BANK OF ALBANIA

BANKA E SHQIPËRISË

BANK OF ALBANIA STATEMENT
Financial Stability Statement for 2015 H2

Data e publikimit: 15.04.2016

 

Pursuant to provisions under Article 69 of the Law No. 8269, dated 23 December 1997 "On the Bank of Albania", as amended, and Article 8 of the Law No. 9962, dated 18 December 2006 "On Banks in the Republic of Albania", as amended, to inform the Assembly of the Republic of Albania and the Council of Ministers, and draw the attention of financial institutions and of the public on the Albanian financial system situation and the potential risks that may jeopardise its stability, the Bank of Albania releases this periodic statement. This statement is an integral part of the Financial Stability Report for the same stated period.

Economic activity expanded over the second half of 2015, driven mainly by the positive contribution of private investments and net exports. The performance of public investments and private consumption was weaker. Economic growth has not been translated in lower unemployment as yet. Fiscal policy continued its consolidating trend. Budget deficit was mainly financed through external sources.

The accommodative monetary policy was reflected in the fall of the average interest rates applied to the borrowing in the interbank market, money market, banking products and the government debt securities. Volatility of the domestic currency exchange rate was low, reflecting the developments in the international markets and the changes in the demand and supply for foreign currency in the domestic market. Both the primary market of government debt securities and the interbank market performed in line with expectations, supported by the necessary operations for liquidity management by the Bank of Albania. Worldwide, authorities continued the efforts to boost crediting and economic growth amid low interest rates and ample liquidity conditions. Nevertheless, international markets reflect instability, attributable to the sluggish economic growth in the advanced economies and the weakness in the emerging economies.

Financial system's activity in Albania was stable during the year, accounting for 101.3% of the Gross Domestic Product. Albeit the total banking sector assets expanded by 1.9%, during 2015, their share to GDP fell at 91.3%. The interbank investments sustained the expansion of the activity in the banking system. The sector's deposits rose by 2.6% in annual terms, driven by the increase in foreign currency deposits. Although businesses provided the main contribution to the increase of deposits during the period, the share of households' deposits in total deposits remains high. Households further expanded their investments in government debt securities, especially in the long-term debt. Credit dynamics was substantially impacted by the loan write-off process, estimated at around ALL 27 billion. This process mainly consisted in the foreign currency-denominated credit and in the credit to businesses. Consequently, total outstanding credit of the banking sector contracted by 1.5%, in annual terms. During the year, outstanding credit denominated in the Albanian lek increased by 2.6%, whereas that in foreign currency fell by 4%. At the end of the year, the ratio of non-performing loans to total loans dropped at 18.2%. All segments of the credit portfolio improved the quality. During the period under review, the banking sector's financial performance improved compared to the previous year, due to the control over activity costs. The largest banks provided the main contribution in the financial result of the sector.

Indices that seek to summarise different risks and to assess the systemic risk, show that they eased during the period under review, thus indicating an improvement in the stability of the financial system. Nevertheless, developments in the domestic and external economic and financial environment, point to some challenges, in particular:

a)  Banking system exposure to risks, such as credit and market risks remains similar to the previous periods, calling for continuous attention. Notwithstanding the fall in non-performing loans and their improved coverage with provisions and capital, issues related to their concentration and the slowdown of lending show that the banking sector's perception for credit risk is considerable. Lending recovery, particularly in lek, is a desired feature that is better supported by the lowering of the average interest rate. Meanwhile, the contraction of foreign currency credit reflects the need for a better balance of the credit portfolio structure and the additional risks accompanying foreign currency credit. The latter remains the main channel through which unfavourable fluctuations of the exchange rate may jeopardise the solvency of borrowers and further threaten the quality of the banks' credit portfolio.

Overall, the Bank of Albania assesses that the banking industry should focus on the accurate identification as well as the timely and complete provisioning of non-performing loans. In this regard, the Bank of Albania shall intensify the supervisory activity, while maximally contributing to the inter-institutional action plan for the resolution of non-performing loans. Also, the Bank of Albania assesses that the support of lek credit products to the private sector should be appropriately provided, in order to balance the credit portfolio structure and control market risk. The support of crediting in the Albanian currency remains one of the alternatives to strengthen banks income generation amid low interest rates environment. Credit recovery will require, among others, the realisation of a more favourable structure of the financing sources of banks, regarding the extension of their term to maturity. Continuous attention should be paid to the assessment and treatment of operational risk in the banking activity, where the focus should be on the completion and perfection of the control systems.

b) Due to the collateral execution related to NPL collection, the volume of real estate transferred to the banks' balance sheet has increased. The inclusion of these assets in the banks' balance sheet is an indicator of the process difficulty, which does not appear to adequately stir the interest of potential buyers of these assets during the respective auction. The rise of these assets' volumes in the balance sheet of the banking sector shows, on one hand, that the functioning of the real estate market has problems and on the other hand, highlights the need for banks to invest more for the profilisation, marketing and identification of mechanisms that facilitate the finding of potential buyers and provide for the swift sale of these assets. The management over a long period of such assets is not a typical activity for commercial banks, and adds human and financial costs to their activity.

Although the current level of these assets in the balance sheet of the banking sector is affordable, the Bank of Albania considers that the authorities need to continue efforts to improve the collateral execution process, focusing on the identification and implementation of mechanisms that attract a high number of potential buyers in auctions. In general, instruments to improve the functioning of the real estate market should be found, and the legal framework for the expansion and validity of other assets securing bank credit must be improved. Banks should steadily continue the efforts for the sale of these assets and undertake the necessary measures to establish the internal infrastructures that help this process. As long as these assets are in the balance sheet of the banking sector, banks should value them regularly according to the respective standards and provision against the possible movements in the value of these assets. Because the management of these portfolios is not a proper activity of a commercial banks, banks should assess continuously the need and the benefit of transferring this process to more specialised non-bank financial institutions in accordance with all forms stipulated in the legal framework. The Bank of Albania shall support this process based on the bank analysis on a case by case basis, and within its legal responsibilities.

c) The overall fall of interest rates in the domestic market will increase the pressure on the financial performance of the banking sector and of the financial institutions, in general. So far, the fall in the return rates from banks' investments (in the asset side) is offset by the fall, to a large extent, in operational expenses, related mainly to interest ones (in the liabilities side). Nevertheless, the space for the further decrease of the latter is considerably limited and in the event the fall in the average return rate from investments continues, the net interest margin for the banking sector will decrease, and negatively affect the net financial result. The possible fall of the financial result weakens the banks' ability to support their activity with own sources, thus increasing the burden to shareholders for raising bank capital.

Although this is not an immediate process, the Bank of Albania assesses that in their development strategies banks should include using the profit made in 2015 mainly to bolster their capital position. They should also accelerate the operations to boost lending at home, when the return rate and risk are at acceptable levels.

d) The international economic and financial developments remain unstable. Notwithstanding measures taken by the central banks and other authorities, the euro area economy remains considerably below its growth potential, lending is weak and the cleaning of banks' balance sheets is still unconsolidated. Thus, the restructuring of the activity of European banking groups, aiming to strengthen the capital position and focus in high return markets or products, is expected to continue. In practice, this process will include operations to alter their network in various countries, cease certain activities that have a relatively high cost, and merge to establish synergies that ensure a more efficient market activity. During the first years of the global financial crisis, these processes affected Albania, mainly regarding the withdrawal of some banks from specific activities. Actually, the degree and form by which this process can affect the region or our country, in the future, remains unclear.

Due to the fact that the concrete information on these issues is rather scarce, the Bank of Albania will attentively monitor the situation to identify how our banking sector and financial system may be affected by these developments. The Bank of Albania shall strengthen the cooperation with the central banks and supervisory authorities in the region and in the euro area, for sharing information and undertaking harmonised actions. In Albania, there will be a continuous communication with banking industry and other public authorities, to undertake all the necessary measures that safeguard the stability of our financial system.

Overall, the Bank of Albania assesses that the financial situation and stability of banking sector are good. The withstanding capacities against different shocks remain resilient, during the period under review, as both capitalisation and liquidity indicators are at good levels. Nevertheless, the present risks suggest for the positive financial result of 2015 to be used for their further strengthening. Stress-tests also confirm the good situation of the banking sector and its resilience against assumed shocks, according to the macroeconomic scenarios and various risks to the liquidity situation.

PUBLICATION DATE: 15.04.2016

 

Pursuant to provisions under Article 69 of the Law No. 8269, dated 23 December 1997 "On the Bank of Albania", as amended, and Article 8 of the Law No. 9962, dated 18 December 2006 "On Banks in the Republic of Albania", as amended, to inform the Assembly of the Republic of Albania and the Council of Ministers, and draw the attention of financial institutions and of the public on the Albanian financial system situation and the potential risks that may jeopardise its stability, the Bank of Albania releases this periodic statement. This statement is an integral part of the Financial Stability Report for the same stated period.

Economic activity expanded over the second half of 2015, driven mainly by the positive contribution of private investments and net exports. The performance of public investments and private consumption was weaker. Economic growth has not been translated in lower unemployment as yet. Fiscal policy continued its consolidating trend. Budget deficit was mainly financed through external sources.

The accommodative monetary policy was reflected in the fall of the average interest rates applied to the borrowing in the interbank market, money market, banking products and the government debt securities. Volatility of the domestic currency exchange rate was low, reflecting the developments in the international markets and the changes in the demand and supply for foreign currency in the domestic market. Both the primary market of government debt securities and the interbank market performed in line with expectations, supported by the necessary operations for liquidity management by the Bank of Albania. Worldwide, authorities continued the efforts to boost crediting and economic growth amid low interest rates and ample liquidity conditions. Nevertheless, international markets reflect instability, attributable to the sluggish economic growth in the advanced economies and the weakness in the emerging economies.

Financial system's activity in Albania was stable during the year, accounting for 101.3% of the Gross Domestic Product. Albeit the total banking sector assets expanded by 1.9%, during 2015, their share to GDP fell at 91.3%. The interbank investments sustained the expansion of the activity in the banking system. The sector's deposits rose by 2.6% in annual terms, driven by the increase in foreign currency deposits. Although businesses provided the main contribution to the increase of deposits during the period, the share of households' deposits in total deposits remains high. Households further expanded their investments in government debt securities, especially in the long-term debt. Credit dynamics was substantially impacted by the loan write-off process, estimated at around ALL 27 billion. This process mainly consisted in the foreign currency-denominated credit and in the credit to businesses. Consequently, total outstanding credit of the banking sector contracted by 1.5%, in annual terms. During the year, outstanding credit denominated in the Albanian lek increased by 2.6%, whereas that in foreign currency fell by 4%. At the end of the year, the ratio of non-performing loans to total loans dropped at 18.2%. All segments of the credit portfolio improved the quality. During the period under review, the banking sector's financial performance improved compared to the previous year, due to the control over activity costs. The largest banks provided the main contribution in the financial result of the sector.

Indices that seek to summarise different risks and to assess the systemic risk, show that they eased during the period under review, thus indicating an improvement in the stability of the financial system. Nevertheless, developments in the domestic and external economic and financial environment, point to some challenges, in particular:

a)  Banking system exposure to risks, such as credit and market risks remains similar to the previous periods, calling for continuous attention. Notwithstanding the fall in non-performing loans and their improved coverage with provisions and capital, issues related to their concentration and the slowdown of lending show that the banking sector's perception for credit risk is considerable. Lending recovery, particularly in lek, is a desired feature that is better supported by the lowering of the average interest rate. Meanwhile, the contraction of foreign currency credit reflects the need for a better balance of the credit portfolio structure and the additional risks accompanying foreign currency credit. The latter remains the main channel through which unfavourable fluctuations of the exchange rate may jeopardise the solvency of borrowers and further threaten the quality of the banks' credit portfolio.

Overall, the Bank of Albania assesses that the banking industry should focus on the accurate identification as well as the timely and complete provisioning of non-performing loans. In this regard, the Bank of Albania shall intensify the supervisory activity, while maximally contributing to the inter-institutional action plan for the resolution of non-performing loans. Also, the Bank of Albania assesses that the support of lek credit products to the private sector should be appropriately provided, in order to balance the credit portfolio structure and control market risk. The support of crediting in the Albanian currency remains one of the alternatives to strengthen banks income generation amid low interest rates environment. Credit recovery will require, among others, the realisation of a more favourable structure of the financing sources of banks, regarding the extension of their term to maturity. Continuous attention should be paid to the assessment and treatment of operational risk in the banking activity, where the focus should be on the completion and perfection of the control systems.

b) Due to the collateral execution related to NPL collection, the volume of real estate transferred to the banks' balance sheet has increased. The inclusion of these assets in the banks' balance sheet is an indicator of the process difficulty, which does not appear to adequately stir the interest of potential buyers of these assets during the respective auction. The rise of these assets' volumes in the balance sheet of the banking sector shows, on one hand, that the functioning of the real estate market has problems and on the other hand, highlights the need for banks to invest more for the profilisation, marketing and identification of mechanisms that facilitate the finding of potential buyers and provide for the swift sale of these assets. The management over a long period of such assets is not a typical activity for commercial banks, and adds human and financial costs to their activity.

Although the current level of these assets in the balance sheet of the banking sector is affordable, the Bank of Albania considers that the authorities need to continue efforts to improve the collateral execution process, focusing on the identification and implementation of mechanisms that attract a high number of potential buyers in auctions. In general, instruments to improve the functioning of the real estate market should be found, and the legal framework for the expansion and validity of other assets securing bank credit must be improved. Banks should steadily continue the efforts for the sale of these assets and undertake the necessary measures to establish the internal infrastructures that help this process. As long as these assets are in the balance sheet of the banking sector, banks should value them regularly according to the respective standards and provision against the possible movements in the value of these assets. Because the management of these portfolios is not a proper activity of a commercial banks, banks should assess continuously the need and the benefit of transferring this process to more specialised non-bank financial institutions in accordance with all forms stipulated in the legal framework. The Bank of Albania shall support this process based on the bank analysis on a case by case basis, and within its legal responsibilities.

c) The overall fall of interest rates in the domestic market will increase the pressure on the financial performance of the banking sector and of the financial institutions, in general. So far, the fall in the return rates from banks' investments (in the asset side) is offset by the fall, to a large extent, in operational expenses, related mainly to interest ones (in the liabilities side). Nevertheless, the space for the further decrease of the latter is considerably limited and in the event the fall in the average return rate from investments continues, the net interest margin for the banking sector will decrease, and negatively affect the net financial result. The possible fall of the financial result weakens the banks' ability to support their activity with own sources, thus increasing the burden to shareholders for raising bank capital.

Although this is not an immediate process, the Bank of Albania assesses that in their development strategies banks should include using the profit made in 2015 mainly to bolster their capital position. They should also accelerate the operations to boost lending at home, when the return rate and risk are at acceptable levels.

d) The international economic and financial developments remain unstable. Notwithstanding measures taken by the central banks and other authorities, the euro area economy remains considerably below its growth potential, lending is weak and the cleaning of banks' balance sheets is still unconsolidated. Thus, the restructuring of the activity of European banking groups, aiming to strengthen the capital position and focus in high return markets or products, is expected to continue. In practice, this process will include operations to alter their network in various countries, cease certain activities that have a relatively high cost, and merge to establish synergies that ensure a more efficient market activity. During the first years of the global financial crisis, these processes affected Albania, mainly regarding the withdrawal of some banks from specific activities. Actually, the degree and form by which this process can affect the region or our country, in the future, remains unclear.

Due to the fact that the concrete information on these issues is rather scarce, the Bank of Albania will attentively monitor the situation to identify how our banking sector and financial system may be affected by these developments. The Bank of Albania shall strengthen the cooperation with the central banks and supervisory authorities in the region and in the euro area, for sharing information and undertaking harmonised actions. In Albania, there will be a continuous communication with banking industry and other public authorities, to undertake all the necessary measures that safeguard the stability of our financial system.

Overall, the Bank of Albania assesses that the financial situation and stability of banking sector are good. The withstanding capacities against different shocks remain resilient, during the period under review, as both capitalisation and liquidity indicators are at good levels. Nevertheless, the present risks suggest for the positive financial result of 2015 to be used for their further strengthening. Stress-tests also confirm the good situation of the banking sector and its resilience against assumed shocks, according to the macroeconomic scenarios and various risks to the liquidity situation.