Albania’s banking sector has rolled with the punches thrown by the economic crisis, but this year should mark a return to growth.
Today there are 16 banks operating in the tiny southern European market, 14 of which are foreign owned and the remaining two are part foreign owned – one of the highest share of foreign ownership in any European market.
Even with so few banks, the top four dominate the business accounting for some 70% of the all the assets in the sector and hold about €10bn of assets and €1.2bn of equity as of the end of last year, according to the central bank data.
With its underdeveloped economy and low income levels, Albania has never been an especially profitable place to do banking business. The entire sector earned a mere €69mn in 2016, of which almost all the profit was earned by the market leader and part Turkish-owned Banka Kombetare Tregtare (BKT), which today commands a 25% market share and €2.2bn in deposits.
The economy has started to pick up after several years of stagnation and the hope is that this will bolster growth in the bank sector too. Last the economy expanded by 3.46%, up from 2.59% a year earlier. And the World Bank is forecasting growth of 3.5% in 2017 and 2018. Foreign direct investments (FDI) is up too by 10.4% y/y in the first quarter to €983mn in 2016, accelerating from a 2.4% increase a year earlier, according to preliminary central bank data.
But the improving macroeconomic backdrop has yet to feed through completely to the bank sector which saw loan portfolios flat in February. Albanian commercial banks' loan portfolios edged up by 0.2% y/y to ALL545.8bn (€4bn) at the end of February, after ticking up up 0.3% in January, central bank data indicated on March 31.
However, hopes are high that the way is up from here as the economic recovery gets under way. The sector is relatively healthy with capital adequacy ratio (CAR) of 15.7% at the end of 2016, but the crisis-induced economic slowdown has hurt banks across the region and Albania is no exception: the proportion of non-performing loans (NLPs) rose to some 22% of total loan book, but the NPLs have fallen back more recently to 18%, a painful but still manageable level.
The crisis has been weighing on the sector heavily in recent years after a growth spurt in the boom years during the early noughties. The number of banks operating in the country has more than doubled since 2000 when there were only six banks in the whole sector. Over the next eight years the sector exploded with several new entries. However, since about 2011 the sector has stagnated with little loan growth and total of assets not moving beyond the €4bn that had been built up.
NPLs were higher at 22%, but were reduced last year when the central bank simply ordered banks to write off 4% in order to improve the health of the sector, demanding owners inject more capital.
Widely used as a benchmark for the health of the banking sector, Albania is more conservative than many of its neighbours as stringent reporting requirements mean that the CAR in Albania is actually about 2% lower than it would be in the rest of the region.
2011 was probably the nadir for the sector when all the banks together earned a mere €5mn in profits, although BKT alone earned €30mn that year, which means many of the other banks lost money.