The profits come at a time when non-performing loans registered a slight increase in the first quarter of this year when they climbed to 24.08 percent, up from 23.22 percent in the final quarter of 2013 and 23.99 percent in the first quarter of 2013.
TIRANA, May 6 – Fuelled by a sharp cut in spending on provisioning against losses from non-performing loans and expenditure on interest rates, banks’ profits registered a historic high for the first quarter of a year despite bad loans accounting for around a quarter of total credit.
Bank of Albania data published this week show the 16 overwhelmingly foreign-owned commercial banks operating in Albania 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 were boosted by a 25 percent reduction on spending on interest rates as deposit interest rates have almost halved during the past year. However, the record profits in the early 2014 were mainly a result of loan provisions dropping by five times to a negative 1.3 billion lek (around Euro 9 million) compared to 4.3 billion lek (Euro 30 million) in the first quarter of 2013. The negative provisions means banks transferred money from their reserves compared to the huge amounts they set aside in each previous quarter to cover anticipated loan losses.
The profits come at a time when non-performing loans registered a slight increase in the first quarter of this year when they climbed to 24.08 percent, up from 23.22 percent in the final quarter of 2013 and 23.99 percent in the first quarter of 2013.
After posting losses of around 1.3 billion lek (Euro 9 million) in the first three quarters of 2013, 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 start of bad debt write-off have also had positive contribution, experts say. With loans classified loss having reached around 11 percent or 400 million Euros, Albania’s central bank and the Finance Ministry are working on a draft law which will allow banks write off bad debt from the balance sheets by recognizing it as deductible expenses.
Bad loans dropped to 23.22 percent in the final quarter of 2013, down from 24.34 percent in the third quarter of 2013 and 22.76 percent in the final quarter of 2012.
The capital adequacy ratio dropped to 17.89 percent in the first quarter of the year, up from 17.96 percent in the final quarter of 2013 and 16.17 percent in the first quarter of 2013, staying comfortably above the BoA’s minimum requirement of 12 percent.
Central bank data show banks increased their provision coverage to 16.74 percent at the end of the first quarter of 2014, up from 16.3 percent in the final quarter of 2013 and 14.38 percent in the first quarter of 2013.
At the end of the first quarter of 2014, the highest percentage in the non-performing loan portfolio belonged to loss loans at 11.98 percent with borrowers having failed to pay instalments for more than one year, up from 7.96 percent during the first quarter of 2013. Second came substandard loans with 8.61 percent, down from 9.71 percent in the first quarter of 2013 followed by doubtful loans at 3.49 percent, down from 6.32 percent in the first 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.
While substandard and doubtful loans have registered significant decreases, loss loans have grown by almost 4 percent during the course of one year.
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 under 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 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,” says Fullani.
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 in 2012. 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.
