The spike in bad loans led to banks’ net profits dropping to 1.3 billion lek during the first three quarters of this year compared to around 4 billion lek during the same period last year, according to central bank statistics
TIRANA, Nov. 7 – 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 continued their rising trend even in the third quarter of this year while banks’ profits dropped by three times y-o-y during the first nine months of this year.
Official Bank of Albania data published this week show non-performing loans climbed to 18.03 percent in the third quarter of 2011, up from 16.61 percent in the second quarter and 13.51 in the third quarter of 2010. The spike in bad loans led to banks’ net profits dropping to 1.3 billion lek during the first three quarters of this year compared to around 4 billion lek during the same period last year, according to central bank statistics.
Some 16 commercial banks, which are overwhelmingly foreign-owned, operate in the Albanian banking system.
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 8.77 percent whose holders have failed to pay them off from 61 to 90 days. Second come lost loans at 5.11 percent followed by doubtful loans at 4.15 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 10.21 percent in the third quarter of 2011, up from 9.68 percent in the previous quarter and 8.16 percent year-on-year.
Data show banks spent 11.2 billion lek (USD 112 million) in provision coverage during the first three quarters of this year, up from 10.5 billion lek during the same period last year, accounting for 56 percent of their gross revenue.
According to the Association of Albanian Banks, non-performing loans account for a total of 96 billion lek, or 960 million dollars.
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.
