Bank profits double in 2010 despite bad loans climbing to 14%

TIRANA, Feb. 21 – Bank profits soared in 2010 almost doubling compared to 2009 when commercial banks operating in Albania saw their profits halved because of the deposit withdrawal impact at the end of the 2008. Preliminary data published by the Albanian Association of Banks show bank profits in 2010 climbed to 6.7 billion lek (48 million euros), up from 3.5 billion lek (25 million euros) in 2009 despite rising percentage of non-performing loans.
Data show bad loans climbed to 14 percent at the end of 2010, up from 10.5 percent at the end of 2009, slightly recovering from November 2010 when they reached a record 14.4 of the total loan portfolio.
Meanwhile, total banking assets increased to 990 billion lek up from 886 billion lek at the end of 2009 with lending increasing by 9 percent and deposits by 12 percent.
Latest central bank data show bad loans continued growing rapidly even in the third quarter of 2010, 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. Problematic or non-performing loans climbed to a record 13.5 percent of the total portfolio at the end of the September 2010, 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 in 2010, 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 had 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.
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. 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 2010 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.
Although the Albanian banking system overcame the global financial crisis effects almost unaffected, government approved last December legal changes to control the soundness of the banking system, adopting international accounting standards to control loan provisions, which Finance Minister Ridvan Bode said were twice tighter compared to the current Bank of Albania regulations. According to him, this measure will make bank directors and owners more cautious and responsible when giving loans forcing them to demand higher collateral and eliminate recognition of deductible expenses for provisions above international standards.
The measure, expected to further tighten lending standards came after bad loans hit a record 13.5 percent at the end of September 2010.