Albania only SEE country to have double-digit loan growth, report shows

TIRANA, Nov. 21 – Albania’s banking sector has been singled out as one of the few in the South-East European region that could register double-digit loan and asset growth for the 2011-2015 period, according to a recent Raiffeisen report. “The smaller Albanian banking sector seems to be the only banking sector in the SEE that might offer double-digit loan and asset growth rates over the forecast horizon (2011-15). Moreover, the need for additional deposit collection is limited, given a loan-to-deposit ratio of 60 percent in Albania,” says Raiffeisen Research in its latest report covering 14 banking sector markets from the central and Eastern European Countries. The rising bad loan portfolio, currently at 18 percent, and the macroeconomic situation with public debt as the most problematic indicator at around the legal ceiling of 60 percent of the GDP, were the main two factors contributing to the tightening of lending standards for both businesses and individuals during the third quarter of 2011, according to a BoA survey. Banking experts expect lending standards to remain tight even in the final quarter of 2011 both for businesses and individuals. Lending in foreign currency, especially Euro, continues to account for 70 percent of the total portfolio in Albania, mainly due to the difference in interest rates, revenues and purchases made in Euro, especially in the construction sector. The latest Bank of Albania move to lower the key interest rate for lek by 0.25% to 5 percent is expected to a give a boost to lending, which after the 2009 global financial crisis has been at slightly more than 10 percent compared to the pre-crisis levels of 30 to 50 percent. Credit to the economy continued preserving the slow growth rates even in August 2011. Latest Bank of Albania data show credit to the economy grew by 58.7 billion lek or 12.7 percent y-o-y last August. Meanwhile, total deposits in August 2011 continued their rising trend, growing by 111 billion lek or 15 percent y-o-y. What remains challenging is the ongoing sharp rise in non-performing loans after the 2008 crisis, with bad loans climbing to a 17 percent rate with the NPL ratio for foreign currency loans slightly below this average. This marks a rather strong increase from 14.7 percent at the end of Q1 2011, considering that the ratio had stood at 14.0% at the end of 2010, says Raiffeisen. According to the latest EC quarterly report on EU candidate and potential candidate countries, the quality of the loan portfolio deteriorated further in the second quarter in Serbia where the share of non-performing loans in total loans reached 18%, Albania (16.6 %) and Bosnia and Herzegovina (11.8%). NPLs remained very high in Montenegro (25.3%) and Iceland (40%). In Macedonia, the ratio of non-performing loans to total loans has remained stable in the second quarter, at 9.4% in June 2011. The NPL ratios for some banks are now well above 20%. At 14.2%, the sector’s capital adequacy remains high, but deteriorated somewhat in H1 2011 (2010: 16.2%). The aggregated net profit in H1 2011 amounted to EUR 7.94 mn (this figure includes the combined loss of around EUR 32 mn posted by Greek-owned banks). The Greek banks’ poor performance weighed on the banking sector’s aggregated profitability (H1 2011 RoE: 2.4%, RoA: 0.2%). More adverse scenarios were avoided due to proactive and tight pre-crisis regulation and liquidity buffers (including prudent loan-to-value ratios and a partial ban on distributing dividends). Nevertheless, given the country’s strong links to Greece’s economy and banking sector, there is a need for Albania to pursue contingency planning, possibly in cooperation with other SEE economies. Some potential for M&A activities remains, given the number of banks operating in the country and the rather low collective markets share banks outside of the Top-5 continue to hold, despite the decreasing domination of the two largest banks in recent years. The Raiffeisen report notes that the banking markets in the three SEE countries Albania, Bosnia and Herzegovina and Croatia are highly concentrated, with the five largest banks in these countries holding markets shares of 70- 75% of total assets. Albania was one of the few CEE economies that did not experience recession in the wake of the global financial crisis. On the back of this performance, loan growth remained in positive territory in 2009 and 2010 and the country’s financial sector did not require any public sector support. Nevertheless, weak domestic demand and a slowing external backdrop are weighing on the growth outlook. Loan growth in H1 2011 stood at 4.6% year-to-date, driven primarily by the corporate sector (up 5.2% in H1 2011 and 14.9% in 2010) while the overall banking environment remains challenging. The banking sector is highly penetrated by foreign banks (94% of total assets). Greek banks hold some 23% of total assets, although the Albanian share in their mother banks assets is low at some 0.2-1%. With deposits continuing to increase strongly (up 16.4% in 2010 and 5.4% Year-to-date) and Greek banks not managing to increase their market share, there is some evidence that Albanian emigrants in Greece are withdrawing some of their deposits in Greece and channeling them into other foreign-owned non-Greek banks in Albania. With a loan-to-deposit ratio of 60%, the banking system is less dependent on external financing (only 2 larger banks have loan-to-deposit ratios above 100%). The share of FCY loans in total loans remains high with some 70%. In FCY, the loan-to-deposit ratio remains somewhat above the average loan-to-deposit ratio (80-85%). The average GDP per capita at purchasing power parity in SEE stands at EUR 11,500. Croatia has the highest GDP per capita income in SEE (EUR 14,500, 54% of the Eurozone), Bosnia and Herzegovina and Albania have the lowest average incomes in SEE (EUR 6,700-7,000, 23% of the Eurozone).