The IMF says the banks’ high exposure to government bonds put them at risk of sizeable losses in case of a sovereign debt re-pricing at a time when their balance sheets have deteriorated as a result of a rapid increase of non-performing loans
TIRANA, March 19 – Albania’s banking system remains well capitalized, liquid and provisioning appears to be adequate but high financial euroization, low profitability and non-performing loans being the highest in the region are a significant risk to the banking system, says the IMF in its financial system stability report after an IMF mission visited Albania in late 2013 at a request by Albanian authorities.
Foreign, mostly euro-denominated loans stood at 61 percent of total credit outstanding in July 2013, down from 64 percent a year earlier, while the share of foreign currency-denominated deposits in the total deposit stock fell from 49 percent to 47 percent in the same period. “Such high euroisation inhibits monetary policy’s effectiveness and could expose banks to currency mismatches or indirect credit risks. It is therefore a potential source of instability in the financial system,” says the European Commission in its 2013 progress report on Albania.
The IMF with whom the Albanian government has signed a new three-year deal assisted by a Euro 331 million soft loan, says the banks’ high exposure to government bonds put them at risk of sizeable losses in case of a sovereign debt re-pricing at a time when their balance sheets have deteriorated as a result of a rapid increase of non-performing loans.
“Large holdings of government securities amidst shallow markets present systemic risk for banks and investment funds, and the government depends on regular rollover of debt by banks. High financial euroization is another source of vulnerability,” says the IMF.
“One-third of bank assets consist of government securities, and these holdings represent two-thirds of total government debt. This financial interdependence represents systemic risks for banks, which are vulnerable to changes in the value of longer-term debt securities, and for the government, which depends on regular rollover of debt by banks.”
The report says the systemic risk in the financial system has further increased with the recently established investment funds which it describes as inadequately supervised and regulated and facing liquidity risks.
Vulnerabilities in banks are confirmed by stress tests. In extreme macroeconomic scenarios, banks suffer simultaneous losses from credit, market, and sovereign risks, and at least six banks (representing 21 percent of the assets of the banking system) become undercapitalized, although
the aggregate capital shortfall is limited. Sensitivity tests also indicate that a lek depreciation would deteriorate the quality of loan portfolios and that credit risk is exacerbated by the high concentration of loan portfolios. Liquidity stress tests confirm that banks are amply liquid, however, and are able to confront large deposit withdrawalsحitigating systemic liquidity risks somewhat.
Direct contagion risk through bilateral domestic interbank exposures is also limited.
The IMF advises the Albanian government to intensify efforts in tackling non-performing loans (NPLs) which have climbed to a record 24 percent, reduce the systemic risks arising from the large holdings of government securities by banks and investment funds, address the risks of pervasive use of the euro and improve the supervision of non-banks.
Banks, which are overwhelmingly foreign-owned, represent over 90 percent of total financial system assets, equivalent to about 90 percent of the GDP.
The NPL ratio has increased from 3.4 percent at end-2007 to more than 24 percent in September 2013 (or 9.1 percent net of provisions). This reflects economic weakness and government arrears (recently estimated at more than 5 percent of GDP), but also the consequences of a lending boom prior to the global financial crisis, when deficiencies in supervision allowed underwriting standards to weaken. Albania’s central bank has estimated that government arrears may have contributed 5-6 percentage points to the NPL ratio.
Banks’ profits registered a turning point in the final quarter of 2013 driven by a slight drop in non-performing loans and a rise in non-interest income activities, according to the central bank. After posting losses of around 1.3 billion lek (Euro 9 million) in the first three quarters of 2013, banks’ profits unexpectedly recovered to 6.5 billion lek (Euro 46 million) at the end of 2013 as bad loans dropped by 1 percent while non-interest income rose by five times.
Bank of Albania data show the 16 commercial banks operating in Albania posted profits of around 6.5 billion lek in 2013, registering the best performance since 2010.
