Non- performing loans in the third quarter of the year reached 24.34 percent, slightly down from 24.39 percent in the first half of the year and 22.7 percent in the third quarter of 2012
By Ervin Lisaku
TIRANA, Nov. 15 – Affected by credit growth having plunged to negative growth rates and bad loans at a record 25 percent, the 16 commercial banks operating in Albania are facing their worst ever situation since the collapse of the so-called pyramid investment schemes in 1997. Central bank data shows banks’ net income in the first three quarters of this year registered a loss of around 1.3 billion lek (around Euro 9 million), the worst performance since 1998 soon after the turmoil triggered by the collapse of the pyramid investment schemes when the 10 banks operating in Albania at that time reported losses of around 3.3 billion lek (Euro 23 million).
Bank of Albania data show banks’ profits during the first three quarters of this year registered a loss of 1.27 billion lek, compared to profits of 1.5 billion lek in the first half of the year and 3.14 billion lek (Euro 22 million) in the first three quarters of 2013.
The situation was a result of soaring spending on provision coverage for bad loans which rose to 14 billion lek (Euro 98 million) in the first three quarters of the year, up from 7.8 billion lek in the first half of the year and 4.8 billion lek in the first three quarters of 2012.
Experts say the losses are also a result of banks having started to write-off bad loans. Central bank governor Ardian Fullani has earlier said the new measure will free banks, representing more realistic balance sheets and giving a new impetus to lending. The central bank estimates that writing off loss loans whose holders have failed to pay for more than 1 one year clears the banks’ balance sheet from non-performing assets which deform the structure and quality of the balance sheet.
Non- performing loans in the third quarter of the year reached 24.34 percent, slightly down from 24.39 percent in the first half of the year and 22.7 percent in the third quarter of 2012.
The capital adequacy ratio in the third quarter of the year rose to 17.76 percent, up from 17 percent in the second quarter and 15.85 percent in the third quarter of 2012, staying comfortably
above the BoA’s minimum requirement of 12 percent.
“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,” says Seyhan Pencabligil, the chairman of the Albanian Association of Banks. The Association 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.
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, banks’ profits returned to moderate growth rates, registering around 3.77 billion lek (Euro 26.5 million) at the end of 2012.
Banks’ profits in 2011 registered their lowest level during the past 12 years as bad loans reached a historical 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 were 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.
Bad loans end rising trend
Data shows 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 third quarter of the year registered negative growth rates of 1.8 percent. Non- performing loans in the third quarter of the year reached 24.34 percent, slightly down from 24.39 percent in the first half of the year and 22.7 percent in the third quarter of 2012, according to BoA.
Experts describe bad loans as the second major threat to the Albanian economy after public debt which is officially reported at 62 percent but does not include an estimated Euro 200 million in unpaid bills to private companies, VAT refunds, and loan guarantees to state-run KESH Power Corporation for electricity imports.
Central bank data show the 16 commercial banks operating in Albania, which are overwhelmingly foreign-owned, increased their provision coverage to 16.29 percent at the end of the third quarter of 2013, up from 15.12 percent at the end of the first half of 2013 and 13.11 percent in the first three quarters of 2012.
At the end of the first half of 2013, the highest percentage in the non-performing loan portfolio belonged to loss loans at 11.2 percent with borrowers having failed to pay instalments for more than one year. Second come substandard loans with 9.1 percent followed by doubtful loans at 4.04 percent. Under the BoA regulation, loans are considered doubtful when borrowers have not been able to pay for 180 days and substandard when payment has been delayed from 61 to 90 days.
While substandard and doubtful loans have almost preserved their late 2012 levels, loss loans registered a sharp increase at the end of the third quarter of 2013 when they rose to 11.2 percent, up from 9.23 percent in the previous quarter and 7.02 percent at the end of the third quarter of 2012.
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, 19 percent in 2011 and 22.76 percent at the end of 2012.
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.
Recent changes approved by Parliament in consensus foresee that the value of seized 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.
IMF on bad loans
In its latest country report on Albania, the International Monetary Fund warns continued supervisory vigilance is essential, given the high non-performing loans (NPL) level and weak profitability. “Strict monitoring of NPLs, enforcement of loan provisioning, and ensuring that banks respond promptly to capital shortfalls are essential,” says the IMF.
A strong rebound in credit would be contingent on progress in restructuring troubled corporate balance sheets. The high NPLs are indicative of the state of disrepair of corporate balance sheets, and partly explain banks’ high risk aversion in lending. Credit would continue to be weak till there is improvement on this front, says the IMF. Government bond yields have declined in 2013 despite the deterioration in public finances, reflecting the easing of monetary policy, low inflation and risk averse domestic banks that have opted to buy government paper rather than lend to the private sector. NPLs have continued to rise to nearly 24 percent of all loans, while the banking sector remains vulnerable to shocks emanating from parent banks abroad, including changes in their regulatory environment.
The IMF mission welcomes the authorities’ recent efforts to prevent delays in court cases and facilitate collateral execution, but encourages them to pursue additional measures to support the cleanup of bank balance sheets, including loan restructurings, removal of tax distortions, and facilitating out-of-court settlement. The mission welcomed the authorities’ intention to participate in the Financial Sector Assessment Program (FSAP).
