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Albania’s banking sector: Facts & Figures

Updated September 2018 – For earlier editions of Facts & Figures click here

Albania is one of the fastest growing economies in Europe, with GDP growth reaching 3.8% in 2017. The main growth driver was private domestic demand, with accelerating exports providing additional impetus over the past couple of years. Unemployment decreased, public debt is on a declining trend, economic sentiment improved, and average inflation stood at 2%. Inflation is projected to rise gradually towards the central bank target of 3% as domestic demand heats up and global commodity prices and inflation edge up.

In April 2017, Albania received a European Commission recommendation to open EU accession negotiations, reflecting the progress made so far in structural and institutional reform. Bold implementation of reforms are necessary, to put Albania on a faster, sustainable and inclusive income convergence path.

The Albanian financial system consists of 16 banks, 31 non-bank financial institutions and 13 saving and loans institutions. The ratio of financial system assets to GDP increased to 102.6%. This was due to the expansion of the assets of all component segments of the system, including non-bank financial institutions, insurance companies and investment funds. The structure of financial system assets is dominated by banks, whose assets account for about 93% of the total assets of the system. Over the period, the share of banks in the financial system has increased. Banks with foreign capital account for around 81.4% of the sector’s total assets.

During 2017, the banking sector expanded its activity with the main contribution from treasury and interbank transactions, as well as by the contraction of the credit risk provisioning fund. Bad debt write-offs from the banks’ balance sheets as well as the increase of loan repayment and reconstructing has led to lower non-performing loans (NPLs). Exposure to market risks is presented at limited levels, and but needs to be monitored on a continuous basis.

By the end of 2017, the share of banking sector assets to GDP was estimated at 92.5%. This share has increased during the period, driven by the expansion of interbank transactions and the contraction of provisioning funds. In terms of financial soundness indicators, the banking sector was characterised by higher levels of capitalisation, profitability and liquidity. The direct exposure of the banking sector in the non-banking sector is assessed to be low. Banking system was operating 494 bank branches and agencies as the end of 2017.

Commercial banks represent the biggest financial market segment in the country, holding roughly €8.3 billion worth of deposits and operating a loan portfolio of close to €5 billion. Around 85% of deposits are household deposits, 65% of which are time deposits.

Lending activity slowed down in the aftermath of the crisis. A moderate credit recovery is ongoing, following higher credit demand and better credit supply. The latter reflects determined action to reduce NPLs and improve the domestic credit environment. By the end of December 2017, the balance sheet of the banking sector recorded ALL 600 billion in outstanding loans (€ 4.76 billion). Credit to residents grew by 3.4% in 2017, broadly reflecting the pick-up in domestic currency lending. The gradual rebalancing towards Lek-denominated loans continues and the share of foreign currency loans in total credit declined to 53% in December 2017, down from 60% five years ago. Lending to households grew by 7% in 2017, with mortgage loans increasing by 5% and consumer loans by 13%. Lending to businesses grew by 1.4%; with construction and service sectors benefiting the most. Business loans represent 63% of the total loans. Notwithstanding the new lending dominated by loans to enterprises, the decline in their outstanding loans has been due to the decline in NPLs, as a result of write offs, loan repayment and loan restructuring.

Banking sector assets expanded by about 4%, to ALL 1.445 billion. The performance of assets was determined by the increase of the items “Treasury and interbank transactions” and “Customer transactions” as well as by the significant contraction of the provisioning funds for credit risks. The Albanian government’s debt securities represent around 22% of the total assets.

The banking sector closed 2017 with a profit of around ALL 22 billion, as per Bank of Albania reporting standards, significantly higher than the previous year. The main reason for the increase in profits is related to the significant decrease of credit risk provisions, while net interest income continued to contract. Return on assets and return on equity are estimated respectively at 1.6% and 15.7%. The fall of interest income brought a decrease in net interest margin to 3.9% from 4.2% in 2016.

The capitalisation of the banking sector is good. In December 2017, the capital adequacy ratio stood at 16.6%, up from 16% in 2016. This is determined by the increase of regulatory capital.

The Albanian banking sector is characterised by a low financial leverage ratio. As of December 2017, the financial leverage ratio (assets to equity ratio) was 9.8 times, from 10.3 times in the previous year.

Contributor: Altin Tanku atanku@bankofalbania.org

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