TIRANA, Oct. 18 – Poor demand and the banking sector’s tight lending policies continue to affect credit performance in Albania, where lending to the private sector in the year’s first half statistically registered negative growth rates, but a moderate growth rate of 5 percent when adjusted for the bad debt write-off effect and the strong appreciation of the Albanian lek against Europe’s single currency.
Tighter lending standards applied by banks are a result of non-performing loans only slightly dropping to 12.9 percent in the first eight months of this year, down from 13.2 percent at the end of 2017 and around 15 percent during the same period last year, according to Albania’s central bank.
NPLs have been on a downward trend since mid-2014, when they hit a record high of about 25 percent of total credit, but lending has been struggling to recover to positive growth rates amid tight lending standards and poor demand by both businesses and households.
The NPL decline is mainly a result of mandatory write-off of bad debt that has spent three years in the ‘loss’ category since 2015 and loan restructuring with big borrowers, but yet NPLs in Albania remain the highest in the Western Balkan region, posing a key barrier to easier lending standards and credit recovery.
Meanwhile, demand for new loans by both businesses and households remains sluggish as the economy slowly recovers to growth rates of around 4 percent, but mainly due to some large energy-related investment and heavy rainfall lifting Albania’s hydro-dependent electricity sector out of crisis, with not much effect on Albanian households.
The sluggish credit growth rates comes at a time when loan rates on both national currency and Euro-denominated credit stand at a record low due to historic low key rates by both the Bank of Albania and the European Central Bank.
Credit growth in the first half of this year was fuelled by household lending which continues to grow faster than corporate lending in the whole Western Balkan region, according to a European Commission report.
“Total lending to the private non-financial sector remained sluggish, with its decline deepening to -1.3 percent year-on-year in the second quarter. Sluggish lending to businesses as well as loan write-offs and the appreciation of the lek cause weak headline credit figures. Adjusting for the latter two factors, the average growth rate of credit to the private sector was around 5 percent year-on-year in the second quarter,” says the latest European Commission economic quarterly on EU candidate and potential candidates.
The country’s banking system is considered well-capitalized, liquid and profitable, but is currently undergoing reconstruction with two mergers and acquisitions having cut the number of commercial banks operating in the country to 14 this year, down from a decade of 16.
The NPL stock dropped by an annual 17 percent to 77 billion lek (€612 mln) in mid-2018 in an ongoing decline since early 2015 when the mandatory write-off of bad loans that have spent three years in the loss category started. The central bank says some 51 billion lek (€405 mln) has been removed from banks’ balance sheets since January 2015 in a process that has statistically kept credit at negative rates, but at moderate growth rates when adjusted for the loan write off and this year’s 10 percent strengthening of the Albanian lek against the Europe’s single currency that accounts for about half of total credit.
