TIRANA, Oct. 5 – Commercial banks operating in Albania continued to increase their lending abroad in the first half of this year when credit to domestic businesses and households slightly dropped, the central bank says in its financial stability report for the first half of this year.
Central bank data shows lending to non-residents increased by an annual 15.5 percent at the end of the first half of 2017 when it reached a total of 69 billion lek (€509 million), accounting for 11.6 percent of total credit at the end of June 2017.
By contrast, credit to local businesses was down by 5 percent year-on-year and slightly grew by 3.7 for local residents. The decline in credit to local businesses was also a result of the ongoing process of compulsory write-off of bad debt that has spent three year in the ‘loss’ category of banks’ balance sheets, statistically keeping real credit at lower rates.
The central bank, which has earlier warned of legal risks associated to lending abroad, says 85 percent of credit to non-residents goes to businesses and the overwhelming majority of it is denominated in Euro.
Loans to non-residents are mainly long-term, but only of a few number of the 16 commercial banks operating in Albania have been currently engaged in these kind of operations.
Non-performing loans held by non-residents are quite minimal currently, at only 3.5 percent or a total of €18 million, but since this category of credit is relatively new in the Albanian banking system, the central bank warns the assessment of its quality requires continuous attention and monitoring.
“Mainly awarded in the past few years and relatively new, this kind of credit contains some specifics related to the ability of these banks to properly evaluate the risk of borrowers operating under foreign jurisdiction and that’s why its quality assessment requires continuous attention and monitoring,” the Bank of Albania has earlier warned.
Experts hint credit to non-residents is mainly being provided in regional countries, especially in neighbouring Kosovo where euro-denominated loan rates offered by commercial banks in Albania seem more favourable.
The central bank says it will continue applying measures aimed at reducing non-resident investments through higher capital requirements in a bid to promote domestic credit which is held back by NPL-triggered tight lending standards and poor demand by both businesses and households despite loan rates having sharply dropped as the key rate stands at a historic low of 1.25 percent.
With high deposit-funded liquidity and poor demand for new loans, local banks have also increased interbank and government security investments abroad.
Lending in the first half of this year, mainly grew in the national currency, which now accounts for about 43 percent of total credit, compared to only about a quarter just before the onset of the global financial crisis in 2008. The situation unveils the country’s declining but still high euroization rate, a barrier preventing the transmission of the central bank’s easier monetary policy which has led the country’s central bank to undertake de-euroisation measures for next year.
Since 2015, when banks were forced to write off non-performing loans that have spent three years in the ‘loss’ category, bad debt removed from banks balance sheets has increased to 43.3 billion lek (€320 million), of which 4 billion lek (€30 million) was written off in the first half of this year.
The bad debt write off as well as loan restructuring with large borrowers led to non-performing loans dropping to a 6-year-low of 15.6 percent at the end of June 2017, down from a record high of 25 percent in mid-2015.
Albania’s banking system remained liquid, well-capitalized and highly profitable in the first half of this year, despite credit struggling to return to positive growth rates.
