After panicky withdrawing around 10 percent of total deposits (Lek 62.7 bln, Euro 440 mln) in the final quarter of 2008 and in early 2009, Albanians have returned to deposits and cut down on credit seeing less investment opportunities in a saturated market where consumption is declining
By Ervin Lisaku
TIRANA, March 7 – While domestic consumption and investments remain sluggish preventing the country’s economic recovery, Albanians continue depositing considerable amounts in banks uncertain about their futures and fearing a possible escalation of the crisis. Meanwhile, lending continues growing moderately at slightly more than 10 percent compared to the pre-crisis levels of 30 to 50 percent. A sharp rise in bad loans, tighter lending standards and falling demand by both businesses and consumers are the reasons behind the moderate credit growth.
After panicky withdrawing around 10 percent of total deposits (Lek 62.7 bln, Euro 440 mln) in the final quarter of 2008 and in early 2009 in the face of spillovers from instability of global financial markets, Albanians have returned to deposits and cut down on credit seeing less investment opportunities in a saturated market where consumption is declining for consecutive quarters as shown by INSTAT data on retail sales.
The latest central bank data show deposits grew by around 193 billion lek (Euro 1.35 bln) to 881.3 billion lek in 2011, registering an 11.7 percent increase, lower compared to the 18.5 percent growth rate in 2010, but better compared to 2008 and 2009 at 2.2 percent and 6 percent respectively.
Meanwhile, new loans rose by 58.4 billion lek (Euro 410 million) to 531 billion lek, recording a 13 percent increase, the highest annual growth rate since 2008 when lending grew by 35 percent. In the global crisis year of 2009 credit growth slowed down to 11 percent and decelerated to 9.6 percent in 2010, according to Bank of Albania data.
Differently from loans, 63 percent of which are issued in foreign currency, mainly in Euro, the situation with deposits appears more balanced with lek deposits accounting for 52 percent of total deposits.
Lending to businesses
Lending to businesses continued growing at moderate double digit rates even in 2011 despite banks tightening lending standards as bad loans rose to 19. The latest central bank data show new loans to businesses rose by 59 billion lek (Euro 414 million) to a total of 389.4 billion lek at the end of final quarter of 2011, with the annual growth rate accelerating to 17.9 percent, compared to 13.45 percent in 2010 and 14.64 percent in 2009. Back in 2008 just before the outbreak of the global financial crisis, loans to businesses grew by around 38 percent y-o-y.
Detailed Bank of Albania data show capital Tirana, where a quarter of the country’s total 3 million population lives and the majority of businesses operate, holds the overwhelming majority of 292 billion lek, or 75 percent of total lending to businesses in Albania. Most credit is taken to finance the “trade, and repair of cars and household equipment” accounting for around 90 billion lek or 30 percent of total credit to businesses in Tirana. The construction sector and the processing industry rank second and third with a 19 percent and 14 percent share respectively.
Lending to businesses in other districts stands at low levels with Durres coming second at a total of around 30 billion lek or 7.8 percent of total credit nationwide. The southwestern district of Fier has climbed to third with 10.6 billion lek or 2.8 percent of total lending to businesses overtaking the coastal district of Vlora with a slight difference. The distribution of credit in these districts is similar to Tirana with the “trade, and repair of cars and household equipment” category and construction sector benefitting the majority of loans.
Bad loans barrier
Banks’ profits in 2011 registered their lowest rate during the past 12 years as bad loans reached a historical high record of 19 percent, according to statistical reports published by the Bank of Albania. Data show banks’ net profits at the end of 2011 were only 706 million lek (Euro 4.95 million), the worst level since the notorious 1997-1998 pyramid investment schemes when banks registered negative balance sheets. The 2011 profits were almost 10 times lower compared to 2010 and 15 times lower compared to the peak 2007 profits of 10 billion lek (Euro 70 million). The sharp rise in bad loans at an official 18.94 percent of the total at the end of 2011, three times higher compared to the end of 2008, and delays in executing collateral are the key reasons for the poor performance in the banking system.
The rising bad loan portfolio, currently at around 19 percent, and the macroeconomic situation with public debt as the most problematic indicator at around the legal ceiling of 60 percent of the GDP, were the main two factors contributing to the tightening of lending standards for both businesses and individuals during the final quarter of 2011, according to findings revealed in the latest Bank of Albania survey. Low demand for loans also contributed to the tight lending standards.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. 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.
The banks’ tighter policies are being imposed mainly through increasing the margin for credit risk and rising demand for collateral. The liquidity situation and competition in the banking system continue to ease lending standards for businesses, although to a smaller extent compared to the previous quarters, says the report.
With the key interest rate at a record historical low 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 63 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.
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.
More than half of deposits owned by only 4%
The majority of savings in the Albanian banking system are owned by only a few thousand people, an indicator showing the gap between the poor and the rich is growing wider. This is confirmed by the latest data by the Deposit Insurance Agency. The report shows 55 percent of the total amount of deposits in Albania belongs to only four percent of depositors.Data published by the Agency show total savings in 2010 reached 635 billion lek (USD 6.35 billion), of which 350 billion lek is owned by only 63,000 people. Meanwhile, the remaining 286 billion lek is owned by 1.4 million people.
The Deposit Insurance Agency says 96 percent of individuals have their deposits up to 2.5 million lek, making them fully covered by the agency’s insurance scheme.
As elsewhere in the region, Albanian banks witnessed substantial panic deposit withdrawals in the face of spillovers from instability of global financial markets, which were compounded by concerns about the health of the Greek banking system in the fall of 2008. Ample liquidity buffers were utilized to meet deposit withdrawals. To boost confidence, deposit insurance limits were raised fivefold to 2.5 million lek (25,000 US dollars), and deposits started to recover from the second half of 2009. Stress tests assessing key risks suggest that the banking system had sufficient buffers to weather the expected downturn.
Greek banks’ market share shrinks
A recent Bank of Albania report shows the market share of Greek banks operating in Albania shrank in 2011 with their credit share in Nov. 2011 dropping to 30 percent down from 30 percent at the end of 2010 and deposits to 17.9 percent of the total down from 19.3 percent at the end of 2010.
In late 2011, fearing possible spillover impacts from international financial crisis, Albania’s central bank proposed some legal changes that would protect branches of Greek foreign-owned banks in case their mother banks go bankrupt.
The changes which were turned into law focus on converting bank branches into subsidiaries and the establishment of bridge banks as similar measures the European Union has adopted to prevent crisis effects.
Central bank data show Alpha Bank Albania and the National Bank of Greece – Albania are the only two banks operating as branches in Albania with Greek capital. Tirana Bank is also a Greek capital bank while the Emporiki Bank majority stake is owned by French-based Credit Agricole Group.
Some 16 banks operate in the Albanian banking system, which is overwhelmingly foreign-owned. Raiffeisen Bank and Turkish-owned BKT are the leading banks in Albania with a market share of 28 percent and 13 percent respectively.
High lending costs
In a recent financial intermediation analysis, the Bank of Albania says intermediation costs, which involves transforming deposits from one set of customers into loans for another, for the national currency lek rose to 6.8 percent in Oct.-Nov. 2011 up from 6.3 percent in the third quarter of 2011. Average interest rates for lek-denominated loans rose to 11.8 percent, up 0.3 percent while deposit interest rates dropped by 0.16 percent to 4.91 percent.
Meanwhile, intermediation costs for Euro dropped to 4.79 percent in Oct.-Nov. 2011, down 0.16 percent compared to the third quarter of 2011. “The interest rates for loans in Euro continues to considerably remain higher than reference rates of this currency in foreign inter-banking markets, factorizing the high cost of Euro deposits in the country,” says the BoA.
While T-bill yields register increases, average interest rates for lek loans are in fact slightly higher compared to the end of Sept. 2011 when the central bank made its first 0.25 percent key interest rate cut. Average interest rates for loans in lek in Jan. 2011 stood at 11.32 percent, compared to 11.07 percent on Sept. 2011 and 12.17 percent in Nov. 2011 unveiling a poor reflection by banks of the BoA intervention, according to BoA data.
Aimed at stimulating growth by increasing lending, the central bank’s interventions are being hardly reflected in the banking sector which is suffering a sharp rise in the bad loans portfolio and profits as a result. In the latest Bank of Albania auction, 12-month T-bills yields climbed to 7.32 percent, up from 7.21 percent a couple of weeks ago and 7.11 percent in early January 2012 when the key interest rate for lek was at 4.75 percent. 3-month T-bills also rose to 5.27 percent, up from 5.08 percent a month ago.
Lending prospects for 2012 seem grim as both businesses and individuals have cut down on investments and consumption, pessimistic about the country’s economic prospects as the global crisis impacts become more and more obvious with lower retail sales, remittances, FDI and travel revenues.
Albania’s central bank has left the key interest rate for the national currency, lek, at 4.5 percent, its lowest historical rate after lowering it by 0.75 percent in three separate moves since late Sept. 2011 to stimulate the underperforming economy as inflation pressures remain on a downward trend.
