Non-performing loans rise to 20%

Tirana Times
By Tirana Times August 22, 2016 11:41

Story Highlights

  • The surprise bankruptcy of Turkish-run Kurum steelmaker, one of the country’s largest foreign investors, had a key impact on the NPL increase

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By Ervin Lisaku

NPLTIRANA, Aug. 22 - Non-performing loans embarked on upward trend in the first half of this year when they rose for six consecutive months, affecting credit growth and banks' profits, according to the central bank.

On a falling trend since mid-2014 when they reached a record high of 25 percent, NPLs dropped to 18.22 percent at the end of 2015 but rose again to about 20 percent at the end of the first half of this year as one of the country’s key enterprises announced bankruptcy, affecting credit which struggled to recover to positive growth rates.

The 16 overwhelmingly foreign-owned banks in Albania also saw their profits drop to about 5 billion lek (€37 mln) in the first half of this year, down from 8.3 billion lek (€60.7 mln) during the same period last year.

The surprise bankruptcy of Turkish-run Kurum steelmaker, one of the country’s largest foreign investors, had a key impact on the NPL increase.

Kurum is estimated to have borrowed some €40 million from 3 local banks in Albania and another €126 million from the World Bank and the Black Sea Development Bank in the past five years. Last April, a Tirana District Court ruled to suspend the execution of collateral against Kurum steelmaker and allow the company to renegotiate loans with its creditors to save it from bankruptcy.

Kurum International has been operating in Albania for the past 18 years mainly in steel production in Elbasan, central Albania, but expanded its activity in Durres Port through a container terminal concession and purchased for small and medium-sized hydropower plants in the past few years.

Non-performing loans have more than trebled in the past six crisis years, becoming a drag on economic growth and lending which has been struggling with sluggish growth rates in the past couple of years.

Some thirty-five big borrowers hold about half of total NPLs, estimated at €800 million in mid-2015.

Banks’ profits hit a historic high of 15.7 billion lek (€111.7 mln) in 2015 as non-performing loans dropped to 18.22 percent and deposit interest rates registered a record low, according to central bank data. The surge in profits came 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.

Bank of Albania governor Gent Sejko says the implementation of the newly adopted justice reform will be key for the recovery of lending which has struggled to turn to positive growth rates for the past year.

“From the central bank’s point of view, this provides an unusually optimistic signal for the progress of lending, but also for the implementation of the action plan on non-performing loans. The implementation of the justice reform would bring a better collateral execution and better enforcement of contracts in the medium and long-term between banks and borrowers,” the central bank governor says.

Lending to the economy showed signs of recovery last June when it almost overcame its downward trend for the past l2 months as credit registered a negligible annual contraction of 0.03 percent, according to the country’s central bank.

However, the real credit recovery is estimated to be higher, at 3 percent, considering the write-off of bad debt from banks’ balance sheets statistically keeping lending at negative growth rates of about 2 percent for the past year.

With non-performing still at a high level of 18 percent, banks continue applying tight lending standards for both businesses and households while the consecutive cuts to the key interest rate, currently at a historic low of 1.25 percent, have been poorly reflected in loan interest rates.

The gap between loan and deposit rates has increased to more than 8-fold compared to about 3-fold in the pre-crisis credit boom, triggering a probe by the country’s competition authority over allegations of limited competition leading to high loan interest rates and standstill in lending.

Average interest rates on lek-denominated loans slightly rose to 7.3 percent last June compared to a historic low of 6 percent last April at a time when deposit rates for the national currency dropped to all-time low of 0.77 percent.

The poor recovery of lending also reflects sluggish demand and uncertainties by both the business community and households as the country’s economy continues growing at sluggish growth rates of 2 to 3 percent, mainly driven by some private sector energy-related investments.

The payment of some €500 million to the private sector in accumulated unpaid bills in the past couple of years had a small impact on boosting investor confidence, although it slightly reduced NPLs.

Lending to the economy has been striving to maintain positive growth rates since 2012 after growing by 30 to 50 percent annually in the pre-crisis years and an average of 10 percent from 2009 to 2011.

Meanwhile, deposits struggled to recover last June when they increased by a mere 0.5 percent, affected by historic low interest rates of only 0.77 percent, pushing investors to seek other riskier investment opportunities, including online trading.

Tirana Times
By Tirana Times August 22, 2016 11:41