TIRANA, March 1 – Banks’ profits hit a historic high of 15.7 billion lek (€111.7 mln) in 2015 as non-performing loans dropped to 17.66 percent and deposit interest rates registered a record low, according to central bank data.
The surge in profits comes at a time when lending to the economy contracted by 2.4 percent in 2015, registering the second post-crisis decline after a slight drop in 2013.
Banks’ profits were fueled by a sharp cut in spending on interest rates as lek-denominated deposit interest rates dropped to a historic low of 1.36 percent at the end of 2015 while average rates on loans in the national currency slightly dropped to 7.69, six times higher compared to deposits rates. Bank credit in Albania is largely funded by local deposits with the loan-to-deposit ratio at 55 percent.
The 16 overwhelmingly foreign-banks operating in Albania posted profits of 11.2 billion lek (about €80 mln) in 2014 when non-performing loans (NPLs) were at 22.76 percent compared to a 13-year low of 706 million lek (€5 mln) in 2011 when NPLs climbed to 19 percent.
NPLs, which have become a drag on the recovery of lending, dropped to 17.66 percent at the end of 2015 down from 20.23 percent in the third quarter of 2015 and 22.76 percent at the end of 2014. NPLs have declined from their peak of 25 percent in September 2014, due to arrears clearance by the government and various policy initiatives to tackle high NPLs, the International Monetary Fund says in its latest report.
Regulatory and legal changes facilitating collateral execution and loan write-offs have also reduced NPLs.
A new regulation requiring the mandatory write-off of loans categorized as ‘lost’ for more than three years that came into force at the beginning of 2015 is estimated to have reduced non-performing loans by 3 percentage points.
Tackling high NPLs is essential for easing bank risk aversion which continues to thwart a revival in the flow of credit and the broader recovery, says the IMF.
In late 2015, Albania’s Competition Authority launched an enquiry into the country’s banking system over allegations of limited competition leading to high loan interest rates and a standstill in lending.
The loan rates, although considerably lower to the pre-crisis period, are still considered high and unaffordable by the business community because of being six times higher compared to the deposit rates which have dropped below the average inflation rate for the past year.
A preliminary monitoring by the competition watchdog has unveiled that during the past few years the Albanian banking market has displayed characteristic of a market with relatively high interest rates under conditions of stagnation in lending.
