TIRANA, Jan. 22 – The 16 overwhelmingly foreign-owned banks operating in Albania expect lending standards to further tighten for both businesses and households in the first quarter of this year, according to a survey conducted by the country’s central bank.
The pessimistic early 2018 expectations come as credit struggled to return to positive growth rates in 2017 amid a declining but still high level of non-performing loans and poor demand by both businesses and households.
“Demand for new loans is expected to generally remain unchanged for businesses and slightly drop for households in the first quarter of 2018. Banks expect a slowdown both for loans denominated in the national and foreign currencies while interest rates are expected to fluctuate at the same levels,” the survey says.
Non-performing loans, the perceived macroeconomic-situation and specific sector-related problems were the main factors contributing to tighter lending standards on businesses which banks applied through reducing the amount of approved loans, stronger collateral requirements and higher interest rates on risky loans.
Meanwhile, the households’ financial situation, developments in the real estate market and non-performing loans at about 15 percent negatively affected credit to households.
High competition in the banking market, where 16 commercial banks operate, amply deposit-funded liquidity and good levels of capital adequacy ratio, measuring banks’ financial strength were the main indicators with a positive impact on lending for both households and businesses in 2017.
Credit to businesses and households failed to return to positive growth rates in the first 11 months of 2017 amid poor confidence and tight lending standards fuelled by a declining but still high level of non-performing loans, according to the central bank.
The negative growth rate was also affected by an ongoing process of bad debt write-off from banks’ balance sheets which has reduced the level of NPLs to about 14.3 percent, down from a record high of 25 percent in mid-2014 following legal changes making the removal of loans that have spent three years in the ‘loss’ category compulsory.
However, when adjusted for exchange rate effects and loan write-offs, growth of credit to the private sector recovered by an annual 3.1 percent in the third quarter of 2017, led by loans to households with a 6.8 percent increase and credit to enterprises rising by only 1.4 percent, says the European Commission in its latest quarterly report on Albania.
Lending in the national currency also increased to about half of the total at the end of 2017, compared to only slightly more than a quarter just before the onset of the global financial crisis in 2008. The increase comes in a gradual process that aims to discourage high levels of Euro-denominated loans and deposits in the country’s banking system preventing the transmission of the central bank’s easier monetary policy and placing depositors and borrowers at currency risk.
Albania’s central bank has announced it will start implementing a de-euroisation strategy in the second half of 2018 in a bid to discourage credit and savings in Europe’s single currency, currently accounting for about half of the total. The strategy involves several measures, including charging higher fees on transactions in foreign currency.
The poor credit growth in the past few years has reportedly led to an increase in informal borrowing and some banks have increased lending abroad at a time when the deposit-funded local banking system remains highly liquid and profitable.
“Despite the monetary policy easing and excess liquidity—especially in euros—banks remain reluctant to lend to corporates and are increasing foreign placements,” says the International Monetary Fund in its latest country report.
Although loan interest rates have sharply reduced as the key rate has been held at a historic low of 1.25 percent since May 2016, the average rates of 6.8 percent on lek-denominated loans and at 4.2 percent on Euro loans in late 2017 are perceived too high considering deposit rates of slightly above zero.
Albania’s Economic Sentiment Indicator, measuring both business and consumer confidence, was down by 3.9 percentage points in the final quarter of 2017, but remained above its historical average. The situation was a result of a deterioration in confidence by the key construction, trade and industry sectors as well as consumers. Early 2018 prospects remain pessimistic for both businesses and households, shows a Bank of Albania survey.
Capacity utilization rates in the country’s main industries ranged from 60 to 70 percent in the final quarter of 2017, unveiling the untapped potentials and growth being mainly-led by some large energy-related investment such as the Trans Adriatic Pipeline and Devoll Hydropower, whose investment contribution is set to conclude by the end of 2018.
The Albanian banking system has been well-capitalized, liquid and profitable during the past eight years with the Albanian-owned assets increasing their share to 11.5 percent at the end of 2016.
Commercial banks operating in Albania posted record high profits of about 17 billion lek (€125.5 mln) in the first three quarters of 2017 as non-performing loans continued their downward trend and credit returned to positive growth rates, according to the Bank of Albania.
The banks’ record high profits, almost treble compared to the same period in 2016, came at a time when deposit rates are close to zero, spending on provisioning against loss sharply dropped and net income from other activities mainly related to commission fees and foreign exchange operations increased.
