FINANCIAL STABILITY REPORT 2011 - bcv.cv · PDF fileNet position in foreign currency As % of net assets - - - - 3 ... Net assets/ short-term liabilities 44,1 45,1 49,2 ... Financial

FINANCIAL STABILITY REPORT 2011

Banco de Cabo Verde

Cidade da Praia2012

Technical Specifications

Title: Financial Stability Report 2011

Publisher: Banco de Cabo VerdeDepartamento de Supervisão e Estabilidade do Sistema FinanceiroAvenida Amílcar Cabral, 27CP 7600-101 - Praia - Cabo Verdehttp://www.bcv.cv

Printing: Department of Human Resources and Administration

Banco de Cabo Verde / Department of Supervision and Financial System Stability 3

Index

Introductory Note ................................................................................................... 5Chapter 1. Banking System - Framework and Macroeconomic Risks ............ 7Chapter 2. Banking Sector ................................................................................... 13

2.1 - Competitiveness ......................................................................................... 132.2 - Economic and financial analysis .............................................................. 142.3 - Banking activity risks ................................................................................ 15

2.3.1 - Capital Adequacy ................................................................................. 152.3.2 - Credit Risk ............................................................................................. 172.3.3 - Market risk ............................................................................................ 19

2.3.3.1 - Interest rate risk ............................................................................... 192.3.3.2 - Exchange rate risk ........................................................................... 22

2.3.4 - Liquidity risk ......................................................................................... 232.3.4.1 - Funding sources .............................................................................. 232.3.4.2 - Liquidity indicators ......................................................................... 242.3.4.3 - Mismatches by maturity and liquidity gaps ................................. 25

2.3.5 - Operational risk .................................................................................... 262.4 - Stress tests results ....................................................................................... 26

Chapter 3. Insurance Sector ................................................................................ 29Chapter 4. Securities Market ............................................................................... 31Chapter 5. Infrastructures and regulation of financial system ....................... 33

5.1 - Payment system ......................................................................................... 335.2 - Regulation of financial system ................................................................. 34

Chapter 6. Final remarks ..................................................................................... 37

Index of Box

Box 2.1: Interest rate risk in the portfolio of banks in Cape Verde ......20

Index of Tables

Table 1 - Macroeconomic and financial indicators ............................................ 6Table 2 - National Economy - Banco de Cabo Verde projections .................... 8Table 3 - Balance of payments (flows in millions of escudos) .......................... 9Table 4 – State Accounts ...................................................................................... 10

4 Banco de Cabo Verde / Department of Supervision and Financial System Stability

Table 5 – Public debt stock ................................................................................. 11Table 6 - Balance sheet and income statement for the banking sector .......... 12Table 7 - Herfindahl and Hirschman Index (HHI) in the credit market ..... 13Table 8 - Equity and solvency ratio .................................................................... 15Table 9 – Risk vectors ........................................................................................... 16Table 10 - Quality of loan portfolio .................................................................... 17Table 11 – Liquidity indicators ........................................................................... 24Table 12 - Mismatches by maturity and liquidity gaps .................................... 25Table 13 - Operational risk according to overall risk ...................................... 26Table 14 – Stress tests results ............................................................................... 27Table 15 – Penetration rate and insurance density .......................................... 29Table 16 – Market capitalization ......................................................................... 31Table 17 - Market capitalization by segment .................................................... 21

Índice de Gráficos

Graph 1 - Evolution of Tier I, Tier II and Equity .......................................... 16

Graph 2 - Variation of risk-weighted assets ................................................... 17

Graph 3 – Banks’ exposure to construction sector ........................................ 18

Graph 4 – Banking system’s main funding sources ....................................... 23

Graph 5 - Contributions of financing flows to credit change ...................... 24


Introductory note

Ensuring financial system stability is a priority for Banco de Cabo Verde (BCV), as the institution responsible for supervising the national financial system, which involves continuous monitoring, analysis, identification of current and potential risks to the financial system, as well as implementation of mechanisms to restore market equilibrium.

The Financial System Stability Report is an annual BCV publication which describes and analyzes the evolution of the financial system, particularly the banking system, and risks to the system.

This Stability Report, which refers to 2011, brings two new features: analysis of interest rate risk in the portfolio of banks and liquidity analysis, based on the new rules issued by the Department of Supervision and Financial System Stability. These new instruments provide a more detailed assessment of liquidity risk and the magnitude of banks’ balance sheet exposure to interest rate fluctuations, that is, interest rate risk.


Table 1: Macroeconomic and financial indicatorsIn percentage, values at end of period

Macroeconomic and financial indicators 2007 2008 2009 2010 2011Consumer Price Index12-Month average rate of change 4,4 6,8 1,0 2,1 4,5Year-on-year rate of change 4 6,7 -0,4 3,4 3Exchange rate - Euro/Dolar 1,5 1,4 1,4 1,3 1,2Real GDP growth rate 8,6 6,1 * 4,0 * 5,6 * 5,1 *Public sector - Selected indicatorsOverall balance, including grants (% of GDP) 1,3 -1,8 * -6,8 * -12,0 * -8,9 *Overall balance, excluding grants (% of GDP) -3,7 -6,8 * -13,3 * -19,0 * -10,1 *Primary balance (% of GDP) -1,9 -5,2 * -10,7 * -17,3 * -11,5 *Current balance (% of GDP) 5,3 6,3 * 2,5 * 1,9 * 3,75 *Current account deficit, including current transfers (% of GDP) 14,7 16,0 * 16,7 * 13,1 * 10,1 *Domestic public debt as % of GDP (excluding DGT deposits ) 20,3 17,5 * 18,2 * 17,6 * 20,3 *External public debt as % of GDP 46,8 46,4 * 51,6 * 60,0 * 67,2 *Interest rate on Treasury bonds (last issue) 5,5 5,4 5,7 6,0 6,0Banking sector Profitability Implicit lending rate (1) 13,4 10,8 9,4 9,9 9,6 Implicit deposit rate (2) 2,3 2,5 2,7 2,9 3,2 Implicit Margin 11,1 8,3 6,7 7,0 6,4 ROE - return on equity 30,9 15,8 9,8 9,9 8,0 ROA - return on assets 1,6 1,0 0,7 0,7 0,6 MF - Net interest income (% of total assets) 3,7 2,9 3,8 3,03 3,7 Net fees (% of total assets) 0,9 0,7 0,6 0,5 0,5 Operating costs/operating income 53,1 52,3 65,5 66,9 71,3 Operating costs/net assets 2,7 2,9 3,5 3,4 3,4 Solvency Overall capital adequacy ratio 11,4 12,0 11,5 15,6 14,0 Exchange rate risk + Net position in foreign currency As % of net assets - - - - 3,5 As % of equity - - - - 42,3 Interest rate risk + + AS / PS gap up to 1 year As % of Net Assets - - - - 2,8 As % of Equity - - - - 34,1 Liquidity Risk Net assets/ total assets 15,9 15,3 16,4 12,5 13,2 Net assets/ short-term liabilities 44,1 45,1 49,2 37,7 43,3 Loan-to-deposit ratio 53,7 75,7 75,5 79,2 86,0 Credit Risk Quality of loan portfolio (Circular No. 150, of 12/28/2009) Overdue loans and interest/ total loans 4,3 2,5 3,9 4,0 6,8 Net overdue loans/ Total loans -0,5 -2,8 -1,7 -1,8 0,4 Provisions (3) / Overdue loans 113,2 211,5 141,9 143,9 94,8Insurance sector Evolution of portfolio 12,8 15,3 3,3 4,1 4,6 Insurance penetration level (% of GDP) 1,5 1,5 1,5 1,6 1,7 ROA 13,2 12,6 14,6 15,9 13,7 Coverage of technical provisions by assets 141,9 135,2 143,4 155,1 182,6 Solvency margin 166,8 200,1 269,6 298,0 279,2Securities Market Total market capitalization (rate of change in %) 190,8 -3,7 13,7 20,5 -9,0 Total market capitalization (% of GDP) 18,0 16,0 20,0 20,0 17,0AS - interest rate sensitive assets; PS - interest rate sensitive liabilities; DGT - Directorate-General of the Treasury* Provisional figures+ Data on assets and liabilities in foreign currency on 12/31/2011 - DMR ++ Reported data, according to interest rate risk calculation chart[1] Interest and similar income / total credit (excluding securities)[2] Interest and similar expenses / total deposits(3) - it does not include provisions for general credit risks.Source: Banco de Cabo Verde, Bloomberg


Chapter 1 – Financial System – Framework and Macroeconomic Risks

In 2011, macroeconomic risks to financial stability deteriorated, due to the worsening external environment and the slowdown in domestic economic activity, as suggested by data and quantitative indicators produced by Banco de Cabo Verde.

The global economy slowed down significantly in 2011, reversing the trend of recovery from the financial and economic crisis that started in 2008. Thus, the Cape-Verdean economy external environment was less favorable, due mainly to poor performance in advanced countries. The unexpected weakness of the U.S. economy, renewed financial volatility caused by fears about the severity of budgetary challenges facing the most vulnerable countries in the Eurozone, and the devastating effects of the Japan earthquake and tsunami on production and consumer sentiment justify the performance of advanced countries, according to the IMF. With regard to the major emerging economies, the available information indicates strong growth in activity and employment, though slowing in India, Brazil and Russia.

The adverse context of economic and financial crisis, particularly Cape Verde’s main partners (Portugal, Spain, Italy and other European Union countries), greatly conditioned the country's economic activity. This region continues to show weak economic performance and high unemployment rates, and it is also struggling with a serious sovereign debt crisis, which has had a negative effect on the national economy, namely conditioning tourism revenue, emigrants’ remittances, foreign investment and official grants. Most tourists in Cape Verde come from the European Union, representing more than 90% of overnight stays. About 84% of emigrants’ remittances and more than 90% of direct investment capital in Cape Verde come from the European Union.

In the context of a deteriorating external environment, national economic growth slowed down in 2011. Banco de Cabo Verde estimates indicate a real GDP growth of 5.1%, which is slightly below the 5.6% estimated for 2010. This less favorable evolution of the national economy was due to a sharp drop in net external demand, as a result of a significant increase in imports of goods and services.


Financial Stability Report 2011

The contribution of net external demand to economic growth was -5.1 percentage points of GDP. The contribution of domestic demand to economic growth was, in turn, very positive, having grown from 5.8 to 10.2 percentage points, driven by the dynamics of private consumption and investment. In 2011 the dynamics of private business investment offset, to a large extent, the slowdown in residential investment and the decline in public investment.

Table 2: National Economy - Banco de Cabo Verde projections

2010 E 2011 E

Percentage change

Gross Domestic Product 5,6 5,1

Private Consumption 4,0 3,3

Public Consumption 2,6 1,9

Gross Fixed Capital Formation 4,1 14,5

Exports 13,8 10,4

Imports 4,1 10,8 Source: Banco de Cabo Verde Notes: E - Estimates

Net external demand adjusted for seasonal effects deteriorated in 2011, despite the very favorable performance of exports of goods and services. The increase in imports determined the worsening of the balance on goods and services.

In terms of supply, the economic climate indicator produced by the National Statistics Institute (Portuguese acronym: INE) also suggests a slowdown in economic activity in 2011.

The inflation rate, as measured by the average annual change in Consumer Price Index (CPI), stood at 4.5% in 2011, higher than the previous year by 2.4 percentage points. Continuing the trend started in April 2010, prices in Cape Verde showed an upward trend throughout the year, reflecting the evolution of international prices of energy goods and processed food, which are mainly imported products.

External accounts deteriorated significantly in 2011, as a result of increased imports of goods, a significant decline in official transfers, and reduced exports of air transportation services, in a context of decreasing foreign direct investment and net disbursements of external public debt.



Table 3: Balance of payments (flows in million escudos)

2010E 2011E t.v. (%)

Current and Capital Accounts (million escudos) -14.568,2 -21.629,8 48,5%

Goods -56.821,8 -67.196,8 18,3%

Exports 11.282,3 16.758,9 48,5%

Imports -68.104,1 -83.955,6 23,3%

Services 17.132,3 20.830,9 21,6%

Exports 42.173,9 45.833,2 8,7%

Air transportation 10.698,2 7.855,7 -26,6%

Travel and tourism 17.185,2 23.269,7 35,4%

Imports -25.041,6 -25.002,3 -0,2%

Income -6.479,5 -4.712,9 -27,3%

Direct Investment Income -4.537,1 -2.198,7 -51,5%

External Public Debt Interest -667,5 -851,5 27,6%

External Private Debt Interest -2.079,1 -2.446,1 17,6%

Current and Capital Transfers 31.600,8 29.448,9 -6,8%

Official transfers 11.967,2 6.394,4 -46,6%

Emigrants' remittances 10.467,0 13.544,0 29,4%

Financial Account (million escudos) 20.107,4 21.039,8 4,6%

Direct Investment 9.282,1 7.274,9 -21,6%

External Public Debt 14.656,7 14.171,8 -3,3%

External Private Debt -2.744,7 1.657,5 -160,4%

Reserve Assets -2.185,1 3.675,6 -268,2%Source: Banco de Cabo Verde E: estimatesT.V. - rate of change

In 2011, net borrowing, which is measured by the combined current and capital account deficit, increased by 4.7 percentage points of GDP, to 16.4%. The current account deficit rose from 14% to 17% of GDP, while the capital account surplus fell by 2 percentage points (to 0.7% of GDP), with the significant reduction in official grants.

The deterioration of current and capital accounts was basically determined by the acceleration of imports of goods (by about 12 percentage points), a significant decline in official unilateral transfers (47%), and reduced exports of air transportation services (20.9%). Exports of goods, tourism revenue and emigrants’ remittances, however, had a very positive performance, growing 48.5%, 26.4% and 29.4%, respectively, in 2011.

The financial account, which represents the channels through which the external financing of the economy is processed, had a net inflow of funds of around 14% of GDP in 2011, that is, 2.3 percentage points less than in 2010. The reduction of net financial inflows was caused significantly by a reduction in foreign direct investment (21.6%), in liabilities of financial companies (13.2%) and in net disbursements of public debt (3.3%).



As a result, the country’s net international reserves fell 33 million euros and now ensure 3.2 months of imports (in 2010, they ensured 4.2 months).

Table 4: State Accounts

2010 2011 Var. %

Tax Revenue 26.389 29.709 12,58%

of which:

Tax without VAT 10.482 11.603 10,69%

Income tax 7.865 8.661 10,12%

Grants 8.662 4.199 -51,52%

Current Expenses 27.670 28.685 3,67%

of which:

Wages 13.225 13.885 4,99%

Transfers 7.343 7.603 3,54%

Pensions 2.749 3.180 15,68%

Investment spending 25.926 22.367 -13,73%

Overall balance (including grants) as % of GDP -11,9 -10,1 -

Current balance as % of GDP 1,7 3,7 -

Source: BCV

In the context of a worsening external environment, in 2011 fiscal policy focused on containing operating costs and improving tax efficiency.

At the end of the year, the budget deficit, including grants, totaled 13.263 million Cape Verde escudos (12.3% of GDP), having reduced by 2.2 percentage points, to 10.1%. The 18% reduction in investment spending explains, to a large extent, the reduction of public deficit in 2011.

Tax revenue grew 12.3% (+2.8% in 2010), reflecting, to a large extent, the dynamism of economic activity in 2010, increased imports, and improved efficiency in tax collection. In particular, revenues from the Value Added Tax increased by 10.3%, at a faster pace than nominal GDP growth by 1.3 percentage points.

As a result of increased financing requirements, the Central Government’s debt stock (excluding Consolidated Financial Mobilization Securities) reached 87.5% of GDP in late 2011. This reflects an increase in both external debt (to 67.2% of GDP) and in domestic debt (to 20.3% of GDP).

With respect to institutional sectors, the banking sector (including BCV) is the main creditor, holding the largest share of the country’s domestic debt (38.7%), totaling a stock of 17.3 billion escudos, compared to 15.2 billion escudos in the same period in 2010. The National Social Security Institute (Portuguese acronym: INPS) holds the second largest share of the country’s domestic debt (35.7%).



Table 5: Domestic Debt Stock

Domestic public debt, in million escudos 2010 2011 Var.( %/pp)

Banking sector 11.984 14.378 19,97%

Non-banking sector 26.304 27.372 4,06%

of which INPS 14.080 19.943 41,64%

Total Domestic public debt 41.466 44.648 7,67%

Source: BCV

The continuing deterioration of the international economy, the national economic downturn, as well as inflation’s upward trend and the public accounts situation, are risks that may affect the stability of the national financial system. On the one hand, they may condition the domestic banking industry and, thus, contribute to the reduction of institutions’ income, profitability and liquidity, as well as to the worsening of financing conditions (via deposit reduction); on the other hand, they can lead to an increase in the number of families and businesses who fail to comply with their contractual obligations to the banking system, which could contribute to increased credit risk and losses for the banking sector.

Regarding the bank debt of the non-financial private sector (companies and private individuals), bank credit to this sector grew 9.4% in 2011, compared to 8.5% in 2010, amid a slowdown in private consumption and strong growth in public investment.



Tabl

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Chapter 2. Banking Sector2.1 - Competitiveness

In line with the trend of previous years, the concentration of the banking industry, as measured by the Herfindahl and Hirschman Index (HHI)11, showed substantial improvements, indicating an appreciable competition between institutions.

The other financial indicators point to the same direction, as evidenced by the following table.

Table 7 – Herfindahl and Hirschman Index (HHI) in the credit market

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Value Value Value Value Value Value

HHI - Credit 3.943 3.381 3.257 3.245 3.004 2.942

R1 (*) 0,52 0,47 0,45 0,45 0,43 0,42

R2 (**) 0,86 0,77 0,75 0,75 0,72 0,71(*) Concentration index in relation to the major bank in CV.(**) Concentration index in relation to the two major banks in CVSource: BCV

Notwithstanding the high concentration of the banking industry in Cape Verde, in 2011 the HHI was slightly lower than in previous years, suggesting greater competition between credit institutions.

It should be noted that the market share for the largest bank (R1) and the two largest credit institutions (R2) improved from 43% to 42% and 72% to 71%, respectively.

1 The Herfindahl and Hirschman Index (HHI) is a measure that is frequently used to assess the concentration of the banking industry. This index is obtained by adding the squares of the market shares of all banks in the industry. This index ranges from 0 to 10,000 points. The industry is considered to be moderately concentrated if the IHH is between 1000 and 1800 points, and highly concentrated if it is higher than 1800 points.



2.2 - Economic and financial analysis

• OrganicgrowthisanimportantaspectinallcreditinstitutionsinCapeVerde at the end of fiscal year 2011. The banking sector’s activity, as measured by total net assets, continued to grow, with the aggregate balance amounting to 155.2 billion escudos, representing a growth rate of 9.98% (1 percentage point more than in 2010). The composition of the structure of applications in Net Assets presents no significant changes, with loans and securities continuing to represent nearly all assets (58.4% and 17.4%, respectively), followed by Cash, with 12.7%.

• Despitethegrowthofthebankingactivity,bothprofitabilityandsolvencyof banks deteriorated, albeit slightly, over the past year. Operating costs and impairment losses in the asset portfolio of banks caused the less favorable performance of income.

• Customer funds, in the form of deposits, remained themain sourceof funding for banks. In this period, this aggregate amounted to 112.9 billion escudos (a 2.8% growth), representing 72.7% of total resources used, 54.8% of which were Time Deposits. This evolution was due to the positive change in Time Deposits (2.51%). In turn, emigrant deposits totaled 41.8 billion escudos in 2011, up from 38.4 million escudos in 2010, which represents an annual rate of change of 8.9%.

• Inadditiontofundsfromdeposits,in2011bankswerealsorefinancedinthe interbank market. This demand for liquidity resulted in an increase of 4.6 billion escudos, in a context where the overall liquidity situation of the banking system began to show some risks.

• Theloantodepositratioreached86.03%,representingan increaseof6.83 percentage points over 2010, a trend that has been observed in previous years.

• Netincomewas859millionescudosin2011,comparedto932millionescudos in the same period in 2010. This 73 million escudos (7.9%) drop was primarily due to degradation of loan portfolio values, as evidenced by increases in the impairments associated with the loan portfolio (14.4%).

• Thisbehaviorofimpairment(netofrecoveries)wasconditionedbytheeffects of the current national economic climate, with particular impact on the larger appropriations for the year, having in mind reinforcement of the coverage of the loan portfolio showing signs of impairment. The cost of risk amounted to 1.288 million escudos, representing a 162.1 million escudos growth over the same period in 2010.

• Net banking operating income grew 4.04%, reflecting the favorableevolution of net interest income (4.93%) and the positive impact of changes in net fees (9.2%).



• In2011,themainindicatorsofthebankingsystem’sprofitabilityshowedvalues that were relatively lower than those for 2010, suggesting a poorer management of financial resources provided by depositors and creditors. Thus, return on assets (ROA) stood at 0.6% (compared to 0.7% in the same period last year) and return on equity (ROE) was 7.3% (compared to 9.1% in the same period last year).

• With the negative effect resulting from a significant increase in staffcosts, the "cost to income" ratio, which measures bank efficiency, had a slight deterioration (1.76 percentage points) over the same period last year, standing at about 68.7%.

2.3 - Banking activity risks2.3.1 - Capital adequacy

Banks’ equity stood at 12.9 billion escudos in 2011, having seen a slight reduction (about 2.1%) over 2010. The solvency ratio stood at 13.9% and the Tier I/Weighted assets ratio stood at 13.4%.

Table 8: Equity and Solvency Ratio

Dez-10 Dez-11 Change (%)/(pp)Thousand escudos Value Value

Tier I 12.150.913.231 12.366.023.846 1,77%

Tier II 1.395.114.000 1.473.606.552 5,63%

Eligible equity 13.204.316.231 12.924.762.338 -2,12%

Total Weighted Assets 84.632.781.241 92.505.528.741 9,30%

Solvency 15,60% 13,97% -1,63

Tier I/Weighted Assets 14,36% 13,37% -0,99

Source: Bando de Cabo Verde

The slight reduction of Equity compares to a 9.3% increase in risk assets, which led to a 1.6 percentage point drop in the solvency ratio.

Despite the slight decline, the system’s solvency ratio is 3.97 percentage points above the regulatory minimum, which is 10%.



Table 9: Risk vectors

Dez-10 Dez-11

Thousand escudos Value % RwA Value %

RwA

Credit Risk Weighted Assets - VAPRC 74.140.062.758 87,60 77.288.369.263 83,55

Exchange rate risk-weighted assets - VAPRTC 231.143.307 0,27 388.523.221 0,42

Operational risk-weighted assets - VEAPRO 10.262.017.893 12,13 14.828.636.257 16,03

Total Weighted Assets (RwA) 84.632.781.241 - 92.505.528.741 -

Source: Banco de Cabo Verde

Credit risk is the main risk in the system, accounting for nearly 85% of all risks.

Graph 1: Evolution of Tier I,Tier II and Equity

1010,51111,51212,51313,51414,51515,5

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

100.000

Dec.2010 Dec.2011

Milli

on e

scud

os

Tier I Tier IIEligible equity Total Weighted AssetsSolvency (scale on the right) in %


The Tier I/Weighted assets ratio stood at 13.37% and the Solvency ratio stood at 13.97%.



Graph 2: Variation in risk-weighted assets

87,60%

12,13%

0,27%

Dec. 2010

Credit Risk Weighted Assets

Exchange rate risk-weighted assets

Operational risk-weighted assets

83,55%

16,03% 0,42%

Dec. 2011

Credit Risk Weighted Assets

Exchange rate risk-weighted assets

Operational risk-weighted assets


In 2011, risk-weighted assets grew 9.3% over the same period in 2010, roughly at the same pace of growth in assets. They accounted for 83.55% of total weighted assets, standing at about the same level as the previous year.

2.3.2 - Credit Risk

The banking activity’s growth, as measured by the expansion of credit to the economy, was accompanied by an adverse change in the quality of loan portfolio in 2011. The overall level of default, as measured by the quality of the loan portfolio quality2, decreased by about 2.69 percentage points.

Table 10: Quality of loan portfolio (Circular No. 150, of 12/28/2009)

Dez-10 Dez-11 Change (%)/(pp)Value Value

Overdue loans and interest (in CVE) 3.678.401.674 6.718.635.608 82,65%

Ratios

Overdue loans and interest / total loans (CT) 4,22% 6,92% 2,69

Overdue loans and interest for more than 90 days up to 180 days/ CT 0,45% 0,63% 0,18

Overdue loans and interest for more than 180 days but not more than 1 year/CT 1,17% 3,06% 1,89

Overdue loans and interest for more than 1 year but not more than 3 years/CT 1,96% 2,26% 0,31

Overdue loans and interest for more than 3 years /CT 0,65% 0,97% 0,31

Net overdue loans /CT -1,93% 0,25% 2,18

Provisions (a) / Overdue Loans 145,66% 96,33% -49,33Source: Banco de Cabo Verde(a) - it does not include provisions for general credit risks.

2 Circular No. 150 of 12/28/2009 establishes the basis for calculating the indicator



The Provisions/Loans ratio stood at 96.33%, compared to 145.66% in 2010, representing a significant reduction in the establishment of provisions over the previous year.

In structural terms, the loan portfolio continues to concentrate highly in the construction sector (41.57%), with home purchase loans representing 34.27% and loans granted to construction and real estate companies representing about 7.30% of the total.

Graph 3: Banks' exposure to real estate sector

7,31% 7,30%

34,34% 34,27%

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

30,00%

35,00%

40,00%

45,00%

Dec. 2010 Dec. 2011

Housing Construction


The concentration of loans to non-financial corporations is manifested in high amount exposures (higher than 10% of Equity), which is considered high risk, against a limited number of counterparties. It was found that about 33% of institutions had exposures above the national average in December 2011. Additionally, there is a high degree of exposure to several debtors simultaneously, often belonging to the same sector, which contributes to increase the risk of contagion and overall concentration of the system. Thus, it was found in late 2011 that 67% of banks had exposures to the real estate sector that exceeded the sector’s average exposure. However, it was found that half of the institutions had a level of coverage of major risks by Equity that was above the sector’s average. Notwithstanding the positive assessment of the coverage, concentration risk remains a major risk that could affect the stability and solvency of institutions.



2.3.3 - Market risk2.3.3.1 - Interest rate risk

Interest rates for banking operations remained relatively stable in 2011. The volatility of interest on loans and deposits, as measured by standard deviation, stood at less than 2% on all maturity periods. The average placement rate for TIM was below 5%. Placement rates for TRM also remained stable throughout the year. Regarding government securities (T-Bills), it was found that placement rates for different periods stood at around 4%.

If we consider an interest rate shock of around 200 basis points for all maturities for interest rate sensitive assets and liabilities3, the results indicate a positive impact resulting from a possible rise in interest rates, both in terms of equity and in terms of net interest income, and show that banks seem well positioned to face a possible interest rate risk at the considered level. It follows that the national banking system’s overall exposure to interest rate risk in the bank portfolio is low, due to reduced gross exposure.

3 The simulation of the shock is regulated by Notice No. 4/2011 and its Technical Instruction - Annexed to Circular "A" No. 164, of 12/16/2011.



Box 2.1Interest rate risk in the portfolio of banks in Cape Verde

Assessment of the impact on net interest income and equity

1. Interest rate risk - concept and prudential contextualization

The bank portfolio is exposed to fluctuations in market interest rates, resulting in changes in the value of associated flows, with a direct impact on net interest income, as well as on its market value, should they be traded or settled at the time of their appreciation.

The bank portfolio is defined as the majority of banks’ assets and liabilities whose degree of permanence in the balance sheet is high, with loans and deposits standing out. The bank portfolio’s positions are therefore subject to interest rate risk, that is, to a subcategory of market risks.

Risk is measured using the duration technique, seeking to assess the impact of changes in interest rates on banks’ net interest income and equity. The impact on net interest income is evident as well as direct. Changes in interest rates lead to asymmetric fluctuations in the flows of interest receivable and payable and, therefore, have an impact on banks’ net interest income.

From an operational standpoint, this impact is called prospect of income and consists in simulating changes in interest flows in the short run, typically less than one year, taking into account maturity periods / revision of interest rates in that time.

Measuring the impact on equity makes it possible to record potential gains or losses, should there be any need to transfer part of the assets to carry out liquidity or for early settlement of liabilities, at their market price. Note that there is no liquid secondary market for the instruments in the bank portfolio, which are held until they mature and, therefore, are not speculative and, thus, are not valued at market price. This impact, commonly known as the prospect of economic value, consists in simulating changes in equity, on the assumption that all assets and liabilities equivalent to debt are valued at market prices.

Through the aforementioned Notice and its Technical Instruction, banks are required to provide a standardized reporting to assess the impact of changes in interest rates by 200 basis points, both on equity and on net interest income. The reported exposures should be compared with both the net interest income and the equity of each institution, in order to assess their relevance. The information reporting should allow Banco de Cabo Verde to, not only monitor exposure to interest rate risk in the bank portfolio, but also the possible implementation of corrective measures, taking into account the assumed interest rate risks or the specificity of institutions or financial groups.

2. Nível de exposição das instituições bancárias ao risco de taxa de juro a 31/12/2011

Quantitative evaluation of the importance of interest rate risk in the bank portfolio is based on data from a group of six national banking institutions4, collected under Notice No. 4/2011 and its Technical Instruction - Annexed to Circular "A" No. 164, of 12/16/2011.

4 Only Cape Verde’s New Bank (Novo Banco) was excluded from the calculation.



Assuming a 200 basis point increase in interest rates, the results point generally to a low level of overall exposure, measured both in terms of impact on equity (average increase of around 20.11%) and in terms of the impact on net interest income (average increase of 5.53%).

The impacts on equity and net interest income vary according to the institutions concerned (see graphs shown below). The dispersion reflects differences in the structure of the balance sheet, but it is also the result of assumptions used by institutions in the allocation of instruments in temporal bands, especially for non-contractually fixed maturities (e.g. time deposits).

-0,25

-0,05

0,15

0,35

0,55

0,75

0,95

Impacto - Situação líquida Impacto médio Limite

impact - equity ................... average impact .................. limit

-0,25

-0,15

-0,05

0,05

0,15

Impacto - Margem financeira Impacto médio Limite


Despite the relative dispersion, it can be concluded that, for the group of institutions under consideration and generally speaking, the impact of an increase in interest rates should be positive with regards to interest rate risk, both in terms of equity and in terms of net interest income. Even for those institutions whose impact on net interest income is negative, it lags behind 20%, which is considered critical. Thus, Cape Verdean institutions appear to be well positioned to face interest rate risk, at the considered level.

Impact - Equity Average impact Limit

Average impact LimitImpact - Net interest income



2.3.3.2 - Exchange rate risk

The currency composition of banks presents a relatively low foreign exchange risk exposure. The total exchange rate risk-weighted assets represented less than 1% of total risk-weighted assets, in December 2011, a level of risk that is considered low, thus requiring minimum Equity.

Given the parity between the national currency and the Euro, the risk of losses associated with fluctuations in the exchange rate is, consequently, dependent on the stability of other currencies, particularly the dollar, in relation to the single European currency.

Throughout the year, the U.S. dollar remained relatively stable against the national currency, ranging from a minimum of 77 CVE and a maximum of 90 CVE. The Cape Verde escudo remained equally stable against the pound sterling.

However, there could be losses associated with foreign exchange risk due to a hypothetical devaluation of national currency. The greater the liabilities in foreign currency compared to existing assets, the greater the risk. That is, the larger the gap, the greater the exposure of the balance sheet and the higher the risk. Banks’ total available funds in foreign currency amounted to 9.1 billion escudos in December 2011, against 14.5 billion escudos in total liabilities. The currency composition showed a gap in the amount of 5.4 billion escudos. Considering the risk of loss, in case of a 30% devaluation of national currency, the resulting loss would be around 1.6 billion escudos, which represents 12.4% of banks’ equity. Thus, the foreign exchange risk seems low.

The positive impact on net interest income is explained by an excess of assets over liabilities, within a time frame of up to one year for revision of interest rates. These results should reflect, to a large extent, the proportion of credit in total banking assets.

From the results, it can be concluded that the overall exposure of the national banking system to interest rate risk in the bank portfolio is low, due mainly to reduced gross exposure. One should, however, analyze these same results carefully, since they are sensitive to the specificities of each institution and to the assumptions considered by them.

The Notice on interest rate risk calls for a set of measures to be implemented by the supervised institutions, if the economic value of their balance sheet and the net interest income decrease by more than 20% of their equity, as a result of a sudden and unexpected change in interest rates. In December 2011, none of the analyzed institutions were in this situation.



2.3.4 - Liquidity risk2.3.4.1 - Sources of funding

Aside from being the main source of funding for banks in Cape Verde, customer funds also represent a stable source. Its growth in December 2011 was around 2.7%. Despite the modest evolution in customer deposits, banks’ continued funding from the customer base, especially individuals, is a characteristic that reflects the structural liquidity position of banks in Cape Verde.

Graph 4: Banking system's main funding sources

6,58%

72,74%

7,79%

8,59%Dec. 2011

Funds from credit institutions

Deposits

Other liabilities

Capital and reserves


Funds from credit institutions, as well as other deposits, together account for almost 80% of total resources used to finance their operations. Changes in resources from other institutions and other liabilities, as well as from retained earnings and capital, were the most important flows to increase banks’ funding capacity in 2011.



Graph 5: Contributions of financing flows to credit change

81,57%

2,72%

72,59%

9,83%Dec. 2011

Funds from credit institutions

Deposits

Other liabilities

Capital and reserves


2.3.4.2 - Liquidity Indicators

The modest growth in deposit-taking, which was well below the expansion of the loan portfolio, around 12%, reflected negatively on the ratio of transformation of deposits into loans. Indeed, the index continued to increase, rising from 72.21% in December 2010 to 86.04% in December 2011. The continuing rise in the ratio to levels approaching 100% indicates an increased liquidity risk.

Although still below the limit of 100%, the system’s overall ratio may represent a potential liquidity risk, in the near future, for financing credit operations, if it continues to grow at the pace observed in recent years.

Table 11: Liquidity indicators

Dez-10 Dez-11Change

%Net Assets / Total Assets 12,50% 13,23% 0,73

Net Assets / Short term Liabilities 37,42% 43,26% 5,84

Transformation of deposits into loans index: Total Loans / Total Deposits 79,21% 86,04% 6,83


The Net Assets/Total Assets5 ratio stood at 13.23% in 2011, against 12.50% in 2010, indicating some improvement in the level of general liquidity over the previous year. The observed level, however, is modest when compared with countries whose liquidity ratios reach up to 50% of total assets.

5 The measure used is based on the methodology proposed by the International Monetary Fund (IMF) for financial soundness indicator (FSI) - liquid assets to total assets.



The Net Assets/Current Liabilities ratio also experienced a positive trend, increasing from 37.42% in 2010 to 42.26% in 2011, indicating a restructuring of the asset composition, so as to favor the more liquid assets available for fulfillment of immediate contractual obligations.

A positive feature that strengthens the liquidity position of banks in Cape Verde is the quality of their securities portfolio, more than 50% of which are government securities accepted by the Central Bank for financing operations and secondary market operations.

2.3.4.3 - Mismatches by maturity periods and liquidity gaps

Although they indicate a positive overall evolution, traditional liquidity indicators do not make it possible to take into account the residual maturities of the various assets and liabilities. A detailed assessment of the liquidity position thus implies an analysis of liquidity gaps by maturity. After the Annex to Series A Circular No. 161, of 07/14/2001, regarding liquidity risk came into force, in December 2011, banks began to report their assets and liability positions, where mismatches and liquidity gaps are evaluated by residual maturity periods.

Table 12: Mismatches by maturity and liquidity gaps

In cash and up to

1 week

Over 1 week and up to 1 month

Over 1 month and

up to 3 months

Over 3 months and

up to 6 months

Over 6 months and

up to 12 months

Thousand escudos

Mismacthes by maturity 141.166.141 -437.299.632 -176.480.622 -227.143.377 -156.656.468

Accumulated mismacthes 140.521.038 -296.778.594 -473.057.964 -700.394.313 -856.886.790

Net assets 241.054.648 240.854.386 242.467.755 242.470.593 242.556.290

Volatile liabilities 94.554.144 336.136.882 339.641.584 348.032.660 355.821.319

Net assets - volatile liabilities 146.500.505 -95.282.496 -97.173.830 -105.562.068 -113.265.030

Liquidity Gap (%) 350% -1% -14% -27% -12%


The analysis of liquidity on an aggregated basis enunciates a situation of high coverage in the shortest period, up to one week, and successive and growing gaps in the longer period. There is a wide disparity between institutions, some showing very wide gaps in all maturity periods and a high volume of accumulated mismatch.

The negative gaps are derived from a high volume of volatile liabilities, well above the net assets, which highlights the uncomfortable position of the system’s liquidity as regards exposure to liquidity risk. Faced with this situation, institutions will be forced to use other types of assets to meet their responsibilities, with additional costs. The banking system’s current liquidity



situation makes it possible to anticipate a moderate liquidity risk for the system as a whole, but a potentially high liquidity risk for some institutions, in particular.

2.3.5 - Operational risk

The weight of operational risk-weighted assets in total risk-weighted assets increased by 3.9 percentage points compared to 2010, which means a greater exposure of banking institutions to operational risk.

Table 13: Operational risk according to overall risk

Dez-10 Dez-11 Change

Value Value Value

Operational risk-weighted assets - VEAPRO 0,27% 0,42% 3,90


The indicator of operational risk is calculated based on average net operating income for the last three years, if it is positive6. Despite its limitations, the operational risk indicator suggests that the increase in business volume leads to greater risks related to human, technological and other factors. However, it neglects the implemented internal control mechanisms and processes.

A more detailed assessment of operational risk involves analyzing the efficient internal control mechanisms, namely a rigorous mapping of all activities and sources of operational risk and quantification of potential losses, as well as statistical aggregation of all cases involving errors, fraud, system failures, etc.., and proper accounting for losses resulting from such incidents. Although not exhaustively, the most recent assessments show that institutions are more committed to the implementation of more efficient control systems designed to mitigate/reduce operational risk.

2.4 - Stress tests results

Stress tests were conducted based on data from December 2011 for the four largest banks in the system, which represent more than 90% of the banking system’s total assets, to assess the vulnerabilities of the banking institutions to the materialization of credit and exchange rate risk, assuming that the losses have a direct impact on the capital adequacy ratio. Unlike tests carried out previously, this time one used credit data by economic sector, reported in accordance with the classification by economic activities defined by the National Statistics Institute.

6 Represents 15% of the average Net Operating Income for the last three years, if positive.



Table 14: Stress test results

Capital Adequacy Ratio (%) - Baseline scenario 13,9

Regulatory capital before the shock (million escudos) 12.888,00

Risk weighted assets before the shock (million escudos) 92.841,00

Total loans (million escudos) 97.162,00

Overdue loans (million escudos) 6.614,00

Capital Adequacy after shocks Level Change p.p.

A - Credit Risk

Sectoral shocks

Construction (25% NPL , 70% recovery) 9,8 -4,1

Housing (25% NPL) 9,8 -4,1

Consumption (25% NPL) 6,8 -7,1

Trade (25% NPL) 10,1 -3,8

Construction (25% NPL ) + Tourism (20% NPL ) 7,6 -6,3

Concentration risk

Largest debtor bankruptcy 10,6 -3,3

Two largest debtors bankruptcy 8,8 -5,1

Three largest debtors bankruptcy 7,5 -6,4


Shock results show that banks appear to be quite vulnerable to the materialization of credit risks, particularly in the areas of Construction, Housing and Consumption.

Furthermore, the institutions expose themselves in large amounts with regards to their main debtors. In the event of insolvency of the three main debtors, the solvency ratio of most banks in the system would stand at levels that are below the regulatory minimum, necessarily requiring their immediate capitalization. The concentration risk is thus one of the main risks of the banking system.

The market risks considered were interest rate risk on the bank portfolio and exchange rate risk on banks’ foreign exchange exposure.

Considering the assets and liabilities that are sensitive to interest rate, for a period of one year, institutions are particularly resilient to a hypothetical increase in interest rate, in all maturity periods, at 200 basis points. Materialization of the risk would result in a positive impact on net interest income as well as on equity.

An exchange rate shock, considering a 30% devaluation of domestic currency, would result in minor losses, given the magnitude of the gap between liabilities and assets in foreign currency.

The stress tests results confirm the high vulnerability of the banking system to the materialization of credit risk and the balance sheet’s low exposure to interest rate risk and exchange rate risk.


Chapter 3. Insurance Sector

In 2011, the insurance sector increased its relative weight in the economy to 1.7%, with the production of direct insurance growing 4.6% overall, for a total of 2.258 million escudos.

The estimated value of premium per capita for 2011 was US$54.0, representing an increase of US$1.4 over the previous year.

Table 15: Penetration Rate and Insurance Density

2009 2010 2011

Insurance penetration rate (1) 1,5% 1,6% 1,7%

Direct Insurance Premiums per capita in USD (2) 50,7 52,6 54,0Source: Banco de Cabo Verde(1) Calculations based on BCV GDP estimates (2) Calculations based on INE's population growth projectionsSource: Banco de Cabo Verde

The net income for the year reached 262.4 million escudos, higher than the previous year.

In prudential terms, technical provisions increased from 1,687.7 million escudos in 2010 to 1,807.5 million escudos in 2011. The weight of claims provisions in total technical provisions reached 78.4% in the period.

Assets subject to technical provisions exceeded liabilities by 995.7 million escudos, which corresponded to a coverage rate of 155%.

In 2011, the eligible equity ensured coverage of the solvency margin by 298%, that is, 28 percentage points higher than the previous year.


Chapter 4. Securities Market

In 2011, transactions on the Stock Exchange recorded a lower volume of issues compared to all previous years. All issues were related to Government Securities, including Treasury bills, amounting to 2.35 million escudos, and Treasury Bonds, in the amount of 610 million escudos, and took place in the last quarter of the year. These issues were the first to be carried out on the Stock Exchange for Government Securities.

Table 16: Market capitalization

YearMC

(billion escudos)Dividend yield MC Change MC / GDP

2006 6,5 5% - 7%

2007 18,9 6% 190,8% 18%

2008 18,2 8% -3,7% 16%

2009 20,7 nd 13,7% 20%

2010 24,8 nd 20,0% 20%

2011 22,6 nd -9,0% 17%MC - Market capitalization, GDP - Gross Domestic ProductSource: BVC – BCV calculations

In 2011, interest, dividends and coupons were paid, for a total of 1.45 million escudos.

The market capitalization amounted to 22.6 billion escudos and was distributed as follows:

Table 17: Market capitalization by segments - 2011

%

Shareholder segment 36,85

Company Bonds Segment 60,39

Treasury Bonds Segment 2,76

Source: BVC



In the secondary market, the volume of transactions totaled around 738 million escudos, representing a slowdown over the previous year. The dynamization of this segment remains the main challenge for the national securities market.

As supervisor of the Securities Market, in 2011, the work of the Office of the Auditor General of the Securities Market (Portuguese acronym: AGMVM) focused especially on introducing market monitoring mechanisms, based on the regulation of reporting requirements on the part of issuers and on the assessment of risks emerging from the market itself.

In partnership with the Cape Verde Stock Exchange, the AGMVM worked during the year to create conditions for strengthening the institutional capacity of the capital market, as an alternative source of financing and investment in Cape Verde.


Chapter 5. Infrastructures and financial system regulation

5.1 - Payment system

The Payment System in Cape Verde continued to ensure the normal flow of settlement operations, thus contributing actively to the dynamics and stability of the national financial system.

Regarding means of payment and payment instruments, 2011 was characterized by increased use of electronic tools, particularly payment cards, which represented 71.4% of total transactions made with payment instruments in use nationwide. In fact, this growth is reflected in the downward trend of the "preference for central bank money" ratio, which reinforces Cape Verdeans’ preference for electronic instruments.

Overall, the settlement system (Deposit Management and Settlement System - SGDL) showed an increase in transactions, in terms of both quantity and value, with 5,951,232 transactions being made, amounting to 935,036,500,000 escudos. In line with what has been observed over the years, clearing settlement contributed about 99.9% of total transactions and 19.6% of total amount, while gross settlement represented 0.1 % of total transactions and about 80.4% of total amount.

The clearing settlement system – Integrated Interbank Clearing and Settlement System (SICIL) – had a bigger growth (33.1% in quantity and 2.3% in value), reflecting the daily average of transactions processed, which went from 12,797 transactions/day, amounting to 694.2 million escudos, in 2010, to 16,874 (+31.9%) transactions/day, amounting to 702.8 million escudos (+1.2%), in 2011.

With regard to Banco de Cabo Verde’s activities in the area of payment systems, ongoing projects were consolidated, having the activities undertaken in 2011 focused on:

• Preparingthebankingsystemforthestart-upoftheElectronicFundsTransfer System, a process which included validating operational tests and infrastructures, in close collaboration with system participants and the processing entity (SISP);

• Performing(continuing)testsaspartofthedevelopmentoftheReserveManagement System and its interfaces with settlement systems in domestic currency and foreign currency;

• Conductinginspectionsofcreditinstitutions,withtheaimofassessingcompliance with the law on restrictions on the use of checks and



verifying compliance with the legal regime on the movement of funds between demand deposit accounts;

• Preparing a framework of guiding principles aimed at effectiveimplementation of the supervisory role according to international principles, focusing on security and interaction among the various systems and consequent prevention of systemic risk;

• Formulating awork plan in close collaborationwith Banco deCaboVerde’s partners in the area of Deposit Management and Settlement System, with a view to its full development.

Also concerning activities undertaken in 2011, we highlight the publication of Notice No. 2/2011, laying down the general conditions for opening and operating deposit accounts with credit institutions that are legally authorized to carry on business in Cape Verde, and the updating of SICIL regulation, by virtue of the operationalization of the Electronic Funds Transfer System.

Regarding other stakeholders, – banks, the Treasury and SISP, – activities continued to focus primarily on consolidating infrastructures and improving existing services and a wider coverage in terms of service and product delivery, through the emergence of new credit institutions and, consequently, expansion of branch network; a continued commitment to the development of virtual banking and new electronic channels, and expansion/enhancement of ATM and POS network to other areas and municipalities.

5.2 - Financial system regulation

In 2011 there were regulatory initiatives aimed at strengthening the financial system in Cape Verde.

Within the banking sector, the following were published:

1) Ordinance No. 2/2011, of 01/17 -- Authorizes the Merger by incorporation of ECV Serviços Financeiros - Agência de Câmbios, S.A. (Financial Services - Currency Exchange Office) and Ecobank Cabo Verde (IFI), Sociedade Unipessoal S.A. (Sole Proprietorship) in Ecobank Cabo Verde, S.A;

2) Notice No. 1/2011, of 03/07 -- Authorizes the Establishment of a Financial Management Company called NOVAGEST, S.A. – Series I of the Official Bulletin No. 10, of 03/07/2011;

3) Notice No. 2/2011, of 08/17 -- Establishes the General Conditions for Opening Deposit Accounts with Credit Institutions that are Legally Authorized to Operate in Cape Verde

4) Law No. 4/VIII/2011, of 08/29/2011 – Amends Law No. 3/V/96, of July 1, on Banking System and Credit Structure

5) Notice No. 4/2011, of 10/26/2011 – Regulates Interest Rate Risk in the Bank Portfolio



6) Notice No. 5/2011, of 10/26/2011 – Regulates Foreign Exchange Risk

7) Technical Instruction No. 161, of 07/14/2011 – Regulates Liquidity Risk;

8) Technical Instruction No. 162, of 11/07/2011 – Regulates fee collection/general office expenses;

9) Technical Instruction No. 163, of 11/23/2011 – Regulates and normalizes check use;

10) Technical Instruction No. 161, of 12/16/2011 – Regulates interest rate risk in the bank portfolio.

Technical Instructions were issued on the Circulation Quality of BCV Notes and Coins and, under the Integrated Interbank Clearing System, the System Manual and Technical Specification Manual were produced.

Regarding para-banking institutions, the statutes of Promoleasing-Sociedade de Locação Financeira (financial leasing company) were published in B.O. Series III No. 17, of 05/06/2011.

As part of the activities of insurance institutions, the following were published:

1. Ordinance in B.O. Series III No. 26, of 08/12/2011 – Publishes Increase in Garantia’s (Insurance Company) Capital Stock

2. Ordinance No. 39/2011, of 12/12/2011 -- Sets the Amount and the Minimum Conditions for Civil Liability Insurance in Real Estate Brokerage;

3. Ordinance No. 40/2011, of 12/12/2011- Sets the Amount and the Minimum Conditions for Civil Liability Insurance in Condominium Management;

4. Ordinance No. 41, of 12/12/2011 -- Sets the Amount and the Minimum Conditions for Civil Liability Insurance in Construction by entities referred to in Article 26 of Decree-Law No. 45/2010, of October 11.

Aimed at boosting the Micro-Finance sector, Decree-Law No. 13/2011, of 01/31/2011, which regulates the establishment of Unions and Federations of Microfinance Institutions, and Decree-Law No. 12/2011, of 01/31/2011, which gives validity and enforceability to mutuums (loans for consumption) entered into between Microfinance institutions and beneficiaries, were published.

Finally, to promote the capital market, Law No. 7/VIII/2011, of 11/28/2011, which gives the Government legislative authority to, under a new Securities Market Code, set the rules regarding criminal offenses and administrative offenses, including the procedural aspects, was approved.


Chapter 6. Final remarks

Macroeconomic risks to financial stability increased in 2011, given the continuing deterioration in the external environment, the national economic downturn and the worsening of external and public accounts.

Despite the economic indicator showing a slowdown in economic growth, banks in Cape Verde had good growth levels.

However, banks profitability revealed deceleration over the same period last year.

In general, credit risk, particularly in housing, construction and consumption, was the main risk to the banking system, as well as the high exposure of the bank portfolio in relation to the real estate sector and a limited number of counterparties.

In prudential terms and in order to monitor risks inherent in their operations, banks increased their eligible equity in the second half of 2011. However, given that risk assets grew at a faster pace than equity, institutions’ solvency level fell compared to 2010, although it remained above the regulatory limit (10%).

Liquidity indicators suggest a slight improvement in liquidity level; however, the information reported by institutions point to high liquidity gaps, which may materialize in liquidity constraints and higher financing costs and, consequently, significantly increased risk.

The insurance industry had a good pace of growth, a high level of solvency and good solvency margin.

Despite the slowdown in 2011, the Stock Exchange issued Government securities and, thus, was able to finance the general government.

Stress tests suggest potential loss in the quality of the portfolio in case credit shocks materialize, particularly in construction, housing and consumption.

Test results also alert to the existence of high risks due to credit concentration. The exposure of banks’ loan portfolio is high in relation to the real estate sector and a small number of counterparties. Thus, the concentration risk is relevant. The occurrence of losses, in the event of default, would be materially relevant and could seriously jeopardize financial system stability.

Documents

FINANCIAL STABILITY REPORT 2011 - bcv.cv · PDF fileNet position in foreign currency As % of net assets - - - - 3 ... Net assets/ short-term liabilities 44,1 45,1 49,2 ... Financial