Non-performing loans account for a total of around 1 billion dollars, representing around 7.6 percent of the GDP and becoming a drag on economic growth
TIRANA, May 17 – Banks’ profits trebled in the first quarter of 2012 despite bad loans hitting a historical record high of 20 percent. Latest Bank of Albania data show the 16 commercial banks operating in Albania, which are overwhelmingly foreign-owned, registered a net profit of 1.95 billion lek (Euro 13.7 million) in the first quarter of 2012, up from only 668 million lek (Euro 4.7 million) in the first quarter of 2011. Data show this is the best first quarter performance since 2008 when banks’ profits registered 2.2 billion lek.
Banks’ improved performance was a result of net revenues doubling to 2.3 billion lek and expenditure on provision coverage at only 28 million lek compared to 3.9 billion lek during the first quarter of 2011.
Central bank data show non-performing or bad loans climbed to 20.07 percent at the end of the first quarter of 2012, up from 14.42 percent during the same period last year. However, the capital adequacy ratio, an indicator measuring banks’ stability, increased to 15.92 percent, up from 14.64 percent in the first quarter of 2011.
The highest percentage in the non-performing loan portfolio belongs to sub-standard loans at 9.9 percent whose holders have failed to pay instalments from 61 to 90 days. Second come loss loans at 6.1 percent followed by doubtful loans at 4.07 percent. Under the BoA regulation, loans are considered doubtful when borrowers have not been able to pay for 180 days and lost when the payment has been delayed by more than one year.
Facing increased risk, banks’ increased their provision coverage to 11.39 percent, up from 9.11 percent in the first quarter of 2011. Non-performing loans account for a total of around 1 billion dollars, representing around 7.6 percent of the GDP and becoming a drag on economic growth.
Experts say they are considered the second major threat to the Albanian economy after the public debt, currently at the legal ceiling of 60 percent of the GDP.
In its latest country report, the IMF says Albania’s banking system has been resilient, but declining asset quality is a concern.
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 and 19 percent in 2011.
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.
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 BoA. 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.
A newly drafted law by Albania’s central bank and the Association of Banks on the acceleration of procedures for the execution of collateral, a key barrier which has directly influenced on rising bad loans and falling banks’ profits as a result, is expected to bring positive changes. The draft law which has already been submitted to government foresees changes to the Civil Code requiring a qualified majority of 3/5 of votes.
Other measures envisaged in the draft law are the establishment of a special court section dealing with the execution of collateral and an amendment to the law on registration of real estate because of problems with the real ownership of property put up as collateral.
Presenting the Bank of Albania annual report at the parliamentary economy committee, Bank of Albania governor Ardian Fullani said Albania’s high non-performing loan (NPL) portfolio was also a result of the very conservative methods used for their classification.
“If Albania used the same classification as in the region, bad loans would stand at 9.5 percent from 19 percent of the total currently,” said Fullani. The Albanian system classifies as non-performing loans even substandard loans whose holders have failed to pay instalments from 61 to 90 days at a time when in regional countries only doubtful and lost loans are taken into consideration. Banks in Albania also do not include in calculating NPLs collateral coverage, which according to Fullani stands at 85 percent.
At around 20 percent in early 2012, Albania’s non-performing loan portfolio is among the highest in Central, Eastern and Southeastern Europe (CESEE), becoming a drag on economic growth, according to a recent report issued by the European Bank Coordination Initiative. “In Albania, borrowers have encountered serious delays in receiving VAT refunds and payments for goods and services provided to the government. While the exact amount of these payments is currently unknown, anecdotal evidence indicates that there is a direct correlation between this slowdown and increasing NPLs,” says the report.
Latest Bank of Albania data show the construction sector leads the NPL portfolio with 29.6 percent, followed by trade with 21.3 percent and agriculture with 13.6 percent. In December 2011, non-performing loans for the real estate sector climbed to 12.55 percent from 9 percent a year ago. The NPL rate for individuals is estimated at 15.35 percent compared to 20 percent for businesses.
