Bad loans hit record 13.5%
By Ervin Lisaku
TIRANA, Nov. 16 – Bad loans continued growing rapidly even in the third quarter of this year, confirming the severe financial problems businesses and individuals are facing to pay them off and somehow justifying the commercial banks’ tougher lending standards since the beginning of 2010. Central bank data show problematic or non-performing loans climbed to a record 13.5 percent of the total portfolio at the end of the third quarter of this year, up from 9.82 percent during the same quarter in 2009 and 12 percent at the end of the second quarter of 2010.
Provision for bad loans also climbed to 8.16 percent at the end of September 2010, up from 7.31 percent last June and 6 percent in September 2009.
Lost loans at the end of the third quarter of 2010 increased to 3.88 percent, up from 3.53 percent in the previous quarter and 2.68 percent year-on-year. Meanwhile, the number of doubtful loans also rose to 3.79 percent, up from 3.13 percent in the previous quarter and 2.37 percent in the third quarter of 2009.
The percentage of substandard loans also registered a slight increase of 0.5 percent compared to the second quarter climbing to 5.84 percent of the total loans, but remained high compared to third quarter of 2009 when they were at 4.77 percent of the total.
According to a report by the International Monetary Fund released earlier this year, non-performing loans in Albania registered a rapid year-on-year increase at the end of 2008, when they doubled to 6.6 percent of the total portfolio, reflecting the first impacts of the global financial crisis. At the end of 2009, bad loans further climbed to 10.5 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, and deposits started to recover from the second half of 2009. Stress tests assessing key risks suggest that the banking system has sufficient buffers to weather the expected downturn. Moreover, Albanian firms and households are only moderately leveraged compared to South Eastern European peers, says the IMF.
Meanwhile, a Bank of Albania monetary report covering the July-September period said the tightened standards applied to commercial loans by the 16 second-tier banks operating in the country were enforced by increasing both provisions on high risk loans and also demand for collateral.
Bank profits
Despite rising bad loans and provisions on them, banks’ net profits increased to 3.95 billion lek (40 million dollars) at the end of September 2010, some 400 million lek more than the whole of 2009 when banks saw their profits halved because of the deposit withdrawal impact at the end of the 2008.
Data show the banking system’s profits in the third quarter increased by 350 million lek compared to the second quarter and almost doubled compared to the first quarter.
The second quarter of this year registered a record 3.6 billion lek more in profits, or 5.5 times, compared to the second quarter of 2009 when banks’ profits dropped to a mere 660 million lek, the second-lowest rate in the past 11 years after the 275 million lek profit at the end of the first three months of 2009.
Expenditure on provisions to cover bad loans almost doubled to 10.5 billion lek at the end of the third quarter of 2010, a figure which stands at only 1.3 billion less compared to the whole provisions of 2009.
Net revenues from interest rates climbed to 27.4 billion lek.
BoA warning
The need to stabilize and improve the credit quality is the main challenge the Albanian banking sector currently faces, the Bank of Albania said last month after its Supervisory Council approved the financial stability report for the first half of this year.
In a statement, the central bank said that although the financial system and banking sector situation at the end of last June was stable, problematic loans increased to 12.2 percent of the total portfolio at the end of the first half of 2010.
Banking sector experts say there are a number of causes that have led to strong growth of bad loans. They include shrinking family incomes, businesses in crisis and depreciation of the local currency, mainly against the euro. These factors have made it harder for people to pay back the loans they took in better times.
The report says the quality of credit portfolio will continue deteriorating, not only because of internal factors but also because of the crisis in Greece and Italy, where dozens of thousands of immigrants working in construction, agriculture and tourism have been hit, affecting the remittances they send home.
Tirana tops lending list
Total lending in Tirana at the end of the third quarter of 2010 registered 312.3 billion lek, accounting for 70 percent of all loans in Albania, according to central bank data.
Total short term lending in Tirana, both in the national currency lek and foreign currency dropped by 672 million lek compared to the second quarter but climbed by a considerable 8.7 billion lek year-on-year. Short-term lending in lek registered slight year-on-year increases but remained almost unchanged compared to the second quarter for all kinds of loans. The same trend was also reported for lending in foreign currency, mainly in Euro, which represents 70 percent of the total portfolio.
Lending in other big cities such as Durres, Vlora, Shkodra, Fier remained at almost the same levels compared to one year ago.
Loans to individuals showed the same trend.
As far as commercial loans are concerned, Tirana stills tops the list with a total of 229.6 billion lek, some 74 percent of the total 310 billion lek reported at the end of the third quarter.
Lending to the “Trade, car and household article repair” group, which holds the majority of loans, dropped by 1.35 billion compared to the second quarter but increased by 7.5 billion year-on-year. Lending to this group in Tirana registered 70.5 billion lek at the end of September 2010.
Second came the crisis-hit construction sector, whose lending slightly improved, increasing by 5.8 billion lek year-on-year and 1.8 billion lek compared to the second quarter of 2010.
The situation was similar even in other cities where trade, industry and construction sectors are given the majority of loans.
Lending standards remain tight
Lending standards during the third quarter of this year eased somehow for businesses but further tightened for individuals, said the Bank of Albania in a survey published in its latest monetary policy report.
Data show lending standards eased only for small and medium-sized enterprises and home loans to individuals, confirming the commercial banks’ hesitation to lend for the third quarter in a row this year, especially because of a significant increase in the bad loans which climbed to 13.5 percent at the end of September 2010.
Banking experts said the tight lending standards were influenced by specific problems in the sectors where businesses operate, the macroeconomic situation and the individuals’ financial situation.
Banks expect lending conditions for the fourth quarter of this year to ease for businesses but further tighten for consumers despite an expected increase in demand by both of them especially in foreign currency loans.
Meanwhile, the monetary expansion registered significant growth rates during the third quarter of this mainly because of foreign currency inflows. Bank deposits further increased, improving the banks’ liquidity, especially in foreign currency, mainly because of favourable interest rates offered in seasonal promotional campaigns.
Individuals continued preferred time deposits while businesses increased their preferences for liquid products supporting their activities. Lending preserved the second quarter’s moderate rates with the public sector continuing to positively contribute while the private sector’s contribution dropped to one of its lowest historical levels.
Deposits in the July-August 2010 registered a significant increase especially those in foreign currency because of the immigrants’ arrival to spend their summer holidays at home. Foreign currency deposits, mainly in euro, contributed to 90 percent of the total growth of 227.5 million euros.
Meanwhile, the annual growth for deposits in the national currency lek slowed down to 9 percent, down from 10 percent in the second quarter.
Increase expected
The central bank expects credit to the private sector to grow during the second half of this year after the budget review and the cut of the key interest rate by 0.25 to 5 percent percentage points few months ago.
Credit to the private sector continued growing at low rates even in the first half of this year despite improved liquidity and a significant increase in the number of deposits which was followed by declining interest rates.
The average year-on-year growth of credit to the private sector during the second quarter of 2010 was 9 percent, said the central bank. Meanwhile, the International Monetary Fund expects the private credit growth to drop to 8.6 percent of the GDP this year, down from 10.3 percent in 2009 and 32.1 percent in 2008 when the global crisis started.
