Banco de Cabo Verde
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Financial Stability Bulletin

1. Financial system stability is one of the priorities for Banco de Cabo Verde. This presupposes identifying, analyzing and monitoring existing and potential risks to the financial system and implementing mechanisms to restore market balance. The Semiannual Financial Stability Bulletin falls into this context.

2. The trend observed in the first half of 2011, namely the deteriorating external economic environment -- particularly with the worsening of the financial situation in the European Union, the national economic slowdown, the deterioration of external and public accounts and increased credit risk -- has caused macroeconomic risks to financial system stability to increase.
3. However, the good performance of the national banking system was evident, with continued growth in activity and solvency, although banks’ profitability levels slowed down, as reflected in operating costs and impairment losses in the asset portfolio. To cope with the risks inherent to the performance of their activities, banks significantly increased their equity, to ensure soundness and ability to absorb losses, although the quality of the credit portfolio revealed a slight deterioration, as did liquidity indicators.

4. The financial indicators revealed a substantial improvement in the competition between credit institutions, despite the still high concentration in the banking industry, with the top two banks controlling more than 70% of the credit market. The interest rates on banking operations remained relatively stable year-on-year.

5. The growth of bank credit granted to the non-financial private sector (companies and private individuals) slowed down compared with the same period last year, in line with the slowdown in domestic consumption and national economic activity. In turn, the Central Government’s bank debt increased, given the increased need for public funding.

6. While still fulfilling some of their liquidity needs with resources obtained from Banco de Cabo Verde, deposits – in various forms – continued to be the main source of funds for commercial banks.

7. Stress tests conducted on the banking system revealed the potential for loss of quality of the portfolio in case of shocks to credit, especially in the sectors of construction, housing and consumption, as well as concentration of the loan portfolio on the real estate sector and on a small number of counterparts, contributing to increase the risk of contagion and overall concentration of the system. On the other hand, a general increase in interest rates, in one year, would result in a significant reduction in the solvency ratio of banks. In contrast, the risk of devaluation of the national currency against major currencies is relatively low and given the system’s positive net external position, it would be resilient in the face of such a shock, in which banks would have gains and see their capital ratio increase.

8. The insurance sector enjoyed an increase in production, particularly with regards to life insurance, and a significant increase in the solvency margin. The automobile, accident and health branches continue to be responsible for the recorded increase in claims costs.

9. Regarding payments systems, where increased use of book and electronic instruments (checks and payment cards) is evident, the settlement of financial transactions has been taking place normally.

10. In the securities market, where there were no issuances at the primary market level, issuers continued to honor their financial commitments during the six-month period in question. In the secondary market the evolution was positive and there was an increase in the total volume of transactions compared to the same period last year.
(1) Data in the semiannual report is unaudited and provisional