BoA warns bad loans threatening banking system

TIRANA, Oct. 13 – The need to stabilize and improve the credit quality is the main challenge the Albanian banking sector currently faces, the Bank of Albania said on Wednesday after its Supervisory Council approved the financial stability report for the first half of this year.
In a statement, the central bank said that although the financial system and banking sector situation at the end of last June was stable, problematic loans increased to 12.2 percent of the total portfolio at the end of the first half of 2010.
“As a result of increased credit risk perception, the banking system’s annual credit growth rate dropped, the loans’ average maturity was cut, further reducing consumer loans. Reserve funds on credit risk protection increased by 20 percent at the end of the first half, accounting for 52.5 percent of the problematic loans,” said the central bank in a statement.
Bad loans continued increasing even during the second quarter of this year climbing to 12 percent of the total loan portfolio, up from 11.45 in the first quarter, according to Bank of Albania statistics.
Lost loans increased to 3.5 percent, up from 3.2 percent in the previous quarter and 2.1 percent during the same period in 2009. Meanwhile, the number of doubtful loans also increased to 3.1 percent, up from 2.0 percent in the previous quarter and 2.4 percent in Q2 2009.
The percentage of substandard loans registered a slight decrease of 0.1 percent dropping to 5.3 percent of the total loans but remained high compared to Q2 2009 when it was 4.2 percent.
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 depreciation of the local currency, mainly against the euro. These factors have made it harder for people to pay back the banks for loans they took in better times.
Gross problematic loans at the end of 2009 increased to 10.48 percent of the total loans, up from 6.64 percent at the end of the previous year. The report says the quality of credit portfolio will continue deteriorating, not only because of internal factors but also because of the crisis in Greece, where thousands of immigrants working in agriculture and tourism have been hit, affecting the remittances they send home.
Central bank data show the banking system’s net revenue at the end of the second quarter more than doubled reaching 3.6 billion lek, up from 1.55 billion in the previous quarter and 660 million in the second quarter of 2009.