Banks’ net profits in the first half of 2013 slightly dropped to 1.5 billion lek (Euro 10.5 million), down from 2.3 billion lek during the same period in 2012 on higher spending on provisions which in the second half of 2013 almost quadrupled to around 7.9 billion lek
TIRANA, August 6 – With lending striving to remain at positive growth rates, non-performing loans which are considered the second major threat to the Albanian economy after public debt, have slowed down in the first half of this year increasing by only 1.6 percent to a total of 24.4 percent compared to the end of 2012. Compared to the first quarter of 2013, bad loans have increased by only 0.4 percent. Bank of Albania data published this week show bad loans rose to 24.39 at the end of the first half of 2013, up from 22.76 percent in the final quarter of 2012 and 21.17 percent at the end of the first half of 2012. Data show the rising trend in bad loans initiated in the onset of the global financial crisis in 2008 is considerably slowing down as lending standards become tighter and loan growth at the end of the first half of 2013 was at only 0.85 percent. Experts describe bad loans as the second major threat to the Albanian economy after public which is officially reported at 62 percent but does not include an estimated Euro 200 million in unpaid bills to private companies and loan guarantees to state-run KESH Power Corporation for electricity imports.
Non-performing loans which have reached a record more than 1 billion euro are affecting banks’ profitability so badly, making them unable or unwilling to lend more, says Seyhan Pencabligil, the chairman of the Albanian Association of Banks. The Association of Banks says the better news is that most of these bad loans are collateralized and all they need is efficient execution of collateral to liquidate the problems and revitalize the economy.
Central bank data show the 16 commercial banks operating in Albania, which are overwhelmingly foreign-owned, increased their provision coverage to 15.12 percent at the end of the first half of 2013, up from 13.57 percent at the end of 2012 and 12.19 percent in the first half of 2012. The capital adequacy ratio at the end of the first half of 2013 rose to 17 percent, up 1.34 percent compared to the same period in 2012, comfortably above the Bank of Albania minimum requirement of 12 percent.
At the end of the first half of 2013, the highest percentage in the non-performing loan portfolio belonged to sub-standard loans at 9.78 percent with borrowers having failed to pay instalments from 61 to 90 days. Second come loss loans with 9.23 percent followed by doubtful loans at 5.38 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. While substandard and doubtful loans have preserved their late 2012 levels, loss loans registered a sharp increase at the end of the first half of 2013 when they rose to 9.23 percent, up from 7.96 percent at the end of the first quarter of 2013 and 6.58 percent at the end of the first half of 2012.
Non-performing loans slightly slowed down in 2012 when they rose by only 3.8 percent year-on-year, while banks increased their profits by five times, according to the latest Bank of Albania data. Data show bad loans climbed to 22.76 percent in the final quarter of 2012, up 22.3 percent in the third quarter and 19 percent at the end of 2011.
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.
Bad loans which have trebled to 24 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.
IMF on Albania’s banking system
In its latest country report the IMF says the Albanian banking system remains resilient despite the rise in bad loans. “Despite the preponderance of European bank subsidiaries, the banking system has proved resilient, but continued vigilance is needed. Stress tests should continue to guide decisions on capital and liquidity buffers, while close cooperation with foreign supervisory authorities is key to mitigating cross-border risks. The rising level of non-performing loans is a concern and requires prompt action. Not all of the recent increase in NPLs can be ascribed to the slowing economy. Removing structural distortions in collateral executionةncluding streamlining legal processes, strengthening judicial enforcement of creditors’ rights , and increasing the efficiency of private bailiff officesءnd clearing unpaid government bills and VAT refunds would be important,” says the IMF which is also conducting a financial sector assessment in Albania after eight years.
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.
Banks profits decline
“What is more worrying for us bankers is the alarming increase in bad loans that are about a quarter of the total loans in the system. In other words, more than one billion Euro worth of loans are late in repayments by more than three months. This is affecting our profitability so negatively that we are either unable or unwilling to lend more,” said Seyhan Pencabligil, the chairman of the Albanian Association of Banks in a recent meeting with Prime Minister-designate Edi Rama and central bank governor Ardian Fullani.
The severe situation commercial banks are facing is also proved by latest Bank of Albania data. Banks’ net profits in the first half of 2013 slightly rose to 1.5 billion lek (Euro 10.5 million), up from 1.3 billion lek in the first quarter of the year, but down from 2.3 billion lek during the same period in 2012 on higher spending on provisions which in the second half of 2013 almost quadrupled to around 7.9 billion lek (Euro 55 million).
After making a profit of only 706 million lek (Euro 5 million) in 2011, the worst since the 1997-1998 turmoil fuelled by the collapse of the so-called pyramid schemes, banks’ profits returned to moderate growth rates, registering around 3.77 billion lek (Euro 26.5 million) at the end of 2012. The situation is mainly attributed to banks’ spending on provision coverage which dropped by 4 billion lek to 8.8 billion lek at the end of 2012.
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. The 2011 profits are almost 10 times lower compared to 2010 and 15 times lower compared to the peak 2007 profits of 10 billion lek (Euro 70 million).
Experts say non-performing loans, which account for a total of around 1 billion Euro, representing around 7.6 percent of the GDP, are becoming a drag on economic growth.
Online portal on property at auction launched
Property placed as collateral and put up for auction because of loan defaults has now been made available in an online portal launched by the Albanian Association of Banks. The portal (aab-ankande.com) provides detailed information on the property put up for sale and the initial sale price in the auction.
Recent changes approved by Parliament in consensus foresee that the value of collateral will be lowered by 20 percent in the first auction and by 30 percent in the second auction. This means collateral worth 1,000 euros will drop by 20 percent to Euro 800 in the first auction and by another 30 percent to Euro 560 in the second auction, a drop by 44 percent in total.
The Albanian Association of Banks had earlier warned legal steps that would require changes to the Civil Procedure Code are needed to accelerate the execution of collateral, one of the key barriers which has led to bad loans jumping to a record 24 percent and accounting for around 1 billion euros Albania’s central bank has approved some changes to the regulations on capital adequacy, the administration of credit risk and liquidity in an effort to give a boost to lending which has slowed down to the lowest historic levels.
