Bank of Albania 1

Bank of Albania

Trends in Lending2018 Q4

The views expressed herein are solely of the authors and do not necessarily reflect those of the Bank of Albania.

January 2019

Erjona Suljoti, Olta Manjani, Medvin Shehu and Anjeza Gazidede Monetary Policy Department, Bank of Albania

2 Bank of Albania

Bank of Albania 3

c o n T e n T s

OVERVIEW OF THE RESULTS 6

1. LOANS TO ENTERPRISES 7

2. LOANS TO HOUSEHOLDS 11

3. TRENDS IN LENDING IN THE COUNTRIES OF THE REGION 14

4 Bank of Albania

Bank of Albania 5

inTroducTion

This analysis presents a detailed overview of the most recent credit developments in Albania. To this end, the analysis studies the monetary data on the credit portfolio, as well as lending standards based on the Bank Lending Survey (BLS). In addition, trends in lending includes an overview of the most recent credit developments in Central, Eastern and South Eastern European (CESEE) countries.

The main statistics taken into account in this analysis are:- Data on the bank lending activity for the resident sector of the economy;- Qualitative data from the bank lending survey;- Statistics on credit price in both lek and euro; - Monetary data for the credit volumes in the countries of the region.

The countries included in the analysis are: Bulgaria (BU), Croatia (CR), Romania (RO), Serbia (SR), Poland (PL), Hungary (HU), the Czech Republic (CZ), and Macedonia (FYROM).

Lending data are obtained from banks’ balance sheets and refer to funding by domestic banks to the resident private sector - enterprises and households. The loan portfolio analysis is based on data adjusted for the exchange rate effect. Also, these data take into account written-off loans pursuant to Bank of Albania’s Supervisory Council Decision No 50, dated 30.03.2015 “On amendments to the Regulation ‘On Credit Risk Management’”.

The analysis covers data published as at 25 January 2019. These data include information for monetary and financial data as at December 20181, and data from the BLS 2018 Q4. Data on credit in regional countries are as at November 2018.

1 Monetary data for December are preliminary.

6 Bank of Albania

oVerVieW oF THe resuLTs

Credit to the private sector improved the growth rates in 2018 Q4, mostly reflecting the positive developments recorded in December, when a significant growth in loans to enterprises and lending in lek was noted. Despite short-term volatility, the growth of credit to the private sector remains moderate reflecting sluggish demand for loans to enterprises and banks’ conservative lending policies. Lending in lek continues to be the main contributor to the expansion of credit to the private sector. Loans to enterprises registered higher growth rates than in 2018 Q3, mainly reflecting the significant growth recorded in December. From a long-term perspective, the performance of credit to enterprises remained moderated. Banks report that enterprises’ demand has been somewhat higher from the large firms segment, but credit standards have not changed in 2018 Q4. The growth of loans to enterprises has been supported by the growth of loans for liquidity and investment purposes. By currency, lek-denominated loans provided the main contribution in this quarter.

Interest rates on new loans to enterprises in lek did not change from the previous quarter, but they are slightly lower than in 2018 H1. The decrease of interest rates on loans for working capital in lek has given the main contribution to this performance. Interest rates on euro-denominated loans are lower than in the previous quarter, dictated by interests on loans for liquidity. Non-price conditions offered by banks to enterprises remained on the easing side in this quarter, as well.

Loans to households grew slightly slower than in 2018 Q3, following a decelerating trajectory throughout the year. In the last quarter of the year, the slowdown was driven by the performance of house purchase loans, while consumer credit improved slightly. By currency, lek-denominated loans continued to grow at high rates, thus supporting the positive dynamic of this segment.

Interest rates on new loans to households in lek decreased in the last quarter of the year, whereas interest rates on euro loans were somewhat higher than in 2018 Q3. In this quarter, banks eased collateral requirements for households, and kept the other non-price conditions unchanged.

Lending in CESEE countries registered an improved dynamic during October-November 2018. The expansion of the stock of credit to the private sector was broad-based, in geographical terms. The Central European countries continue to lead the annual growth rates of this portfolio in the wider CESEE region.

Bank of Albania 7

1. Loans To enTerPrises

The growth rate of loans to enterprises improved in 2018 Q4, driven by the growth of this portfolio in December. This improvement appears to reflect a slightly higher demand for loans to large firms, although credit standards have not changed. From a long-term perspective, growth rates for this portfolio are moderated and reflect both a sluggish demand for loans, and tightening policies applied by banks for enterprises. For 2019 Q1, banks expect credit demand to be higher, due to easing credit standards for this segment, as well.

Loans to enterprises, after showing a weak growth in October-November, registered improved growth rates, at 5.4% in December2, when this credit increased by ALL 7 billion, doubling its growth rate from 2018 Q3. However, the ratio of loans to enterprises against GDP, in 2018 Q4, is assessed to be lower than in the previous quarter, at 23.1%. This ratio followed a downward trend throughout the year standing, in December, 1.3 percentage points lower than in the previous year. Besides the short-term volatility, the portfolio of loans to enterprises continues to register moderate growth, driven by both the weak demand for loans from enterprises and the conservative approach of banks. In December 2018, the ratio of non-performing loans to total loans to enterprises registered 14.3%, or 2.3 p.p. lower than in 2018 Q3. Despite the decrease of the non-performing loans ratio in this segment, banks hesitate to undertake risk, due to problems related to collateral demanded and enterprises’ creditworthiness3. Banks’ policies for financing enterprises have been, overall, on the tightening side, over the last three years.

By currency, the performance of loans to enterprises improved driven by both foreign currency and lek-denominated loans. The latter, however, registered a

2 In this month, the loans to enterprises portfolio were significantly affected by loan write-offs from banks’ balance sheets.

3 For more details, see the Bank Lending Survey 2018 Q4 https://www.bankofalbania.org/Monetary_Policy/Surveys_11282/Bank_Lending_Survey/.

Chart 1 Loans to enterprises (annual, quarterly changes in %* and net balance)

Source: Bank of Albania.

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8 Bank of Albania

significantly higher growth than in the previous quarters of the year. The growth rate of loans to enterprises in lek peaked at 6.3% in December, against the average growth of 3.5% registered for the year. Meanwhile, foreign currency loans to enterprises increased by 4.9% year on year, slightly higher than the annual average.

Positive developments in loans in lek are mainly related with loans to enterprises for liquidity. This portfolio registered a weak performance until November, increasing annually, on average by 0.8%. Meanwhile, in December, loans for liquidity registered 4.1% annual growth. Given the short-term nature of this credit category, it shows significant fluctuations, driven by the high levels of repayments and use of own funds. Loans to enterprises for investments also showed improved growth rates in 2018 Q4. The annual rate of this portfolio registered 6.6% in December, close to the 2018 average.

Chart 2 Loans to enterprises by currency and purpose of use (annual changes and contributions in p.p. (%))

Source: Bank of Albania.

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Chart 3 Loans to enterprises by sector

Source: Bank of Albania.*Trade represents trade, hotels and restaurants sector.

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Bank of Albania 9

From the sectorial perspective, in 2018 Q4, banks increased lending to enterprises that operate in construction and services sectors. Loans to the sector of trade, hotels and restaurants retained similar rates to 2018 Q3, around 8%. Meanwhile, loans to the sectors of industry and agriculture contracted compared to the previous year, by 5.4% and 4%, respectively. These developments are reflected in an increase of the share of loans to other services against the total, at 16.2%. Loans to the construction sector retained the same share against the total as in 2018 Q3, at 15%. Meanwhile, loans to the sectors of trade, industry and agriculture have a slightly smaller share in total loans to enterprises, compared to 2018 Q3, at 44.2%, 23.1% and 1.5%, respectively.

inTeresT raTes

The average interest rate on loans to private enterprises in lek resulted 6.5% in 2018 Q4, slightly lower than in the previous quarter (6.6%). This performance was driven by the interest rates on loans for investments and liquidity purposes. In the latter, the decrease was driven by interest rates on loans for working capital, while interest rates on overdraft loans registered volatility and showed an upward trend. The interest rate on loans for investments in lek averaged 5.8%, from 6.0% in the previous quarter. Compared to 2018 H1, their level is slightly higher. Interest rates in this category decreased only for investments in real estate, and increased for equipment purchasing and business start-up loans. Despite short-term fluctuations, compared to the previous year, interest rates on new loans to enterprises remained at slightly lower levels.

Interest rates on loans to enterprises in euro decreased in the last quarter, reflecting mainly the performance of interest rates on loans for liquidity. On average, they registered 4.1% in this quarter from 4.3% in the previous quarter and 4.2% in 2018 H1. By purpose of use, changes were present in loans for

Chart 4 Interest rates on loans to private enterprises in lek

Source: Bank of Albania.

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10 Bank of Albania

liquidity purposes, compared to the previous quarter, whereas interest rates on loans for investments in euro also trended down compared to the previous year.

oTHer Terms and condiTions oF Loans

In 2018 Q4, based on BLS results, overall terms and conditions for loans to enterprises eased to some extent4. This backdrop was due to a combination of unchanged factors related to loan price with a minor ease of the non-price component for new loans to enterprises. In 2018 Q4, the increase of loan size was reported as the only factor contributing to the easing side of credit terms and conditions; meanwhile, all the other non-price components remained unchanged from the previous quarter.

4 For more details, see the Bank Lending Survey 2018 Q4 https://www.bankofalbania.org/Monetary_Policy/Surveys_11282/Bank_Lending_Survey/

Chart 5 Interest rates on loans to private enterprises in euro

Source: Bank of Albania.

% business lending rates, euro (MA6M)??

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Chart 6 Terms and conditions for loans to enterprises, according to two main categories (left) and detailed for non-price category (right)*

Source: Bank of Albania.*: Values represent net balances between positive and negative responses, according to the BLS questionnaire in

Albania, revised in 2018 Q2, by including new factors as part of non-price terms and conditions. Price related to terms and conditions include the applied margin on average loans and on riskier loans. Non-price terms and

conditions include non-interest rate charges, loan size, loan maturity, collateral requirements and loan covenant.

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Non interest fees Loan sizeCollateral requirements Loan maturity

Bank of Albania 11

Over the medium-term, overall terms and conditions for new loans to enterprises appear to have eased, driven by the approach of banks to decrease continuously the margins applied on loans in this category. On the other hand, in the medium-term, banks appear somewhat conservative in determining non-price standards, mainly due to the increase of collateral requirements as a ratio of disbursed loans.

2. Loans To HouseHoLds

Loans to households grew at a slightly slower pace than in 2018 Q3, following a decelerating trajectory throughout the year. In the last quarter of the year, the slowdown was driven by the performance of loans for house purchase, while consumer credit improved slightly. By currency, the growth of loans in lek continued to grow at high rates, supporting the positive dynamic of this segment. In 2019 Q1, banks expect household credit standards will continue to ease, which is also expected to generate higher demand for loans.

Loans to households showed a stable performance during 2018 Q4, increasing by 7.3%, y-o-y, on average, against 7.6% in 2018 Q3. In absolute terms, the quarterly expansion of this portfolio registered ALL 2.3 billion, broadly unchanged from the previous quarter. The positive performance of loans to this group was also driven by a continuously high demand from households, as well as more eased standards offered by banks. The improvement of labour market and consumption indicators in Albania generates a continuous demand for bank loans to households. For several years, banks have continued to pursue a more favourable approach towards households through both price and non-price standards. Loans to households against GDP ratio is assessed to be around 12% in December, or 0.2 percentage point lower than in 2017, determined also by the effect arising from the appreciation of lek against foreign currencies.

Chart 7 Loans to households (annual, quarterly changes in % and net balance)

Source: Bank of Albania.

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12 Bank of Albania

The main contribution to the positive performance of loans to households came from the stable performance of loans in lek, which grew, on average, by around 10.3%. In the meantime, loans to households in foreign currency appear to follow a slowing down trajectory, since June, registering 2.6% annual growth, in December. As a result, the structure of loans to households shifted further towards loans in lek. At the end of December, this portfolio accounted for 62.7% of the total stock, or 3.5 percentage points higher than in the previous year. Low interest rates on loans to households, as well as the applied conditionality of banks to provide lending to households in the same currency of their income for several years are believed to have determined this dynamic.

Loans for house purchase continue to be the main contributor of the increase of households loans. In 2018 Q4, this portfolio grew by around 5.9% on average, against 7.6% registered in the previous quarter. Data from the Bank Lending Survey show that this slowdown may have reflected a lower demand for mortgage loans. Banks assess that this slowdown in demand has reflected developments in the housing market, although they have continued to ease credit standards and overall terms and conditions for this segment. On the other hand, consumer credit registered a better performance than in the previous quarter, driven by both higher demand and eased credit standards and overall terms and conditions. The share of this portfolio to total loans to households, accounted for 31.4%, or 1.1 percentage points higher than in the previous year.

inTeresT raTes

Interest rates on loans to households in lek in 2018 Q4, similarly to enterprises, registered a slight decrease compared to the previous quarter. The average interest rate on loans to households was 6.9% in 2018 Q4, from 7.1% in 2018 Q3. Overall, interest rates applied on loans to households appear

Chart 8 Loans to households by currency and purpose (in % and p.p.)

Source: Bank of Albania.

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Bank of Albania 13

lower than in 2018 H1 and comparable to the previous year. By purpose of use, in 2018 Q4, interest rates on consumer credit registered a slight decrease. Meanwhile, interest rates on mortgage loans did not change from the previous quarter, but shows to be slightly lower from a year earlier.

The average interest rate of loans to households in euro increased at 4.2% in this quarter continuing the upward trend observed since 2018 Q2. By purpose of use, in this quarter, interest rates increased particularly in the segment of mortgage loans (at 3.5% from 3.0%) and consumer credit (at 5.2% from 4.4% in 2018 Q3). During this year, a significant increase was registered for interest rates on overdraft loans, while interest rates on loans for purchasing goods registered a slight downward trend.

Chart 9 Interest rates on lek loans to households

Source: Bank of Albania.

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Chart 10 Interest rates on loans to households in euro

Source: Bank of Albania.

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14 Bank of Albania

oTHer Terms and condiTions oF Loans

In 2018 Q4, commercial banks reported they kept terms and conditions unchanged for loans to households. Terms and conditions related directly with the loan price were almost unchanged, as well as the major part of the other factors that do not directly define credit price. The only exception is collateral requirement for the disbursed loan, which was reported as a factor contributing to the easing of overall terms and conditions for loans to households. The lower collateral requirement during this quarter triggered a positive balance of non-price conditions for new approved loans to households during 2018 Q4. Over a medium-term period, banks behaviour has leaned towards easing terms and conditions for loans to households. To a large extent, the easing of terms and conditions is defined by price-related factors.

3. Trends in Lending in THe counTries oF THe region

Lending in the CESEE countries recorded an improved dynamic during October-November 2018. This expansion resulted broad-based in geographic terms. The Central European region has continued to lead the growth rates of this portfolio in annual terms in the CESEE region.

The outstanding credit to the private sector recorded around 5% annual growth on average in October-November 2018, compared to 4.1% registered in 2018 Q3. Despite the demand-supply gap for loans reported in the Bank Lending Survey for CESEE countries5, the supply seems to have largely accommodated the higher demand for financing from economic agents in this region. The expansion of credit is also driven by favourable interest rates, which overall have registered a decline, or have retained their low levels.

5 The CESEE Bank Lending Survey 2018 H2 includes 2018 Q2 and Q3 and the forecasts for the future half year. This Survey is available from the following address http://www.eib.org/attachments/efs/economics_cesee_bls_2018_h2_en.pdf

Chart 11 Terms and conditions for loans households, according to two main categories (left) and detailed for non-price category (right)*

Source: Bank of Albania.*:Values represent net balances between positive and negative responses, according to the BLS questionnaire in

Albania, revised in 2018 Q2, by including new factors as part of non-price terms and conditions. Price related terms and conditions include the applied margin on average loans and on riskier loans. Non-price terms and conditions

include non-interest rate charges, loan size, loan maturity, collateral requirements and loan covenant.

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Bank of Albania 15

The performance of loans to enterprises in the CESEE countries indicates a positive dynamic across almost all the countries of the region. The annual growth rates indicate an expansion of the portfolio of loans to enterprises by 4.8% on average in October-November 2018, recording growth rates at around 1.3 percentage points compared to the previous quarter. The expansion of this portfolio was driven by the high growth rates in Central Europe. The performance of loans to enterprises in this region resulted more stable and always in positive territory, supported also by the low interest rates of this portfolio, the lowest throughout the entire CESEE region. On the other hand, in the Balkan countries, this portfolio shows more volatility and has registered contracting rates for a major part of it. The annual growth rate of loans to enterprises in Albania improved compared to the previous quarter.

Chart 12 Credit to the private sector in the countries of the region

Source: Respective central banks, author’s calculations, CESEE Bank Lending Survey 2018 H2

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Chart 13 Loans to enterprises in the countries of the CESEE region

Source: Respective central banks, authors' estimates.

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16 Bank of Albania

Loans to households show relatively more stable performance in the last two years. Developments in the portfolio of loans to households also confirm a uniform performance, in geographic terms. The outstanding loans to households increased by around 5.1% on average in annual terms in October-November, around 0.5 percentage point higher than in 2018 Q3. This performance was supported, among other things, by the decline of interest rates in the last two-three months in most of the countries of the region. The portfolio of loans to households expanded more rapidly in the Balkan countries. The growth rates of loans to households in Albania have been stable in 2018 Q4, in line with the region.

Chart 14 Loans to households in the countries of the CESEE region

Source: Respective central banks, authors' estimates.

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