of no less than 99.7% of its daily production time, i.e., to achieve the expected result stipulated in the Strategy of Risk Management in the Payment System of the Republic of Belarus. The ratio of banks’ accessibility to the ASIS in 2015 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. The pricing policy in the field of settlement services provided by the

National Bank was aimed at covering the costs associated with the ASIS operation at the expense of incomes, obtaining income in the amount ensuring a sufficient level of funds investment in its development, as well as reorienting the payment flow to the first half of the BISS business day. The National Bank’s income from settlement services provided in 2015 amounted to BYR96.18 billion, growing by 8% against 2014 (BYR89.02 billion in 2014).

Due to the consistent efforts of the National Bank aimed at ensuring sound, secure, and efficient functioning of the payment system the major risks therein (settlement risk: credit and liquidity risks; operational risk; and legal risk) were limited. A threat of escalation of risks into the systemic risk was prevented from happening.

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 of the BISS participants were reviewed and maintained current that made it possible to limit the legal risk in the ASIS. For the purpose of determining the strategy of development of the payment system of the Republic of Belarus in the

81

medium term based on the best international experience and implementation of tasks designed to improve its efficiency, reliability and security, the Concept of the Development of the Payment System of the Republic of Belarus for 2016 - 2020, adopted by Resolution of the Board of the National Bank of the Republic of Belarus No. 779 dated December 29, 2015, was approved.

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. Despite a temporary liquidity shortage in the banking sector the BISS, as a whole, saw sufficient liquidity and was able to process all incoming payments (the time of electronic payment documents waiting in a queue – 44 seconds).

With a view to reducing liquidity risk the National Bank implemented economic measures designed to regulate interbank settlements which were aimed at encouraging banks to make an early entry of payment documents into the BISS. In 2015, the analysis of the terms of entering the payment instructions into the BISS showed that the share of payment instructions received by the BISS prior to 2 p.m. remained at the level of 67% of the number of payment instructions sent per day. This makes it possible to draw a conclusion that an application of the differentiate indexes to the amounts of fees charged for the settlement services contributed to the redirection of the payment flows to the first half of the operational day.

In 2015, 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 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 May, July, September, and November (in line with the approved schedule – one time in two months for a week). In addition, due to the implementation of the virtualization technology, the above-mentioned operation of the ASIS software and hardware complex in the industrial mode at the backup computer center was also carried out in January and February 2015 for 3 weeks according to a separate schedule. The list of the ASIS’s reserve personnel, Catalog of the ASIS threats, as well as the document “The Automated System of Interbank Settlements. Contingency Plan for Business Continuity and Recovery Procedures. 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. Integration tests of the ASIS under the conditions of performing all set of works by reserve personnel (March 21, 2015) with regard to the ASIS’s operation and verification of failover of virtual

82

infrastructure of the ASIS’s software and hardware complex at the main data center were conducted (September 26, 2015). Within these tests the actions of the personnel of the Settlement Center of the National Bank during a crisis situation related to the failure of the virtualization facilities of the ASIS’s software and hardware complex were examined.

In 2015, 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 (six banks in 2015) as to ensuring a smooth functioning in the payment system thereby (reservation of critical resources: software and hardware complexes, communication channels, power supply, staff; availability of Contingency Plans for Business Continuity and Recovery Procedures, their actualization, 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”.

In 2015, the National Bank completed the assessment of operational risk of the BISS participants. An assessment of operational risk in the intrabank systems of the largest banks: JSC “JSSB Belarusbank”, JSC “Belagroprombank”, JBPS-Sberbank, “Belinvestbank” JSC, “Priorbank” JSC was carried out. Operational risk was estimated in the segment of business continuity and recovery procedures of intrabank systems based on the information obtained as a result of the survey of banks and participation in the comprehensive inspections. For the purpose of carrying out evaluation the methodology based on the method of expert evaluations with the application of the evaluation map method and elements of a core-weighting method was used. The evaluation showed that the levels of operational risk in the intrabank systems of these banks are within the acceptable range.

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 2015, 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):

83

- compliance with the Principles for Financial Market Infrastructures in the payment system BelCard, as well as the fulfillment of the central bank’s obligations owed to the payment system BelCard were assessed. Evaluation results are the following: nine principles are observed, four principles are fulfilled for the most part, and all obligations are performed. One of the main problems is the technological gap between the payment system BelCard and international payment systems. In this regard, BelCard was recommended to take decisions on the development of such areas as the implementation of the interbank transfers from one card to another (P2P), assurance of the acceptance of BelCard cards in the Belarusian segment of the global computer network Internet, performance of contactless payments using BelCard cards, as well as switching from issuing card portfolio of the payment system BelCard to the cards with EMV standard microprocessor;

- RUE “Republican Central Securities Depository” carried out the self-assessment of securities settlement system of Central Depository as to the compliance with the Principles for Financial Market Infrastructures. Evaluation results are the following: eight principles are observed, four principles are partially fulfilled, two principles are observed for the most part, and ten are not applicable; and

- JSC “Belarusian Currency and Stock Exchange” performed the self-assessment of securities clearing system with regard to the compliance with these Principles. Evaluation results are the following: 11 principles are observed and nine are not applicable. At present, given the conditions of current unified payment system in the Republic of Belarus for exchange transactions with securities the Stock Exchange, which serves as a clearing organization in the securities market, does not have significant problems (gaps) in the provision of clearing services requiring urgent solutions.

The National Bank continues to take measures aimed at implementing the national standards in the payment system of the Republic of Belarus based on the methodology of ISO 20022 “Financial Services. Universal Financial Industry Message Scheme” (ISO 20022 is a group of international standards, the methodology of 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 with the minimum participation of a person at the intermediate stages). 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.

84

Appendix 1 Table 1.1

DYNAMICS of financial performance of enterprises

BYR billion 2014 2015 Growth rate,

% For

information: 2014 to 2013, %

Proceeds from sale of products, goods, works, and services

1,429,515.5 1,585,116.1 110.9 111.4

Taxes and fees accrued from proceeds 181,115.2 197,730.4 109.2 108.8

% of sales proceeds 12.7 12.5 х х

Cost of sold products, goods, works, and services

1,146,397.1 1,266,668.0 110.5 111.1

% of sales proceeds 80.2 79.9 х х

Profit/losses (-) from sales of products, goods, works, and services

102,003.2 120,717. 7 118.3 120.4

Profit/losses (-) before tax 59,485.8 42,564.8 71.6 114.1

Net profit/losses (-) 44,865.4 25,923.9 57.8 114.5

Profitability of sales, % 7.1 7.6 х х

Profitability of sold products, goods, works, and services, %

8.9 9.5 х х

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

14.3 20.6 х х

Amount of losses 19,373.0 42,806.5 221.0 178.9

Donations from the budget for the compensation of losses

19,565.8 18,717.7 95.7 107.9

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

85

Table 1.2 RATES OF GROWTH of profits by industry

% of 2014 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 118.3 101.6 71.6 61.5 57.8 49.7

Agriculture, hunting, and forestry 55.8 47.9 31.6 27.1 29.2 25.1

Industry 129.5 111.3 48.1 41.3 20.9 18.0

mining 96.4 82.8 43.4 37.3 40.1 34.5

processing 123.7 106.3 47.7 41.0 15.3 13.1

production and distribution of power, gas, and water 216.5 186.0 53.3 45.8 38.7 х

Construction 81.9 70.4 71.8 61.7 64.7 55.6

Trade; repair of vehicles, household appliances, and items of personal use 91.7 78.8 60.3 51.8 54.1 46.5

trade in vehicles and motorcycles, their servicing and

repair 101.5 87.2 68.6 58.9 68.3 58.7 wholesale trade and trade

through agents, excluding the trade in vehicles 81.6 70.1 71.5 61.4 69.2 59.5

retail trade, excluding the trade in vehicles and

motorcycles, repair of household appliances and items of personal

use 108.1 92.9 25.3 21.7 - -

Transport and communication 135.1 116.1 125.3 107.6 118.1 101.5 Source: the Belstat data.

86

Table 1.3

PROFITABILITY of sold products, goods, works, and services and profitability of sales

% Profitability of sold

products, goods, works, and services

Profitability of sales

2014 2015 2014 2015

Republic of Belarus 8.9 9.5 7.1 7.6 Agriculture, hunting, and forestry 6.8 3.4 5.7 2.9 Industry 9.8 11.1 7.8 8.7

mining 15.8 13.0 9.8 9.4 processing 11.0 12.2 8.8 9.7

production and distribution of power, gas, and water

4.1 6.9 3.3 5.2

Construction 10.4 8.7 8.3 7.0 Trade; repair of vehicles, household appliances, and items of personal use

4.9 4.4 4.0 3.6

trade in vehicles and motorcycles, their servicing and repair 4.4 5.2 3.6 4.1

wholesale trade and trade through agents, excluding the trade in vehicles and

motorcycles

7.3 6.5 5.8 5.3

retail trade, excluding the trade in vehicles and motorcycles, repair of household appliances and items of personal use

2.9 2.7 2.5 2.3

Transport and communication 13.2 15.2 10.4 11.8 Source: the Belstat data.

87

Table 1.4 DYNAMICS of payables and receivables

BYR billion 01.01.2015 01.01.2016 Growth rate,

% For

information: 01.01.2015 to 01.01.2014,

%

Payables 284,048.2 353,099.3 124.3 117.7 of which: in arrears 38,293.4 57,978.9 151.4 132.1

% of total 13.5 16.4 х х Receivables 218,745.6 269,822.1 123.3 112.1

of which: in arrears 40,477.0 60,416.7 149.3 139.0 % of total 18.5 22.4 х х

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

payables 62.4 64.6 х receivables 72.0 74.4 х

Debt under credits 318,151.6 461,218.2 145.0 128.3 of which: in arrears 4,563.7 11,216.9 245.8 199.4

% of debt under credits 1.4 2.4 х х Total payables 662,659.7 921,000.6 139.0 125.0

of which: in arrears 44,869.4 72,785.3 162.2 138.3 % of the total arrears 6.8 7.9 х х

Source: the Belstat data.

88

Table 1.5 DYNAMICS of external payables and receivables

BYR billion 01.01.2015 01.01.2016 Growth rate,

% For

information: 01.01.2015 to 01.01.2014, %

External payables 63,333.4 89,388.9 141.1 116.3 of which: in arrears 7,684.1 11,891.4 154.8 117.2 % of total external payables 12.1 13.3 х х

External receivables 51,028.9 69,524.9 136.2 98.9 of which: in arrears 5,901.3 10,450.0 177.1 158.0 % of total external receivables 11.6 15.0 х х

Source: the Belstat data.

Table 1.6 DYNAMICS of monetary funds on organizations’ accounts

BYR billion 01.01.2015 01.01.2016 Growth rate, %

Republic of Belarus 43,131.8 53,527.2 124.1

Agriculture, hunting, and forestry 1,069.4 1,092.7 102.2

Industry 15,545.4 18,693.9

120.3

Construction 2,540.9 2,948.0 116.0

Trade; repair of vehicles, household appliances, and items of personal use

8,085.5 9,743.9 120.5

Transport and communication 8,499.5 10,244.9 120.5 Source: the Belstat data.

89

Table 1.7 DYNAMICS of credit amounts owed to banks

BYR billion 01.01.2015 01.01.2016 Growth rate, %

Republic of Belarus 318,151.6 461,218.2 145.0

Agriculture, hunting, and forestry 44,235.5 49,784.4 112.5

Industry 190,133.0 285,127.6 150.0

Construction 5,285.5 6,470.8 122.4

Trade; repair of vehicles, household appliances, and items of personal use

31,400.6 39,235.7 125.0

Transport and communication 5,084.0 5,741.0 112.9 Source: the Belstat data.

Table 1.8 DYNAMICS of current solvency

% 01.01.

2015 01.04. 2015

01.07. 2015

01.10. 2015

01.01. 2016

Republic of Belarus 112.6 94.8 93.9 98.7 92.3 Agriculture, hunting, and forestry 9.9 6.9 8.4 6.9 6.4 Industry 93.1 78.4 81.3 86.4 75.3 Construction 72.5 54.7 58.0 68.7 64.8 Trade; repair of vehicles, household appliances, and items of personal use

200.5 191.4 153.5 137.2 132.5

Transport and communication 717.6 549.0 697.5 707.2 698.7 Source: the Belstat data.

Table 1.9

INDICATORS of financial stability of non-financial corporations sector of the Republic of Belarus

Indicators 2013 2014 Change January – September

2014 г.

January – September

2015 г. Change

Ratio of aggregate debt to own capital, % 62.1 62.1 74.6 12.6 71.0 96.7 Rate of return on own capital (return on own capital), % 6.8 6.8 6.9 0.2 5.9 4.9

Ratio of profit to expenses related to the repayment of principal and payment of interest, % 37.2 37.2 30.8 -6.4 40.4 24.4

Ratio of net open foreign exchange position to own capital, % -17.9 -17.9 -22.7 -4.8 -20.7 -29.8

Number of applications for protection against creditors 1,648 1,648 1,994 346 2,002

Source: the NBRB data.

91

Appendix 2 PERFORMANCE INDICATORS OF THE BANKING SECTOR OF THE REPUBLIC

OF BELARUS Table 2.1

MAIN PERFORMANCE INDICATORS of the banking sector of the Republic of Belarus

Date All banks Large banks Medium-sized banks Small banks BS SOB FB PB SOB FB PB SOB FB PB

Number of banks 01.01.2015 31 3 2 0 1 4 0 1 14 6 01.01.2016 26 3 2 0 1 4 0 1 10 5

Assets, BYR trillion 01.01.2015 478.51 302.93 75.08 0 5.89 61.55 0 2.04 24.90 6.13 01.01.2016 619.89 395.72 97.36 0 8.56 82.63 0 2.78 20.02 12.81

Liabilities, BYR trillion 01.01.2015 414.76 264.09 67.54 0 5.16 52.35 0 1.52 19.97 4.13 01.01.2016 540.41 344.34 88.86 0 7.69 71.67 0 1.88 15.69 10.28

Capital, BYR trillion 01.01.2015 63.75 38.83 7.54 0 0.72 9.20 0 0.52 4.92 2.00 01.01.2016 79.48 51.38 8.50 0 0.88 10.96 0 0.91 4.34 2.53

Profit, BYR billion 01.01.2015 7,593.8 3,045.6 1,263.0 0 157.1 2,021.5 0 7.9 943.5 155.3 01.01.2016 5,858.5 1,539.4 800.4 0 145.7 2,515.3 0 41.5 613.6 202.6

Share of the groups of banks in assets, % 01.01.2015 100.0 63.3 15.7 0 1.2 12.9 0 0.4 5.2 1.3 01.01.2016 100.0 63.8 15.7 0.0 1.4 13.3 0.0 0.4 3.2 2.1

Share of the groups of banks in liabilities, % 01.01.2015 100.0 63.7 16.3 0 1.2 12.6 0 0.4 4.8 1.0 01.01.2016 100.0 63.7 16.4 0 1.4 13.3 0 0.3 2.9 1.9

Share of the groups of banks in capital, % 01.01.2015 100.0 60.9 11.8 0 1.1 14.4 0 0.8 7.7 3.1 01.01.2016 100.0 63.9 10.6 0 1.1 13.6 0 1.1 5.4 3.1

Source: the NBRB data.

92 Table 2.2

FINANCIAL STABILITY INDICATORS of the banking sector of the Republic of Belarus

Indicators 01.01.2014 01.01.2015 Change 01.01.2016 Change Capital adequacy

Regulatory capital adequacy ratio 15.50 17.38 1.88 18.74 1.36 Fixed capital adequacy ratio (Tier I) 10.51 11.52 1.01 13.05 1.53 Capital to assets 13.96 13.32 -0.64 12.82 -0.5

Credit risk Growth of lending to the economy 12.21 5.50 -6.71 9.32 3.82 Large open positions to regulatory capital 133.00 141.95 8.95 195.56 53.61 Share of bad assets in the total amount of assets exposed to credit risk 4.45 4.37 -0.08 6.83 2.46

Share of bad assets in the total amount of lending to the economy 0.87 1.36 0.49 2.11 0.75 Bad assets less actually established provisions thereon to capital 13.98 14.58 0.46 21.18 6.6 Distribution of loans by branch: Industry 52.20 54.05 1.85 55.15 1.1 Agriculture 14.57 11.91 -2.66 10.55 -1.36 Construction 3.45 3.07 -0.38 3.00 -0.07 Trade 13.84 13.91 0.07 14.12 0.21 real estate operations 7.33 8.27 0.94 7.37 -0.9 Other 8.62 8.79 0.17 9.81 1.02

Income/returns Return on assets (before taxes) 2.33 2.10 0.23 1.32 -0.78 Return on equity (before taxes) 16.20 15.28 -0.92 10.41 -4.87 Interest margin to gross income 11.23 9.86 -1.37 10.59 0.73 Non-interest expenses to gross income 92.93 94.50 1.57 96.20 1.70 Staff costs to non-interest expenses 5.28 6.14 0.86 5.40 -0.74

93 Table 2.2 cont’d

FINANCIAL STABILITY INDICATORS of the banking sector of the Republic of Belarus

Indicators 01.01.2014 01.01.2015 Change 01.01.2016 Change Interest rates spread:

for all loans and deposits in Belarusian rubles 13.00 15.70 2.7 15.50 0.2 for newly extended loans and deposits in Belarusian rubles 5.29 -2.19 -7.48 9.09 11.28 for all loans and deposits in foreign exchange 4.60 5.25 0.65 5.77 0.52 for newly extended loans and deposits in foreign exchange 3.78 4.73 0.95 5.95 1.22

Liquidity Liquid assets to total assets 26.78 27.17 0.39 32.05 4.88 Short-term liquidity 1.81 1.93 0.12 2.10 0.17 Instant liquidity 239.56 251.73 12.17 214.57 -37.16 Current liquidity 122.23 133.66 11.43 123.35 -10,31

Foreign exchange risk Total open foreign exchange position to regulatory capital 11.82 9.31 -2.51 4.47 -4.84 Share of clients’ debt on lending and other asset-related operations in foreign exchange in total clients’ debt on lending and other asset-related operations

51.03 52.21 1.18 57.80 5.59

Share of clients’ foreign exchange funds in total funds attracted from clients 53.61 54.67 1.06 67.31 12.64

Source: the NBRB data.

94 Table 2.3

DISTRIBUTION OF BANKS by the regulatory capital adequacy ratio

Group of banks Number of banks/Share in the banking sector’s assets 01.01.2015 CAR * <= 0 0 < CAR <= 10 10 < CAR <= 16 16 < CAR <= 24 24 < CAR <= 30 30 < CAR Total

Banking sector 0 0 0 0.0 8 29.3 9 67.9 1 0.3 13 2.4 31 100.0 State-owned banks 0 0 0 0 2 7.1 2 57.4 0 0 1 0.4 5 65.0 Foreign banks 0 0 0 0 6 22.2 6 10.1 0 0 8 1.5 20 33.8 Private banks 0 0 0 0 0 0 1 0.4 1 0.3 4 0.5 6 1.3 Large banks 0 0 0 0 2 16.5 3 62.5 0 0 0 0 5 79.0 Medium-sized banks 0 0 0 0 4 11.8 1 2 0 0 0 0 5 14.1 Small banks 0 0 0 0 2 1.1 5 3.1 1 0.3 13 2.4 21 6.9

01.01.2016 CAR <= 0 0 < CAR <= 10 10 < CAR <= 16 16 < CAR <= 24 24 < CAR <= 30 30 < CAR Total Banking sector 0 0 0 0.0 7 28.5 9 68.9 0 0 10 2.6 26 100.0 State-owned banks 0 0 0 0 2 7.3 2 57.9 0 0 1 0.4 5 65.6 Foreign banks 0 0 0 0 4 20.2 6 10.5 0 0 6 1.6 16 32.3 Private banks 0 0 0 0 1 1.0 1 0.5 0 0 3 0.5 5 2.1 Large banks 0 0 0 0 3 21.7 2 57.9 0 0 0 0 5 79.6 Medium-sized banks 0 0 0 0 3 5.8 2 8.8 0 0 0 0 5 14.6 Small banks 0 0 0 0 1 1.0 5 2.2 0 0 10 2.6 16 5.8

Source: the NBRB data. * The regulatory capital adequacy ratio.

95 Table 2.4

DISTRIBUTION OF BANKS by the share of bad assets

Group of banks Number of banks/Share in the banking sector’s assets 01.01.2015 share = 0 0 < share <= 1 1 < share <= 2 2 < share <= 4 4 < share <= 8 8 < share Total

Banking sector 1 0 1 0.1 3 43.0 8 14.1 7 21.3 11 21.4 31 100.0 State-owned banks 0 0 0 0 2 43 1 5.9 0 0 2 16.6 5 65.0 Foreign banks 1 0 0 0.0 1 0.5 5 7.9 6 21.0 7 4.3 20 33.8 Private banks 0 0 1 0.1 0 0 2 0.4 1 0.3 2 0.5 6 1.3 Large banks 0 0 0 0 1 41 2 11.0 1 10.6 1 16.2 5 79.0 Medium-sized banks 0 0 0 0.0 1 1.2 1 1.7 2 8.9 1 2 5 14.1 Small banks 1 0 1 0.1 1 0.5 5 1.5 4 1.9 9 2.9 21 6.9

01.01.2016 share = 0 0 < share <= 1 1 < share <= 2 2 < share <= 4 4 < share <= 8 8 < share Total Banking sector 0 0 1 0.2 2 0.5 1 0.6 10 67.5 12 31.2 26 100.0 State-owned banks 0 0 0 0 0 0 0 0 3 59.3 2 6.4 5 65.7 Foreign banks 0 0 0 0 1 0.2 1 0.6 5 7.1 9 24.3 16 32.2 Private banks 0 0 1 0.2 1 0.3 0 0 2 1.1 1 0.5 5 2.1 Large banks 0 0 0 0 0 0 0 0 3 63.4 2 16.2 5 79.6 Medium-sized banks 0 0 0 0 0 0 0 0 1 1.3 4 13.3 5 14.6 Small banks 0 0 1 0.2 2 0.5 1 0.6 6 2.8 6 1.7 16 5.8

Source: the NBRB data.

96 Table 2.5

DISTRIBUTION OF BANKS by liquidity indicators, as at January 1, 2016

Group of banks Number of banks/Share in the banking sector’s assets ILR* 0 < ILR <= 20 20 < ILR <= 40 40 < ILR <= 70 70 < ILR <= 100 100 < ILR Total

Banking sector 0 0 0 0 0 0 0 0 26 100,0 26 100,0 State-owned banks 0 0 0 0 0 0 0 0 5 65.7 5 65.7 Foreign banks 0 0 0 0 0 0 0 0 16 32.2 16 32.2 Private banks 0 0 0 0 0 0 0 0 5 2.1 5 2.1 Large banks 0 0 0 0 0 0 0 0 5 79.5 5 79.5 Medium-sized banks 0 0 0 0 0 0 0 0 5 14.7 5 14.7 Small banks 0 0 0 0 0 0 0 0 16 5.8 16 5.8

CLR* 0 < CLR <= 70 70 < CLR <= 80 80 < CLR <= 90 90 < CLR <= 100 100 < CLR Total Banking sector 0 0 0 0 0 0 1 0,3 25 99,7 26 100,0 State-owned banks 0 0 0 0 0 0 0 0 5 65.7 5 65.7 Foreign banks 0 0 0 0 0 0 0 0 16 32.3 16 32.3 Private banks 0 0 0 0 0 0 1 0.3 4 1.7 5 2.0 Large banks 0 0 0 0 0 0 0 0 5 79.5 5 79.5 Medium-sized banks 0 0 0 0 0 0 0 0 5 14.7 5 14.7 Small banks 0 0 0 0 0 0 1 0.3 15 5.5 16 5.8

Source: the NBRB data. *ILR – instant liquidity ratio, CLR – current liquidity ratio.

97 Table 2.5 cont’d

DISTRIBUTION OF BANKS by liquidity indicators, as at January 1, 2016

Группа банков Number of banks/Share in the banking sector’s assets STLR* 0 < STLR<= 1 1 < STLR <= 1,5 1,5 < STLR <= 2,0 2,0 < STLR <= 2,5 2,5 < STLR Total

Banking sector 0 0 9 73.5 4 3.8 2 10.0 11 12.7 26 100.0 State-owned banks 0 0 3 59.2 0 0 1 6.0 1 0.4 5 65.6 Foreign banks 0 0 5 14.0 1 2.2 1 4.0 9 12.2 16 32.4 Private banks 0 0 1 0.3 3 1.6 0 0 1 0.1 5 2.0 Large banks 0 0 3 68.1 0 0 1 6.0 1 5.5 5 79.6 Medium-sized banks 0 0 2 3.7 1 2.2 1 4.0 1 4.8 5 14.7 Small banks 0 0 4 1.7 3 1.6 0 0 9 2.4 16 5.7

LTAR * 0 < LTAR <= 20 20 < LTAR <= 30 30 < LTAR <= 40 40 < LTAR <= 50 50 < LTAR Total Banking sector 0 0 5 22.6 13 73.1 3 2.6 5 1.7 26 100.0 State-owned banks 0 0 2 16.0 3 49.6 0 0 0 0 5 65.6 Foreign banks 0 0 2 5.6 9 23.0 1 2.3 4 1.4 16 32.3 Private banks 0 0 1 1.0 1 0.5 2 0.3 1 0.3 5 2.1 Large banks 0 0 2 20.1 3 59.5 0 0 0 0 5 79.6 Medium-sized banks 0 0 1 1.4 3 11.0 1 2.3 0 0 5 14.7 Small banks 0 0 2 1.1 7 2.6 2 0.3 5 1.7 16 5.7

Source: the NBRB data. * STLR – short-term liquidity ratio, LTAR – liquidity-to-total assets ratio.

98

Table 2.6 DISTRIBUTION OF BANKS by the ratio of the total foreign exchange position to the regulatory capital

Group of banks Number of banks/Share in the banking sector’s assets

01.01.2015 TFEP = 0 0 < TFEP <= 5 5 < TFEP <= 10 10 < TFEP <= 15

15 < TFEP <= 20 20 < TFEP Total

Banking sector 0 0 4 48.0 7 22.7 5 2.9 2 11 13 15.7 31 100.0 State-owned banks 0 0 2 47.1 2 16.6 1 1 0 0 0 0 5 65.0 Foreign banks 0 0 1 0.6 3 5.6 3 1.5 2 11 11 15.5 20 33.8 Private banks 0 0 1 0.33 2 0.6 1 0.2 0 0 2 0 6 1.3 Large banks 0 0 2 47.1 2 21.3 0 0 1 11 0 0 5 79.0 Medium-sized banks 0 0 0 0 0 0 1 1 0 0 4 12.9 5 14.1 Small banks 0 0 2 0.9 5 1.5 4 1.7 1 0 9 2.8 21 6.9

01.01.2016 TFEP = 0 0 < TFEP <= 5 5 < TFEP <= 10 10 < TFEP <= 15 15 < TFEP <= 20 20 < TFEP Total Banking sector 0 0 8 29.6 17 70.3 0 0 0 0 1 0.1 26 100.0 State-owned banks 0 0 1 14.6 4 51.0 0 0 0 0 0 0 5 65.6 Foreign banks 0 0 5 14.3 10 17.9 0 0 0 0 1 0.1 16 32.3 Private banks 0 0 2 0.7 3 1.4 0 0 0 0 0 0 5 2.1 Large banks 0 0 2 20.1 3 59.5 0 0 0 0 0 0 5 79.6 Medium-sized banks 0 0 3 8.5 2 6.2 0 0 0 0 0 0 5 14.7 Small banks 0 0 3 1.0 12 4.6 0 0 0 0 1 0.1 16 5.7 Source: the NBRB data.