With loans classified loss having reached around 12 percent or an estimated 500 million Euros, a new law allowing banks to write off bad debt from their balance sheets by recognizing it as deductible expenses is having positive impacts, unfreezing considerable funds in provision coverage for bad debt.
TIRANA, Aug. 5 – The 16 overwhelmingly foreign-owned banks operating in Albania continued improving their balance sheets even in the second quarter of 2014 fuelled by a sharp cut in spending on provisioning against losses from non-performing loans which during the past year have remained unchanged at 24 percent after growing by four times in the past five global crisis years.
Bank of Albania data published this week show banks’ profits recovered to 5.4 billion lek (Euro 38.3 million) in the first half of 2014, up from 1.5 billion lek (Euro 10.6 million) during the same period last year as non-performing loans slightly dropped to 24.06 percent, down from 24.08 percent in the first quarter of the year and 24.39 percent at the end of the first half of 2013.
In the first quarter of the year, banks posted net profits of around 4.5 billion lek (Euro 31.6 million), up from 1.3 billion lek (Euro 9.3 million) in the first quarter of 2013, registering a historic high for the first quarter of a year.
Banks’ profits in the first half of this year were boosted by a sharp cut in spending on loan provisions which dropped to a mere 445 million lek (Euro 3.1 million), down from 7.8 billion lek (Euro 55.5 million) during the first half of 2013.
Spending on interest rates also dropped by 30 percent to 12.8 billion lek (Euro 90 million) as interest rates on both lek and euro-denominated deposits stand at historic lows.
The start of bad debt write-off has also had a positive contribution to banks’ balance sheets although it is temporarily keeping credit at moderate negative growth rates of around 2 percent, experts say. With loans classified loss having reached around 12 percent or an estimated 500 million Euros, a new law allowing banks to write off bad debt from their balance sheets by recognizing it as deductible expenses is having positive impacts, unfreezing considerable funds in provision coverage for bad debt.
Banks’ profits unexpectedly recovered to 6.5 billion lek (Euro 46 million) at the end of 2013 as bad loans dropped by 1 percent while non-interest income rose by five times.
In 2012, banks registered profits of 3.7 billion lek (Euro 26 million) compared to 706 million lek (Euro 5 million) in 2011, 6.7 billion lek (Euro 47 million) in 2010 and 3.5 billion (Euro 24.5 million) in 2009 in the onset of the global crisis when the banking system was affected by panic deposit withdrawals fuelled by concerns about the health of the Greek banking system in late 2008.
The capital adequacy ratio dropped to 17.52 percent in the second quarter of the 2014, down from 17.89 percent in the first quarter of the year and 17 percent in the second quarter of 2013, staying comfortably above the BoA’s minimum requirement of 12 percent.
Central bank data show banks increased their provision coverage to 17.19 percent at the end of the second quarter of 2014, up from 15.12 percent in the second quarter of 2013.
Non-performing loans
Non-performing loans have more than trebled in the past five global crisis year, becoming a drag on economic growth and lending which has been plunged into negative growth rates since the second half of 2013.
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, 22.76 percent in 2012 and 23.22 percent in 2013.
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.
While substandard and doubtful loans have registered significant decreases, loss loans have grown by almost 3 percent during the course of one year.
At the end of the second quarter of 2014, the highest percentage in the non-performing loan portfolio belonged to loss loans at 12.28 percent with borrowers having failed to pay instalments for more than one year, up from 9.23 percent during the same period last year and 2 percent in the onset of the global financial crisis in 2009. Second came substandard loans with 7.56 percent, down from 9.78 percent at the end of the first half of 2013 followed by doubtful loans at 4.22 percent, down from 5.38 percent in the second quarter of 2013.
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.
In its latest country report on Albania, the International Monetary Fund warns 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. 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.”
Albania’s banking system remains well capitalized, liquid and provisioning appears to be adequate but high financial euroization, low profitability and non-performing loans being the highest in the region are a significant risk to the banking system, says the IMF in its financial system stability report after an IMF mission visited Albania in late 2013 at a request by Albanian authorities.
Banks represent over 90 percent of total financial system assets, equivalent to about 90 percent of GDP. The largest five banks hold about three-quarters of system assets and deposits.
Subsidiaries of foreign banks (which include four of the top five banks, including from Austria, Greece, Italy, and Turkey) represent about 90 percent of total banking sector assets.
