Banks’ net profits at the end of 2011 were only 706 million lek, the worst level since the 1997-1998 pyramid investment schemes when banks registered negative balance sheets
By Ervin Lisaku
TIRANA, Feb. 29 – Banks’ profits in 2011 registered their lowest rate during the past 12 years as bad loans reached a historical high record of around 19 percent, according to statistical reports published by the Bank of Albania this week. Data show banks’ net profits at the end of 2011 were only 706 million lek (Euro 4.95 million), the worst level since the 1997-1998 pyramid investment schemes when banks registered negative balance sheets. The 2011 profits are almost 10 times lower compared to 2010 and 15 times lower compared to the peak 2007 profits of 10 billion lek (Euro 70 million). The sharp rise in bad loans at an official 18.94 percent of the total at the end of 2011, three times higher compared to the end of 2008, and delays in executing collateral are the key reasons for the poor performance in the banking system.
Considered as the second major threat to the Albanian economy after the public debt, currently at the legal ceiling of 60 percent of the GDP, bad loans rose by 5.3 percent y-o-y in the fourth quarter of 2011.
Detailed BoA data show that at the end of September 2011, the highest percentage in the non-performing loan portfolio belongs to sub-standard loans at 9.33 percent whose holders have failed to pay them off from 61 to 90 days. Second came lost loans at 5.67 percent followed by doubtful loans at 3.94 percent. Under the BoA regulation, loans are considered doubtful when borrowers have not been able to pay them off for 180 days from their final deadline and lost when the payment has been delayed by more than one year.
Facing increased risk, banks’ increased their provision coverage to 10.77 percent up from 10.21 percent in the third quarter of 2011, and 8.17 during the fourth quarter of 2010.
According to the Association of Albanian Banks, non-performing loans account for a total of 96 billion lek, or 960 million dollars.
Some 16 commercial banks, which are overwhelmingly foreign-owned, operate in the Albanian banking system.
Bad loans, which the central bank and financial experts describe as the key risk to Albania’s banking sector, have more than doubled during the past couple of years. 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.
At the end of 2010, the net profit of the 16 commercial banks operating in Albania almost doubled to 6.7 billion lek (48 million Euros), up from 3.5 billion lek at the end of 2009 when banks saw their profits halved because of the deposit withdrawal impact at the end of the 2008.
Banking sector experts say there are a number of causes that have led to strong growth of bad loans. They include shrinking family incomes, 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.
In its latest country report, the IMF says Albania’s banking system has been resilient, but declining asset quality is a concern. “Notwithstanding a steep decline in deposits and increase in problem loans, banks remained generally sound throughout the crisis with adequate capital; recently profits have begun to recover as well. However, nonperforming loans rose from 3 percent pre-crisis to a record high of 15 percent in April 2011, relatively high levels even in the region, and a major concern for the banking sector.”
Bank of Albania governor Ardian Fullani and Finance Minister Ridvan Bode have reiterated the need for the quick execution of collateral to keep the Albania banking safe from the risk of rising bad loans.
A newly adopted regulation on credit risk management foresees that the provision coverage ratio is not less than 20 percent for sub-standard loans, not less than 50 percent for the doubtful category and 100 percent for the loss category.
