PRESS RELEASE
Meeting of the Supervisory Council of the Bank of Albania

The Supervisory Council of the Bank of Albania, in its meeting of March 30th, 2005, after reviewing the proposals of some departments of the Bank of Albania, decided to approve:

1. Cut of core interest rate of the Bank of Albania by 0.25 percentage points

Following this change, the Repo interest rate has been lowered to 5.0 percent, thus recording another historic minimum level since being used as the main instrument of monetary policy implementation. The easing of monetary policy is consistent with the required monetary conditions to maintain the targeted inflation rate and the main monetary equilibriums.

The decision on cutting the core interest rate is based on the performance and expectations at controlled levels of inflation and monetary indicators. Annual inflation rate was kept within the targeted range of Bank of Albania during the nine-months period, tending to come down to the bottom limit of the targeted band during the last months. The absence of aggregate demand pressures, the limited presence of shocks to inflation, as well as the positive developments in productivity and exchange rate, have created a stable inflationary environment.

Bank of Albania estimates that the macroeconomic situation is favourable to maintain price stability even over the short-term run. The current tendencies and expectations show that inflation rate will tend to be within the 2-4 percent targeted range during 2005, while economy development rates will be similar as those of the past years. In this context, Bank of Albania aims at undertaking a more active role in promoting the economic activity, taking into account even the accommodation of negative effects in the economy that may be generated by the by oil price rise recently noted in the international markets.

In this context, the cut of core interest rate aims at further enhancing the monetary incentive, accumulated by the easing steps of monetary policy conduct during the last year. The reduction of the core interest rate is expected to affect the decline of interest rates of the financial market segments in Lek: interbank market; Lek deposits market; Treasury bills market; and Lek credit market. The cut of the interest rate will foster the demand for Lek credits, increasing its weight in credits and creating appropriate conditions for accelerating its progress in the future.

2. Regulation "On supervision of electronic banking transactions"

Technological developments and the competitiveness existing in the banking activity have stimulated and enabled the introduction of new banking products and services, which are being widely accepted by the public. We can mention here the use of electronic cards for payments, service of banking products through Internet, etc.

Electronic banking is a summary term of the process according to which the client may benefit traditional or new banking services, using the electronic method and communication systems in distance, without having recourse to his/her physical presence at the institution.

Banks may provide to their clients distance information on their account statement, credit card statement, unpaid invoices and transfers of funds through accounts, information on the account balance by check and savings accounts, allowing them to effectuate payments for mortgage loans, to purchase different financial assets, etc.

Although being a facility, with dual benefits to either the bank or the client, electronic banking is itself exposed to many risks which should be understood and managed. Therefore, the Regulation "On supervision of electronic banking transactions" is designed with the aim to define some requirements and principles that would enable the risk evaluation in this activity and its further minimization.

The Regulation includes several elements among which the requirements for:

• organizational conditions, conditions related to staff and technical conditions for the performance of electronic banking service;
• conducting verifications from the Bank of Albania on e-banking, and
• principles on e-banking risk management, where Basel Committee on the banking supervision requires that this risk be carefully identified, addressed and managed by the banking institutions, taking into consideration e-banking specific features that relate to the high speed of technology development and client service, to the extended presence and global nature of electronic networks, to the mutual cooperation with third parties from outside, etc.

E-banking is understood as a service in a new form of the banking business that might be part of the licence of a bank.

All banks and branches of foreign banks that operate in Albania shall apply this Regulation 15 days following its publication in the Official Gazette of the Republic of Albania.

3. Estimation on the financial situation of the Albanian banking system for the fourth quarter of 2004

During 2004 banking system assets recorded an increase of Lek 52.8 billion (or 14.1 percent), about Lek 18.5 billion higher than the increase of assets performed in 2003. Although during 2004 a new bank, the Popular Bank, entered in the market, its impact on the growth of banking system assets was only Lek 4 billion. This shows that banks in the country are marking progressive growth rates from one year to another.

The last quarter of 2004 showed a growth of assets for the group of banks (G3) by Lek 9 billion compared to the third quarter, for the group of banks (G1) by Lek 3.5 billion, while the group of banks (G2) showed a decline by Lek 0.45 billion. The domestic banking system continues to focus on the large banks (G3), which represent 83 percent of total assets of the system. However, considering another indicator of concentration, H index (Herfindahl), which focuses on the specific weight of each bank, its declining values speak for a reduction of this phenomenon over the years.

During 2004 the credit balance of the banking system marked a growth by Lek 19.3 billion or 38 percent compared to the yearend 2003. This growth is attributed not only to the large banks of the system but also to some of banks belonging to G1 and G2 groups.

The fourth quarter is distinguished for a growth of new credit relative to the previous quarter, although this element reduced by Lek 3.6 billion or 12 percent, compared to the same period of the previous year. Factor to this reduction is the provision with new opportunities of investment from banks affiliated to the system, such as "other securities", which bring about high exchange rates and are estimated to having lower risk than crediting.

For the contribution of the group of banks in the credit balance growth during the fourth quarter, G3 and G1 groups are identified (by Lek 6.3 billion and 2 billion, respectively), while the impact of G2 group is estimated at only Lek 0.98 billion.

Short-term credit weight against the credit balance resulted to be 26.7 percent, from 40.3 percent it was by the end of year 2003, while medium-term and long-term credits showed a growth respectively by 5.7 and 6.1 percentage points against the credit balance of the banking system. These structural changes of credit portfolio must speak for a rising tendency of banks to finance and support the investment projects rather than the needs for circulation means of businesses, thus contributing in the economy growth.

"Bad loans/(gross) credit balance" indicator, which estimates the effectiveness of credit portfolio management, resulted to be 4.2 percent, from 4.6 percent it was at the end of year 2003. This decline is due to higher growth rate of credit portfolio, nearly 39 percent against the worsening rate of bad loans, nearly 25 percent. Thus, from outside it seems the improvement of this indicator comes rather as a consequence of quantity element impact than quality element impact which relates to the portfolio performance of bad loans.

Notwithstanding the foreign currency credit domination, the Lek credit shows a slight growth of its weight against the credit balance (at 19.5 percent from 17.9 percent in the yearend 2003 (1). Based on the analysis conducted, it results that foreign currency credit, while inflow of borrowers' income is being in Lek, is estimated at 48 percent of total credit balance and 63 percent of foreign currency credit balance. Although, at a first glance, the system appeared to be exposed to the indirect credit risk, hypothetical scenarios that take into consideration the Lek depreciation result in an inconsiderably decrease of capital adequacy rate for the banking system.

Net profit of the banking system at the end of 2004 is about Lek 650 million higher than the previous year. This good performance is underpinned not only by the growth of assets volume and in general of the banking system activities but also by the growth of rentability.

G1 rentability resulted to be the highest one among the three groups, in contrast with the ordering throughout 2004, which relates rather to occasional elements. Whereas G3 rentability, though being lower but estimated as good, is an indication of their stability.

Finally, the growing of effectiveness indicator level, or its worsening, relates mainly to the positive developments of the system, which consist in structural improvement, broadening of activities or enhancing of competitiveness.

Year 2004 continues to know further increase of the shareholder capital levels in the banking system, amounting at the end of the year to Lek 26 billion or about Lek 4 billion more than in the yearend 2003. The system indicator is mainly influenced by the group of large banks (G3) estimated at about Lek 2 billion and of small banks (G1) at about Lek 1.2 billion, while the contribution of medium banks (G2) is estimated at only Lek 0.8 billion.

The essential element of the shareholder capital - paid-in capital,- continues to keep the main weight (nearly 72 percent) in the shareholder capital of the system, with a contribution of Lek 5 billion or about Lek 1 billion more than its contribution in the yearend 2003. A new bank was added to the system throughout the year and some banks raised their paid-in capital, contributing positively to the increase of indicator levels for the system. Also, considerable profit levels impact positively on the capital (Lek 5.1 billion), although their positive effects become wan due to the negative effects of revaluation debit differences (Lek 5 billion) as a result of US dollar deprecation against Lek.

Capital adequacy ratio for the banking system in the yearend 2004 is estimated at 21.6 percent or about 7 percentage points lower than in the yearend 2003. The decline of capital adequacy ratio is due to higher growth of assets classified according to risks (about Lek 33 billion or 52 percent) than the growth rates of regulatory capital (about Lek 3 billion or 15 percent). The last quarter of the year consolidates the declining tendency of capital adequacy ratio mainly due to the growth of investments the banks conduct in higher risk activities.

Capital adequacy analysis according to the groups of banks in the system distinguishes the group of small banks (G1) with significant decline of capital adequacy ratio compared to the yearend 2003, although this group continues to maintain the highest level of capital adequacy ratio, whereas the two other groups of banks evidence insignificant decline of indicator but mark lower levels. The significant decline of indicator in G1 is due to the considerable growth of crediting level of two banks of the group, while the group of medium banks (G2) and large banks (G3) includes some active banks in lending, which continue to contribute to more effective levels of the capital adequacy ratio.

Capital adequacy analysis for banks of the system continues to distinguish for a bank capital adequacy ratio levels very close to the minimum required levels, while other banks of the system keep the capital adequacy levels over the minimum required levels (12 percent).

Year 2004 consolidated the ongoing growth of bank activities aiming at higher risk investments, a growth that followed the declining tendency of the capital adequacy ratio, while the banks of the system showed capital adequacy levels over the minimum required levels (12 percent).

Liquidity indicators confirmed even during 2004 a satisfactory liquidity situation. The facilities offered by the Bank of Albania on liquidity provided the opportunity to absorb excess liquidity from banks of the system as well as to supply the needs of the banking system. At the end of the period that we are analysing, the indicator of liquid assets against total assets for banks of the system maintained a satisfactory level (over 27 percent). We distinguish in the system some banks with higher levels of indicator, which are due to the modest levels of lending activity of these banks.

The indicator of short-term assets against short-term liabilities for the system is estimated at 97 percent at the end of this year or around 10 percentage points lower than the yearend 2003. The decline of the indicator is due to higher growth rates of short-term liabilities rather than short-term assets. Although the indicator shows a decline, it continues to maintain a satisfactory level for the nearly 100 percent), which speaks for a good liquidity management. There are some banks in the system that have reached low values of the indicator but the satisfactory level of liquid assets in the total of their assets does not expose the latter to the liquidity risk.

Finally, according to the hypothetical testing of the banking system capacity to absorb losses that may be caused by shocks, as a consequence of undesirable developments of certain indicators, certain banks without capital adequacy are identified. However, the perspective of increasing the minimum required capital up to Lek 1 billion over the medium-term run 2005-2008 is estimated as a preliminary protective measure for the whole banking system in the future.

(1) - As a consequence, by the end of 2004, the weight of foreign currency credit is estimated at 80.5 percent, from 82.1 percent it was in the previous year.

In this meeting the Supervisory Council approved the Annual Report of Bank of Albania for year 2004 and some other decisions that relate to the Bank of Albania activities