TIRANA, Feb. 11 – Commercial banks operating in Albania continue posting record high profits amid slowly recovering credit and a decline in non-performing loans.
Bank of Albania data shows the 14 overwhelmingly foreign-owned commercial banks operating in the country posted profits of around 18.4 billion lek (€147.6 mln) in 2018, down 38 percent compared to the 2017 historic high profits, but yet registering the second-highest profits in the post-1990s transition to a market economy.
The ongoing high profits came at a time when credit to the private sector officially declined by 3.2 percent, but registered moderate growth rates of around 6 percent when adjusted for the euro’s free fall against the Albanian lek and the write-off of non-performing loans that have spent three years in the loss category, statistically keeping lending at negative growth rates.
Europe’s single currency, which accounts for about half of credit and savings in the Albanian banking sector, lost around 7.4 percent against the Albanian lek in 2018, in a sharp depreciation that hit exporters to the Eurozone, local producers facing tougher competition from cheaper imports, sizeable euro-denominated savings and migrant remittances as well as government revenue due to lower taxation on key imports from the Eurozone, which Albania conducts two-thirds of its trade.
Meanwhile, non-performing loans, a key barrier to easier lending standards, dropped to a decade-low of 11 percent at the end of 2018, down from 13.2 percent in 2017 and a record high of 25 percent in mid-2014.
The NPL decline is mainly a result of mandatory write-off of bad debt that has spent three years in the ‘loss’ category since 2015 and loan restructuring with big borrowers, but yet NPLs in Albania remain the highest in the Western Balkan region, posing a key barrier to easier lending standards and credit recovery. Commercial banks in the country wrote off 3.1 billion lek (€24.8 mln) in bad debt during the first half of 2018, taking the stock of bad debt that has been removed from banks’ balance sheets to 51 billion lek (€408 mln) since 2015, according to a Bank of Albania financial stability report.
The commercial banks’ main profits were a result of a huge gap between loan and deposit rates.
Interest rates on loans denominated in the national currency slightly dropped to an average of 6.5 percent for businesses and to 7 percent on households in 2018 at a time when deposits rates remained only slightly above zero due to the key benchmark at a historic low of 1 percent following a new mid-2018 cut by Albania’s central bank.
Interest rates on euro-denominated loans, accounting for around 40 percent of credit in Albania, were at an average of 4.2 percent in 2018, also in only slightly lower rates compared to 2017.
Commercial banks also collected a sizeable 11 billion (€88.3 mln) in penalties and commission fees, around a fifth of what they collect in loan rates, in ongoing higher rates that have gradually doubled in the past decade.
However, when looking into detailed data by the Albanian Association of Banks seven small commercial banks, including two Italian and Greek units that were taken over by internal competitors cutting the number of second-tier banks to 14 from a decade of 16, posted losses in the first three quarters of the year in an ongoing situation in the past few years amid sluggish credit and a declining but still high level of non-performing loans.
Credit prospects
Credit has been recovering to growth rates of 4 to 5 percent in the past couple of years when adjusted for the NPL and euro’s free fall effects. The moderate recovery comes after a pre-crisis credit boom that saw lending to the economy drop from 35 percent in 2008 just before the onset of the global financial crisis to 15 percent in 2011 and a decline of 1.5 percent in 2015 when Albania started applying the mandatory write-off of bad credit.
Banking experts say sluggish credit growth reflects both poor demand for new loans and tight lending standards amid declining but still high levels of non-performing loans.
Expert Elvin Meka says sluggish credit is a result of commercial banks no longer accepting double-standard balance sheets that businesses commonly use to avoid high taxation, tight lending standards amid higher risk aversion, but also lack of quality projects that can receive funding and poorer demand by both businesses and households.
In addition, a number of small loss-making banks have already sold their Albania units and others are currently holding negotiations to sell their Albania operations as part of a banking sector consolidation process that has already cut the number of commercial banks operating in the country to 13 and is expected to further reduce their number. The banking sector consolidation, which does not affect market competition due to the top four banks holding more than two-thirds of total assets, is estimated to have had a negative effect by shifting attention from credit expansion.
“Banks are on the market to provide credit and support the economy and the society with sufficient funds and liquidity as well as expertise and quality experience so that businesses and consumers can handle economic and non-economic challenges, but as long as we live and work in a market economy, almost everything is triggered by demand and both the market and banks cannot avoid this axiom, but will do their best to offer the best they can,” says expert Elvin Meka in the latest issue of Bankieri, (Banker), a quarterly magazine published by the Albanian Association of Banks.
Klodion Shehu, the head of the financial stability department at Albania’s central bank, says credit has not sufficiently supported economic growth in the past decade.
“The credit to GDP ratio has slightly dropped from 41 percent of the GDP in 2010 to around 37 percent of the GDP in Sept. 2018. In order to reflect cyclical factors in the change of lending, a more appropriate indicator would include comparing credit to the economy to GDP at a certain time with its long-term trend. This difference, known as credit to GDP gap, is currently estimated at -11 percent for Albania, which means credit has not followed the country’s economic growth or put differently economic growth in the past decade has not received the same support by the financial sector,” says Shehu examining credit performance and potential in the Albanian economy.
Facing spillover effects from main trading partners, the Albanian economy has been growing by an average of 2.7 percent annually in the past decade, less than half of a pre-crisis decade of 6 percent annually that is estimated to bring tangible welfare to Albanian households and bridge huge development and income gaps to EU member countries.
Growth in the past four years has been mainly driven by some large energy-related projects with not much direct impact for Albanian households.
Top four banks under probe
Albania’s competition watchdog has recently launched an in-depth probe into the country’s four largest commercial banks to check whether high interest rates amid sluggish credit and high profit rates could be an abuse of their dominant position.
Preliminary findings by the competition authority shows all four leading banks apply extremely low deposit rates and high interest rates and commission fees in behavior that could be part of a banned deal and distort market competition in a banking system that for about a decade until mid-2018 had 16 commercial banks that are about to be reduced to 13 following three mergers and acquisitions.
Albania’s top four banks include Turkish-owned BKT, Austria’s Raiffesen Bank, majority Albanian-owned Credins Bank and Italy’s Intesa Sanpaolo Bank Albania, representing a top of more than two-thirds of assets in the Albanian banking system.
Surveys conducted by Albania’s central bank blame poor demand for new loans and tight lending standards amid a declining but still high level of non-performing loans for the poor credit growth in key barriers that prevent making use of ample deposit-funded liquidity.
