Banks post historic high of 80 million in profits despite bad loans hitting 25%

The record high profits come at a time when non-performing loans rose to 24.88 percent in the third quarter of 2014, up from 24.06 percent in the second quarter of 2014 and 24.34 percent in the third quarter of 2013.
TIRANA, Nov. 6 – Banks’ profits surged in the first three quarters of 2014 despite bad loans climbing to a record high of 25 percent for the past 15 years. Central bank data shows the 16 overwhelmingly foreign-owned banks operating in Albania posted net profits of 8.7 billion lek (Euro 61 million) in the first three quarters of this year, up from a negative 1.3 billion lek during the same period last year on a sharp reduction on provisioning on non-performing loans and lower spending on interest rates as deposit interest rate stand at a record low.
The record high profits come at a time when non-performing loans rose to 24.88 percent in the third quarter of 2014, up from 24.06 percent in the second quarter of 2014 and 24.34 percent in the third quarter of 2013.
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 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 17.59 percent in the third quarter of the 2014, down from 17.76 percent in the third quarter of 2013, staying comfortably above the BoA’s minimum requirement of 12 percent.
Central bank data show banks increased their provision coverage to 17.2 percent at the end of the second quarter of 2014, up from 16.3 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 just overcome moderate negative growth rates of around 2 percent, reached a historic high of 25 percent in the third quarter of 2015.
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.
At the end of the third quarter of 2014, the highest percentage in the non-performing loan portfolio belonged to loss loans at 12.05 percent with borrowers having failed to pay instalments for more than one year, up from 11.45 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 8.32 percent, down from 7.55 percent at the end of the third quarter of 2013 followed by doubtful loans at 4.51 percent, up from 4.94 percent in the third 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 financial system stability report, the IMF says 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.