“Stress tests carried out by the Bank of Albania show a solid situation of the loan portfolio. The Bank of Albania has the situation under control considering the appropriate collateral and provision ratios,” says governor Fullani
TIRANA, Oct. 31 – Albania’s central bank says bad loans, which have jumped by six times to around 18 percent in the past three years, do not pose a serious threat to the country’s banking system which remains well-capitalized, liquid and profitable. Speaking to reporters in the latest press conference, Bank of Albania governor Ardian Fullani, who has been nominated by the government for a second 7-year term, said non-performing loans currently at the 17-18 percent rate, are completely manageable.
“Stress tests carried out by the Bank of Albania show a solid situation of the loan portfolio. The Bank of Albania has the situation under control considering the appropriate collateral and provision ratios. Future special attention should be paid to the execution of collateral so that the lending activity in the country is eased,” said Fullani.
Describing the capitalization rate in Albania’s banking system, as above the regional and European level, Fullani guaranteed that the 16 commercial banks operating in Albania were liquid, solvent and ready to lend to the Albanian economy. According to him, keeping the public debt levels, currently close to the 60 percent ceiling, and budget deficit under control are the main two important objectives to preserve Albania’s macroeconomic stability.
Central bank surveys show the rising levels of bad loans is one of the key barriers to moderate lending rates by the banks operating in Albania which have tightened standards both for businesses and individuals. Low demand by businesses and individuals remains another factor as expectations for the country’s economy remain grim.
In its latest 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.”
The IMF says that this is partly caused by institutional and judicial weaknesses that have hampered collateral execution. While bank profits are recovering, the steep increase of nonperforming loans is a source of major concern. Banks in Albania, which are overwhelmingly foreign-owned, have become increasingly dependent on profits from T-bills. Accelerating resolution measures for problem loans (such as seizure and sale of collateral) would help in cleaning up banks’ balance sheets. The IMF staff has welcomed the introduction of the private Bailiff Officers, noting that further improvement of the court process would also be needed. IMF Staff and the BoA have also agreed on a near-term work plan which comprised stepped-up liquidity monitoring; closer monitoring of positions between parent banks and their subsidiaries/branches; and an improved contingency planning framework (supported by Fund Technical Assistance). There was agreement that early identification of additional capital needs and assurances from parent banks to meet themءs well as maintain exposureءre essential. The rising trend in non-performing loans has forced the Bank of Albania to adopt a new regulation on credit risk management determining risk assessment criteria and calculations for provision coverage.
The regulation comes at a time when latest Bank of Albania data show bad loans at the end of the second quarter of this year climbed to 16.61, up from 14.42 percent in the first quarter of 2011 and 12 percent in the second quarter of last year. Meanwhile, banks’ net profit during the first half of this year dropped to 1.123 billion lek ( USD 11.23 million, Euro 8 million), down from 3.6 billion lek (USD 36 million, Euro 25.7 million) in the first half of 2010. Latest data by Albania’s Association of Banks show bad loans reached 18 per cent of the total credit portfolio in August, the highest level to date. 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, mainly against the euro. These factors have made it harder for people to pay back the loans they took in better times.
Bank of Albania governor Ardian Fullani and Finance Minister Ridvan Bode have also reiterated the need for the quick execution of collateral to keep the Albania banking safe from the risk of rising bad loans.
