Latest data published by Albania’s central bank show banks’ net profit during the first half of this year dropped to 1.123 billion lek (USD 11.23 million, Euro 8 million), down from 3.6 billion lek (USD 36 million, Euro 25.7 million) in the first half of 2010
By: Ervin Lisaku
TIRANA, August 8 – Banks’ profits during the first half of this year dropped by more than three times year-on-year as bad loans continued their rising trend in the second quarter of 2011, confirming the difficult situation businesses and individuals are facing to pay off their debts. Latest data published by Albania’s central bank show banks’ net profit during the first half of this year dropped to 1.123 billion lek ( USD 11.23 million, Euro 8 million), down from 3.6 billion lek (USD 36 million, Euro 25.7 million) in the first half of 2010. The situation was a result of a sharp increase in the commercial banks’ bad loan portfolios which reached 16.61 percent at the end of the second quarter of this year, up from 14.42 percent in the first quarter of 2011 and 12 percent in the second quarter of last year. At the end of the first half of 2009, bad loans were at 8.73 percent, almost twice less compared to their current situation.
Facing the risks of rising bad loans, banks’ increased their provision coverage to 9.68 percent in the second quarter of 2011, up from 9.11 percent in the previous quarter and 7.31 percent year-on-year.
Official Bank of Albania data show lost loans during the second quarter of 2011 increased to 4.82 percent, up from 4.5 percent in the previous quarter and 3.53 percent in the second quarter of 2010. Substandard loans also rose to 7.9 percent, up from 5.87 percent in the previous quarter and 5.34 percent at the end of the second quarter of 2010.
Meanwhile, doubtful loans slightly dropped to 3.89 percent compared to the first quarter of 2011, but were up 0.76 percent year-on-year.
Bad loans, which the central bank and financial experts describe as the key risk to Albania’s banking sector, have more than doubled during the past couple of years. BoA statistics show bad loans doubled to 6.5 percent at the end of 2008, reflecting the first impacts of the global financial crisis. At the end of 2009, bad loans further climbed to 10.5 percent before reaching 13.61 percent at the end of 2010.
The banks’ profits have also been affected despite recovering at the end of 2010.
At the end of 2010, the net profit of the 16 commercial banks operating in Albania almost doubled to 6.7 billion lek (48 million Euros), up from 3.5 billion lek at the end of 2009 when banks saw their profits halved because of the deposit withdrawal impact at the end of the 2008.
Banking sector experts say there are a number of causes that have led to strong growth of bad loans. They include shrinking family incomes, businesses in crisis and the depreciation of the domestic currency, lek, mainly against the euro. These factors have made it harder for people to pay back the loans they took in better times.
Despite the risk bad loans pose, Albania’s central bank describes the Albanian banking system as safe which is confirmed by both the credit and deposit growth. Although not at the pre-crisis levels of 30 to 50 percent, new loans and deposits grew by more than 10 percent year-on-year during the first half of this year.
However, bad loans are becoming the key factor influencing on the tightening of standards, especially for businesses. The latest Bank of Albania survey shows lending standards for businesses became tighter in the second quarter of this year and are expected to further tighten in the third quarter.
Need for quick collateral execution
The Bank of Albania recently called on the 16 commercial banks operating in Albania to cooperate with their customers in case of temporary difficulty in paying off installments but to be strict and act timely in executing collateral in the case bad loans are identified.
Bank of Albania governor Ardian Fullani and Finance Minister Ridvan Bode have reiterated the need for the quick execution of collateral to keep the Albania banking safe from the risk of rising bad loans.
According to the Bank of Albania, delays in court, bailiff’s and real estate registration procedures remains a key concern for the normal activity of the banking system and lending in particular. Governor Fullani has called for the review of legal and regulatory framework to eliminate identified obstacles and training of staff.
Meanwhile, Finance Minister Ridvan Bode has said failure to execute collateral in time was having a major economic impact. “The total unpaid obligations pending collateral execution is estimated at 20 billion lek. Although the value of collateral is almost twice higher than the obligations, unsafety and delays in execution system make compensation for banks a very difficult goal to achieve,” added Bode at a recent seminar on collateral execution.
