Two Bank of Albania interventions in the monetary policy, lowering the key interest rate by 0.5 percent in the final quarter of 2011 failed to either ease lending standards or lower rates for lending in the national currency, lek
TIRANA, Feb. 7 – With bad loans standing at a record high, commercial banks operating in Albania continued applying tighter lending standards for the third quarter in row despite a slight increase in demand for new loans by businesses in the final quarter of 2011. At 18 percent of the total at the end of Sept. 2011, bad loans are likely to have undergone another increase considering the ongoing rising trend which has seen them grow by six times during the past three years of global crisis. While new Bank of Albania data on bad loans for the final quarter of 2011 have not been published yet, the crisis impacts the country’s key economic sectors are facing and the fragile macroeconomic situation with GDP growth slowing down and price levels remaining high especially for basic products, are making banks more and more hesitant to issue to new loans. Individuals are also facing tight lending standards as their financial situation worsens.
The pessimistic situation with current and expected lending are revealed in the latest central bank survey measuring credit in the final quarter of 2011 and expectations for early 2012. Furthermore, the banks’ pessimistic expectations about the first quarter of this year, makes lending a minor contributor to economic recovery in a harsher 2012, when international financial institutions such as the IMF have forecast only a mere 0.5 percent GDP growth rate for Albania, compared to government’s overoptimistic 4.3 percent. Exports which in 2011 rose by 20 percent remain the only hope to keep the Albanian economy growing along with government spending which during the past few months has been forced to spend huge amounts on electricity imports.
Meanwhile, two Bank of Albania interventions in the monetary policy, lowering the key interest rate by 0.5 percent in the final quarter of 2011 failed to either ease lending standards or lower rates for lending in the national currency, lek.
At 18 percent, Albania’s bad loan portfolio is among the highest in regional EU candidate and potential candidate countries, lower only compared to Serbia and Montenegro’s at around 20 percent each. However, the country’s banking system continues remaining safe and profitable.
The spike in bad loans led to banks’ net profits dropping to 1.3 billion lek during the first three quarters of 2011 compared to around 4 billion lek during the same period in 2010, according to central bank statistics. Some 16 commercial banks, which are overwhelmingly foreign-owned, operate in the Albanian banking system.
During the final quarter of 2011, businesses’ demand for new loans registered a slight increase, especially for big enterprises employing more than 50 workers, accounting for only 1 percent of total businesses but employing 42 percent of the total in the private sector. Meanwhile, individuals who are facing rising cost of living and lower revenues are applying less for home loans and more for consumer credits.
The liquidity situation and competition in the banking system continued to ease lending standards for businesses, although to a smaller extent compared to the previous second quarter, says the report. The banks’ tighter policies are being imposed mainly through increasing the margin for credit risk and rising demand for collateral.
With the key interest rate at a record low historical rate of 4.5 percent following another 0.25 cut last January, banking experts expect an increase in lending in the national currency, lek, and a cut in loans approved in the foreign currency, currently holding around 70 percent of the total credit portfolio. The data revealed from the lending survey are in line with the latest Bank of Albania survey showing confidence for key construction and services sectors have dropped to the lowest ever historical rates.
Problems with power supply, corruption, informal economy, law and order and the tense domestic political climate are reported to have negatively contributed to the business performance in the fourth quarter of 2011 and expectations for 2012.
According to latest Bank of Albania data, credit growth accelerated in the third trimester to 13.3 percent, up from 11 percent in the second quarter, standing far below the pre-crisis levels of 30 to 50 percent Meanwhile, deposits grew by some 14 percent year on year in the third quarter, reflecting consumers’ saving trend and pessimism about their economic future as domestic consumption remains at low levels.
However, a recently published Raiffeisen International report has singled out Albania’s banking sector as one of the few in the South-East European region that could register double-digit loan and asset growth for the 2011-2015 period. “The smaller Albanian banking sector seems to be the only banking sector in the SEE that might offer double-digit loan and asset growth rates over the forecast horizon (2011-15). Moreover, the need for additional deposit collection is limited, given a loan-to-deposit ratio of 60 percent in Albania,” says Raiffeisen Research in its latest report covering 14 banking sector markets from the central and Eastern European Countries.
