Report shows lending to continue weakening

TIRANA, June 11 – Albania’s banking sector is expected to undergo a cyclical weakening of lending growth in line with the more challenging overall economic outlook, according to a new Raiffeisen Research report.
A negative impact will be also felt from the decreasing exposure of Greek-owned banks in Albania as response to the difficulties their mother banks are facing. However, from a more medium-term and structural perspective, lending growth in Albania should return to healthy high single-digit or double-digit readings. The country has one of the lowest loan-to-GDP ratios in CEE and compared to SEE peers.
Lending growth in Albania developed more dynamically in 2011. For the full year 2011, loans grew by around 15% yoy, compared to a growth around 8-9% yoy in 2010. Lending growth was particularly strong in the corporate segment, with double digit yoy growth rates, while household lending expanded at a lower pace of around 3-6% yoy (with a negative reading in December).
In the 2009-2011 period, lending grew at moderate 10 to 13 percent rates annually compared to the pre-crisis levels of 30 to 50 percent.
Albanian banks are characterized by a modest loan-to-deposit ratio of 60% on average.
The economic and financial strains in SEE have nevertheless also affected the Albanian banking sector and its profitability suffered in 2011, with RoA (Return on Assets) at 0.1% and RoE (Return on Equity) at 0.8%. However, banks remain well-capitalized and have a solid liquidity position. In 2011, customer deposits increased by almost 13% yoy, showing that the banking sector continues to be trusted. The same customer behavior is also expected for 2012, in which the deposit growth rate in the three first months of the year was almost at the same levels of 2011. The European Banking Authority (EBA) regulation is going to limit the asset growth of the market’s biggest banks, which are part of Western European banking groups. However, the main concern for the banking sector remains the rapid increase of non-performing loans (NPLs,) which currently stand at around 20%. NPLs increased sharply in the last years: the NPL ratio for the sector stood at 6.6% at the end of 2008 and increased to 18.8% by year-end 2011. The main reason for this sharp increase can be found in the negative performance of the construction sector, which has been the engine of the Albanian economy for almost a decade.
In late November 2011, the Bank of Albania introduced additional regulations in order to protect the banking sector from potential spillover effects from the Greek banking sector crisis. The new regulation imposes a haircut on bank’s exposure to other banks with an external rating in the range of “BB+” to “CCC+”. The new regulation also introduced an increase of the index of liquid assets to short term liabilities from 20% to 25%. So far, this index was required to be at 20% for all currencies combined, but now it is required to be at 20% for local currency and foreign currency separately.
The Raiffeisen report says Albania is expected to post GDP growth of 2-2.5% in 2012. For an emerging economy, this is a rather weak performance and can largely be attributed to sluggish domestic demand and economic crises in main trading partners like Greece or Italy.
In SEE, Croatia has the highest GDP per capita income (EUR 14,900 at PPP, or 54% of the Eurozone average), while Bosnia and Herzegovina and Albania have the lowest average incomes (both around EUR 6,000-7,000 at PPP, or 23% of the Eurozone average).
In an earlier report, Raiffeisen singled out the Albanian 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, according to a recent Raiffeisen report.
The Raiffeisen report notes that the banking markets in the three SEE countries Albania, Bosnia and Herzegovina and Croatia are highly concentrated, with the five largest banks in these countries holding markets shares of 70- 75% of total assets. Albania was one of the few CEE economies that did not experience recession in the wake of the global financial crisis. On the back of this performance, loan growth remained in positive territory in 2009 and 2010 and the country’s financial sector did not require any public sector support. Nevertheless, weak domestic demand and a slowing external backdrop are weighing on the growth outlook.