Banks expect lower interest rates on lek-loans

TIRANA, May 13 – Banks expect a slight increase in lending in the national currency and interest rates on lek-denominated loans to further drop in the second quarter of 2014, according to a survey by the country’s central bank. Meanwhile, lending in the foreign currency, which is dominated by loans in Euro at around 60 percent of total credit, is expected to slightly drop and interest rates drop at a slower pace.
Average interest rates on lek-denominated loans registered a historic low of 7.96 percent in March 2014, down from 9.14 percent in February 2014 and 11.14 percent in March 2013, positively reflecting the cut of the key interest rate to a historic low of 2.75 percent.
Meanwhile, interest rates on Euro-denominated loans also slightly dropped to 6.93 percent, down from 6.94 percent in February 2014 and 6.85 percent in March 2013.
Data show lending to the economy shrank by 1.25 percent in 2013, registering the first decline in the past five global crisis years. After growing by 30 to 50 percent annually in the pre-crisis years, lending grew by an average of 10 percent from 2009 to 2011 but sharply decelerated to 2.36 percent in 2012 as bad loans hit more than 22 percent.
The situation reflects a critical situation in the banking system which remains liquid and well-capitalized but faces a record high of around 25 percent in non-performing loans. Apart from poor demand for new loans, tight lending standards applied by banks and high interest rates have also influenced on lending which has been at moderate negative growth rates since the second half of 2013.
Since September 2011, the Bank of Albania has cut the key interest rate by 2.5 percent to 2.75 percent in several consecutive interventions, but the moves had only been reflected on lower T-bill yields and interest rates for lek-denominated deposits. Yields on T-bills, the key instrument of government’s domestic debt, have dropped to 3.5 percent, almost half of the 6.6 percent in January 2013.
Differently from loans, 63 percent of which are issued in foreign currency, mainly in Euro, the situation with deposits appears more balanced with lek deposits accounting for 52 percent of total deposits.
Lending in the national currency lek has gained around 8 percentage points in the past four years and now accounts for one third of the total credit portfolio compared to only a quarter just before the onset of the global financial crisis in 2008. Data published in the latest BoA supervision report show lending in the national currency climbed to 35.5 percent at the end of 2012, compared to only 27.4 percent at the end of 2008.
In late February 2013 Albania’s central bank cut the key rate by another 0.25 percent to 2.75 percent while the European central bank has kept the key rate unchanged at 0.25 percent.