TIRANA, Aug. 6 – The 16 commercial banks operating in Albania have registered one of the best first-half performances in terms of profits since 2009 despite bad loans having doubled to 21 percent. Latest Bank of Albania data show second-tier banks doubled their profits to 2.3 billion lek (Euro 16.4 mln) at the end of the first half of 2012 compared to 1.1 billion lek during the first half of 2011. This despite bad or non-performing loans climbing to 21.17 percent, up from 16.61 percent in the first half of 2011.
After the poor 2009 profits because of the panic withdrawal of deposits, banks’ performance in the first half of 2012 is the second best in the past four years of crisis, worse only compared to the first half of 2010 when profits were at 3.6 billion lek.
Banks’ improved performance in the second half of 2012 is a result of lower spending on provisions which at 2 billion lek was twice lower compared to the first half of 2011.
Provision coverage rate at the end of the first half of 2012 rose to 12.19 percent, up 2.51 percent compared to the same period last year. The capital adequacy rate rose to 15.66 percent, above the BoA minimum requirement of 12 percent.
In the first half of 2009 banks’ profits registered only 660 million lek (Euro 4.7 mln) despite bad loans being at only 8.7 percent.
As elsewhere in the region, Albanian banks witnessed substantial panic deposit withdrawals in the face of spillovers from instability of global financial markets, which were compounded by concerns about the health of the Greek banking system in the fall of 2008. Ample liquidity buffers were utilized to meet deposit withdrawals. To boost confidence, deposit insurance limits were raised fivefold to 2.5 million lek (25,000 US dollars), and deposits started to recover from the second half of 2009.
In the first half of 2012, the highest percentage in the non-performing loan portfolio belongs to sub-standard loans at 9.78 percent whose holders have failed to pay instalments from 61 to 90 days. Second come loss loans at 6.58 percent followed by doubtful loans at 4.81 percent. Under the BoA regulation, loans are considered doubtful when borrowers have not been able to pay for 180 days and lost when the payment has been delayed by more than one year.
Non-performing loans, which account for a total of around 1 billion dollars, representing around 7.6 percent of the GDP, are becoming a drag on economic growth.
Experts say they are considered the second major threat to the Albanian economy after the public debt, currently at the legal ceiling of 60 percent of the GDP.
In its latest country report, the IMF says Albania’s banking system has been resilient, but declining asset quality is a concern.
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 and 19 percent in 2011.
Banking sector experts say there are a number of causes that have led to strong growth of bad loans. They include shrinking household income, 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.
Banks’ profits in 2011 registered their lowest rate during the past 12 years as bad loans reached a historical high record of around 19 percent, according to BoA. Data show banks’ net profits at the end of 2011 were only 706 million lek (Euro 4.95 million), the worst level since the 1997-1998 pyramid investment schemes when banks registered negative balance sheets.
Bad loans which have trebled to 20 percent during the past three years remain the key problem the Albanian banking system faces, central bank governor Ardian Fullani has warned.
“The increase in non-performing loans has increased stress levels in the banking activity, lowered the contribution of the sector in financial intermediation and in supporting economic growth in Albania,” said Fullani.
According to him, delays in the execution of collateral remains the key problem for the sharp jump in bad loans and joint efforts by the banking system, the Bank of Albania and other state institutions, including Parliament and courts are needed to overcome the situation.
A newly drafted law by Albania’s central bank and the Association of Banks on the acceleration of procedures for the execution of collateral, a key barrier which has directly influenced on rising bad loans and falling banks’ profits as a result, is expected to bring positive changes. The draft law which has already been submitted to government foresees changes to the Civil Code requiring a qualified majority of 3/5 of votes.
Other measures envisaged in the draft law are the establishment of a special court section dealing with the execution of collateral and an amendment to the law on registration of real estate because of problems with the real ownership of property put up as collateral.
Worst borrowers
Latest Bank of Albania data show the construction sector leads the NPL portfolio with 29.6 percent, followed by trade with 21.3 percent.
The bad loan portfolio for businesses, which hold 73.5 percent of total credit rose to 20.8 percent at the end of 2011, up from 15.1 percent in 2010. Bad loans for individuals also rose to 15.7 percent, up from 11.8 percent at the end of 2010, according to data published in the Bank of Albania Supervisory report.
“Trade, repair of motor vehicles and household equipment” which holds a quarter of the total credit saw its bad loans rise from 13.8 percent at the end of 2010 to 21.3 percent at the end of 2011. Bad loans in the construction sector, which holds 13.3 percent of total credit, rose to 29.6 percent in Dec. 2011, up from 19.8 percent a year ago. The processing industry, whose share in the total credit is 10.8 percent, also had its bad loans rise by 5 percent to 21.3 percent.
Almost one in two hotels and restaurant owners who have borrowed are finding it impossible to pay back. The BoA supervisory report shows hotels and restaurants lead the non-performing loans list in the business category with 45.3 percent at the end of 2011, up from 22.7 percent a year ago. However, the impact is minor considering that the hotels and restaurants account for only 3 percent of the total credit portfolio.
Monetary and financial intermediation is the least problematic sector with only 1 percent of bad loans.
The agriculture sector saw its bad loans drop to 13.6 percent, down from 23.4 percent a year ago although holding only 1 percent of the credit portfolio.
