Using Credit Registry Data to Assess
Risks in the Financial System
Banco de Cabo Verde’s Experience
June / 2013
Outline
Introduction
NPL task force Objectives and Research Strategy
Credit Information Registry
Micro-Survey
Main Results
Final considerations
1
Introduction
Financial sector can stimulate or be a drag on economic growth
the current global crisis is an unavoidable example of how financial system
problems can harm growth
It started as a result of increasing sophistication of the financial sector,
which was not matched by improvements in regulatory and supervisory
mechanisms and was amplified by governments and excess on leverage
Despite its low degree of international integration, the Cape Verdean financial
system is being severely affected by the global crisis through its ties to
European Economy
economic indicators and the financial soundness indicators are deteriorating
2
12
Real GDP growth rate (%)
10
8
Cape Verde
6
Euro Zone
4
2
0
-2
2004 2005 2006 2007* 2008 2009 2010 2011 2012
-4
-6
Main Sources of External Financing by Country of Origin
Tourism
Exports (goods)
South Africa
0%
Switzerland
1%
Others
14%
Austria
0%
Germany
16%
Belgium &
Netherlands
8%
Portugal
10%
Italy
7%
France
9%
United
Kingdom
33%
Angola Guinea
0% Bissau
0%
Portugal
16%
Belgium &
Netherlands
0%
France
0%
Spain
2%
USA
0%
Spain
77%
FDI
Emigrant Remittances
Spain Italy England
2%
1%
6% Ireland
2%
Others
55%
El Salvador
Others
USA 1%
5%
1%
Portugal
34%
Switzerland Luxembourg
3%
3%
Angola
0%
United
Kingdom
2%
Spain
2%
Others
3%
USA
14%
Belgium &
Netherlands
10%
Portugal
33%
France
23%
Italy
6%
Germany
1%
3
Soundness Indicators
2010
2011
2012
15.6
14.0
12.3
8.4
11.8
14.0
143.9
57.0
71.2
ROA
0.7
0.5
0.3
ROE
9.9
6.3
3.9
Liquid assets/total assets
12.5
8.2
13.2
Liquid assets/short term liabilities
37.7
28.2
43.1
Credit/deposits
79.2
86.0
79.1
Capital Adequacy
Capital Adequacy ratio
Asset Quality
NPL/Total Loans
Provisions/Defaulting loans
Earnings & Profitability
Liquidity
NPL Task Force Objectives &
Research Strategy
4
Objectives
Uncover the reasons behind the NPL performance
Anticipate future NPL trends based on risk assessment
Reasons behind banks credit to the economy performance?
Macroeconomic (domestic and/or international) environment?
Economic performance of some regions?
Sectors specific issues?
Social causes (divorces)?
Risk analysis failures?
Moral hazard (creditor)? adverse selection (debtor)?
Impact of monetary or fiscal policy?
Empirical Strategy
Data Collection and analysis of the Credit Information Registry
Identify sectors, institutional sectors and regions of major NPL
concentration or faster NPL growth
Assess if NPL increase is more related with some temporary economic
problems or with structural ones (purpose of financing, modality and
maturity of debt contracts and duration of impairments)
Assess individuals specific issues (marital status, employer, selfemployer, monthly income,…)
Survey for Banks
Questionnaire design
Set a representative sample (200 largest defaulting borrowers)
Submitted and received by e-mail
Processed in Excel
5
http://www.bcv.cv/vEN/publicationsandspeeches/Cadernos%20de%20Ed
ucacao%20Financeira/Paginas/CadernosdeEducacaoFinanceira.aspx
Main Results
6
In the past decade the bank loans increased at a very fast pace to finance mostly
construction related activities ….
Credit by Sector
Credit to nominal GDP
65%
60%
agriculture &
fisheries
0%
55%
50%
45%
manufacturing
4%
other services
31%
40%
construction &
related
activities
47%
transports &
Communicat.
7%
35%
30%
25%
restaurants &
hotels
trade
4%
7%
20%
2002 2003 2004 2005 2006 2007 2008 2009 2010
….pushed by excess liquidity and lack of other investment opportunities
Total Deposits and Emigrant Deposits
12,0
Interest rates
60.000,0
10,0
in percentage
40.000,0
30.000,0
8,0
6,0
4,0
20.000,0
2,0
10.000,0
Emigrants Deposits
Euribor (3 month)
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
2007
2006
2005
2004
2003
2002
Total Deposits
Jan-01
0,0
0,0
2001
million CVE
50.000,0
TB (91 days)
BCV's deposits facility
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Main results for companies
Defaulting Credit by funding purposes
Defauting credit contracted before 2009
90%
100%
84,1%
90%
77,4%
80%
80%
70,9%
70,3%
69,4%
70%
70%
60%
60%
50%
50%
40%
38,7%
40%
30%
20%
30%
10%
20%
0%
1
10%
2
0%
3
4
Investiments
1
2
3
4
5
6
71,9%
others
9%
trade
10%
restaurants &
hotels
15%
60%
real state
tourism
related
24%
50%
36,4%
construction
8%
26,5%
30%
agriculture &
fisheries
1%
manufacturing
4%
20,6%
20%
10,9%
other services
5%
10%
0,9%
transports
24%
0%
1
2
3
4
Total
NPL by economic sector
70%
40%
7
Total
Defaulting Credit with last payment made in 2010
80%
5
Cash Flow needs
5
Total
Main results for Individuals
80%
Defaulting credit contracted before 2010
90%
71%
80%
80%
70%
Defaulting credit with last payment made in 2010
70%
60%
65%
59%
60%
50%
54%
41%
40%
50%
40%
30%
30%
20%
20%
10%
28%
11%
10%
0%
0%
1
1
2
4
2
4
3
3
Defaulting credits by funding purposes
Defaulters running own business
education
100%
100%
90%
87%
90%
automobiles
80%
70%
76%
80%
70%
investment
60%
50%
60%
50%
40%
consumption
30%
40%
42%
30%
30%
30%
20%
commercial
housing
10%
16%
20%
6%
10%
0%
1
2
4
3
5
6
7
mortgage
loan
0%
1
2
4
3
5
6
7
8
Summing up
NPL increase is pushed by temporary factors:
weak economic performance
deterioration of external economic environment
contraction of the construction activity
but it is greatly related to structural features of Cape Verde’s Economy:
excess liquidity
undeveloped financial system
asymmetric information, monetary policy and risk analysis failures have
also played a role in the NPL increase
Forecasting ….
NPL trends should remain high and increasing in short run
IMF forecasts recession for Eurozone, which can affect companies’ earnings
and households’ disposable income (further deterioration of income of sectors
that depend on Euro Area markets as well as decreasing emigrants’
remittances)
BCV’s more conservative forecasts point to: a recession of Cape Verde’s
economy; some FDI recovery and weak performance of construction
Defaulting loan contracts mature in the long run, the problem could last for
many years
There are other risks to be aware off
Banks are the ones that most invest in corporate bonds, issued thru the stock
market and defaulting bank debtors are the same that are defaulting debt
securities
Further depreciation of loan collaterals
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Final Considerations
It is critical to match the Credit Information Registry (CRC) with supervisory
needs in a more complex and demanding environment
Recommendations:
assessment of CRC data collection, validation and analysis, to be performed by a
team of bank supervision, statistics and research experts;
design and implementation of an Action Plan to maximize the usefulness of the
CRC in terms of bank risk assessment and statistical needs;
improved dissemination of the upgraded CRC data to the banks so they may
improve their risk appraisal framework, in line with a risk-based supervisory
approach.
10
Thank you
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