While net interest income remained almost unchanged at around 40 billion lek (Euro 280 million), and spending on provision coverage rose by 11 percent to 10 billion lek, it was the non-interest income (commissions and fees) that made the difference in the bank’s balance sheet
TIRANA, March 3 – Banks’ profits registered a turning point in the final quarter of 2013 driven by a slight drop in non-performing loans and a rise in non-interest income activities, according to the central bank. 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.
Bank of Albania data show the 16 commercial banks operating in Albania posted profits of around 6.5 billion lek in 2013, registering the best performance since 2010.
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.
While net interest income remained almost unchanged at around 40 billion lek (Euro 280 million), and spending on provision coverage rose by 11 percent to 10 billion lek, it was the non-interest income (commissions and fees) that made the difference in the bank’s balance sheet.
Non-interest income in 2013 rose by 6 billion lek to 5.4 billion lek (Euro 38 million), registering the highest level since 2010.
A slight drop in non-performing loans and the start of bad debt write-off have also had positive contribution, experts say.
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.
Meanwhile, the capital adequacy ratio rose to around 18 percent, up from 17.76 percent in the third quarter of 2013 and 16.17 percent in the final quarter of 2012, staying comfortably
above the BoA’s minimum requirement of 12 percent.
Central bank data show the 16 commercial banks operating in Albania, which are overwhelmingly foreign-owned, increased their provision coverage to 16.23 percent at the end of the final quarter of 2013, up from 13.57 percent in the final quarter of 2012.
At the end of the final quarter of 2013, the highest percentage in the non-performing loan portfolio belonged to loss loans at 11.45 percent with borrowers having failed to pay instalments for more than one year. Second came substandard loans with 7.55 percent followed by doubtful loans at 4.22 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 final quarter of 2013 when they rose to 11.45 percent, up from 11.2 percent in the previous quarter and 7.02 percent at the end of the final quarter of 2012.
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.”
Bad loans to be recognized as deductible expenses
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 recognizing it as deductible expenses.
The changes foresee that loss loans will be recognized as deductible expenses one year after a request has been filed by the bank for the compulsory execution of collateral and one year after court has issued an execution order on different assets the borrower may possess in case the loan is not guaranteed by collateral.
The conflict had arisen from different interpretations of the profit tax law which determined that one of the conditions for the bad debt to be recognized as deductible expenses “is having taken all possible legal action for its collection.” The tax authorities did not recognize bad loans as tax-deductible expense when banks wanted to write them off, imposing taxes on them.
Apart from lowering the rate of non-performing loans currently standing at a record 24 percent, the write-off will also unfreeze considerable funds in provision coverage for bad debt.
Central bank governor Ardian Fullani has 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.
