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Albania’s banking sector: Facts & Figures

Updated September 2019 – For earlier editions of Facts & Figures click here

The Albanian economy has benefitted from the economic reforms of recent years, supportive financial conditions and a positive performance of the external sector. The economy grew by around 4.2% in 2018. Unlike the previous year, growth has been supported by robust external demand, due to buoyant export growth, and less by expansion of domestic factors. While inflationary pressures increased throughout the year, local currency appreciation and the shift of the economy towards external demand contributed to a lower inflation outcome. The consumer price index increased by 2% on an annual basis, while monetary policy remained accommodative throughout the year.

Those trends have allowed further fiscal consolidation, narrowing of the current account deficit and a positive gain in terms of employment. Following a primary surplus of 0.6% in 2018, the overall fiscal deficit has declined to 1.7%, from 2% the previous year. With the robust growth rates observed last year, the public debt further declined to below 70% from 71.9% in 2017 while the current account deficit shrunk moderately to 6.5-7%. Amidst the positive economic outlook, Albanian authorities successfully completed the issuance of a Eurobond amounting €500 million with seven-year maturity at a relatively low yield of 3.5%.

Following the trends observed through the European economies and the large share of banks owned by European banks, financial consolidation in Albania has led to a reduction in depository financial institutions. The number of banks declined to 14 in 2018 due to the acquisition of two foreign subsidiaries in the Albanian banking system. The acquisition of the two banks followed similar developments of parent companies located in the euro area. As a result, the number of banks with foreign-owned capital has declined to 11 banks, of which seven banks are owned by financial institutions or agents located in the euro area. The capital of the three banks is owned by domestic agents. The share of total bank assets held by the 11 banks with foreign capital stands at 78%.

With the decline in the number of banks, the size of the banking system has slightly changed. The total number of bank branches or agencies operating across the country was 447 in 2018, a slight decline from 473 branches in 2017. In addition, the relative size of total bank assets in terms of GDP slightly declined to 96.8%, compared to 99.4% in 2017.

Despite the smaller number of banks, the financial activity of the banking sector has continued to grow with a moderate positive trend. The currency composition of deposits and loans held by the banks in Albania and the changes in exchange rate mask these positive trends. By the end of 2018, around 53% of bank deposits and around 51% of bank loans to private sector were denominated in a foreign currency. When bank assets are accounted by with a fixed exchange rate, the total assets of the banking system expanded by 1.9%. Nevertheless, the sharp appreciation of the domestic currency to 123.4 Lek/€ (from 133 Lek/€ in 2017) and the high share of loans and deposits denominated in foreign currencies have led to a slight decline in total bank assets when measured in domestic currency by 0.7%.

Banking activity measured by total bank deposits expanded by 3%, after accounting for changes in exchange rate. Whilst total lending has seen a moderate decline, owning to the cutting down on lending to non-residents and to financial institutions, lending to the private non-financial sector has expanded.

The total loans to the non-financial (non-public) corporate sector and to households increased by 3%, mainly due to the expansion of credit to the latter. The sharp appreciation of currency in 2018 has masked some of these moderate trends owning to the direct accounting effects.

The financial soundness of the banking system has improved, in terms of capitalisation, asset quality and liquidity. Regulatory capital to risk weighted assets has continued the upward trend, observed in the previous two years, reaching 18.2%. Similarly, the liquidity position of the banking system has continued to improve as liquid assets to total assets reached 34.2% in 2018, up from 26% in 2010. The ratio of non-performing loans to total loans further declined to 11% in 2018, a decline of two percentage points compared to the previous year, and much lower than the peak of 23.5% observed in 2013.

Compared to the banking sector, the non-bank financial institutions account for a small fraction of the financial system when measured by asset size. Currently, there are 30 non-bank financial institutions and 13 savings and credit institutions. Despite the large number, their financial activity is relatively small. The total assets of non-bank financial institutions account for around 3.9% of GDP as of 2018.

Contributor: Altin Tanku atanku@bankofalbania.org