trends in lending - bank of albania · lending to enterprises, although some of them have begun to...

PB Bank of Albania Bank of Albania 1

TRENDS IN LENDING

2017 Q3

B a n k of A l b a n i a

ERJONA SULJOTI, OLTA MANJANI AND SOFIKA NOTE MONETARY POLICY DEPARTMENT, BANK OF ALBANIA

OCTOBER 2017

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

Bank of Albania.

2 Bank of Albania Bank of Albania 3


C O N T E N T S

INTRODUCTION 4

SUMMARY 5

1. LOANS TO ENTERPRISES 7

2. LOANS TO HOUSEHOLDS 12

3. TRENDS IN LENDING IN THE COUNTRIES OF THE REGION 16


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. In addition, this analysis includes an overview of 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 volume 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).

The analysis covers data published as at 20 October 2017, which include monetary1 and financial data, as well as data from the bank lending survey 2017 Q3.

1 Monetary data for September are preliminary.

INTRODUCTION


Credit to the private sector improved the growth rates during Q3. This improvement is supported mainly by the higher demand for funding. The loan portfolio continued to expand driven by lending in lek. Unlike the previous quarter, lending in foreign currency expanded as well. Despite the positive developments in this quarter, in average terms, the growth of credit to the private sector remains moderate.

Loans to enterprises increased during Q3, reflecting the higher demand from the corporate segment and the overall unchanged lending standards. This portfolio expanded by 2.2%, mainly supported by loans for investments, while loans for liquidity show volatile. These developments have contributed to improving the economic activity in Albania, enhancing confidence and reducing uncertainties in the post-election period, as well as easing monetary and financial conditions.

Interest rates for lek loans to enterprises remained close to the average levels noted in 2017 Q2, being lower than in 2017 Q1 and in the previous year, for all types of lending. The interest rate for euro loans decreased in 2017 Q3, after four quarters of stability. Overall, banks continue to be prudent in lending to enterprises, although some of them have begun to be more positive towards their funding.

Growth rates of loans to households continue to follow an upward trend, giving the main contribution to the growth of credit to the private sector. The portfolio of loans to households expanded in this quarter, supported by both consumer and house purchase loans. By currency, lek loans to households continue to be the main contributor to the growth of this portfolio. The continuous recovery of loans to households is supported mainly by the improvements in the labour market and consumer confidence, the better financial situation in the housing market, and the easing of financing standards by the banks.

Interest rates for lek loans to households maintained the average levels of the previous quarter. Their performance appears stable, with slight fluctuations, in the last two years. Interest rates for euro loans remained near the levels noted in 2017 H1. The spread between the interest rates on lek loans against euro loans to households remained near the level of the first two quarters of the year. Banks continue to have positive approaches towards loans to households and almost all lending standards were further eased this quarter.

Credit growth in the countries of the CESEE region improved further in 2017 Q3. Credit to the private sector expanded, supported by both

SUMMARY


households and enterprises segments. The bank lending survey in these countries in 2017 H1 confirmed the expectations for further improvement of the demand for financing, parallel to the easing of the lending standards by the banks. The narrowing of the gap between demand and supply seems to have had contributed to the positive performance of lending in these countries in 2017 Q3, as well.


2The portfolio of loans to enterprises showed positive performance in 2017 Q3. The eased monetary standards, the improvement of the economic activity and the growth of banks’ propensity to fund the corporate segment underpinned the growth of the portfolio. However, this growth remains below the average level registered in 2016, conditioned by both a prudent approach by the banks toward easing, and a volatile demand for loans by enterprises. Meanwhile, the interest rates for lek loans to enterprises remained near the low levels of 2017 Q2, whereas those for euro loans decreased. Banks expect that the growth of credit demand by enterprises will continue in 2017 Q4 as well, supported also by the easing standards for this segment.

Bank loans to enterprises showed a positive trend in 2017 Q3, increasing by ALL 6.2 billion compared to the end of June. Also, the annual growth rates of this portfolio gradually improved, to 2.2% in September. These positive developments have reflected the improvement of the economic activity in Albania, the reduction of uncertainties in the post-election period, and a higher propensity by banks to respond to the higher demand by this segment. The portfolio of loans to enterprises expanded supported by the lek loans to this segment. The annual growth of the portfolio of lek loans to enterprises improved to 9.1%, while loans in foreign currency for this group decelerated the contraction pace. However, the latter also reflects the appreciation of lek against the main currencies, which continued in the third quarter. Accounting for this appreciation, the third quarter would show an improvement of foreign currency loans to enterprises and the growth of this portfolio would move into positive territory. The ratio of lek loans against total loans to enterprises improved to 38.4% or 1.4 p.p. higher than at the end of 2016. In terms of GDP, loans to enterprises remained at the same level as in the previous quarter, at 24.6%.

2 Credit to business data are adjusted for the impact of writte of loans and of the exchange rate

1. LOANS TO ENTERPRISES2


By purpose of use, loans to enterprises in 2017 Q3 were mainly supported by financing for investment. The growth rate of this portfolio improved to 4.2%, on average, against 2.9% in the previous quarter. The portfolio of loans for investments expanded, supported by lending to the corporate segment, mainly interconnected with public projects. In parallel, loans for liquidity increased by ALL 2 billion in this quarter, while in average they maintained the same contraction rate as in the previous quarter, at 1.9%. Accounting for the lek appreciation, the contribution of loans for liquidity would be positive for Q3 and improved compared to the previous quarter. In parallel, the contribution of loans for investments to the expansion of loans to enterprises would be higher, confirming the positive trend of this segment for more than four quarters.

The positive developments of loans to enterprises are also confirmed by the

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

Source: Bank of Albania.

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

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new loans for this segment. Their annual growth accelerated in Q3 to 35.6%, confirming the change in the seasonal behaviour of lending for this quarter. Similarly, unlike the previous quarter, the repayment of loans and write-offs were at a low level, transmitting the positive effect of disbursed loans on the portfolio’s performance.

Lending by sector shows that banks in Q3 increased financing to construction, services and agriculture sectors. The annual growth rate of loans to enterprises in construction accelerated to 5.5%, compared to 2.4% in Q2. Similarly, in annual terms, the portfolio of loans to the services sector, expanded on average by 5.5% against 1.2% registered in the previous quarter. Meanwhile, the trade sector registered a modest annual improvement of the growth rate up to 2% (1.6% on average in 2017 Q2). In parallel, the portfolio of loans to the industry sector contracted in quarterly and annual terms by -0.5 billion lek and -2.8%, respectively. The agriculture sector, despite the positive dynamics showed in 2017 Q3, attracts a very small share of banks’ funds for enterprises, only 1.5%. The dynamic of loans by sectors of the economy is overall in line with the sectorial data for economic activity. The above-mentioned developments are reflected in a slight shift of lending by sectors of the economy compared to the end of 2016, as noted in the table below.

Table 1 Structure of loans to enterprises by major sectors of the economy In % of loans to enterprises 2007-2010* 2011-2015* 2016 2017 Q3Agriculture 1.3% 1.8% 1.5% 1.5%Industry 24.7% 28.5% 26.3% 26.0%Construction 20.8% 14.7% 14.4% 15.0%Trade, hotels and restaurants 38.3% 38.0% 43.2% 42.1%Other services 14.8% 17.0% 14.6% 15.4%

Source: Bank of Albania.*Average of the period

Chart 3 Value added and loans to enterprises by sector of the economy

Source: INSTAT and Bank of Albania.

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INTEREST RATES AND OTHER LENDING STANDARDS

The interest rates on lek loans to private enterprises in 2017 Q3 maintained the same average levels of Q2, remaining lower than 2017 Q1. The average interest rate resulted 6.9% for this quarter, from 6.8% and 7.3% registered in 2017 Q23 and 2017 Q1, respectively. The stability of the interest rates in this quarter was evident across almost all the segments of loans to enterprises. The only exception was the category of loans for working capital, whose rates registered a slight increase, but due to the low share of loans granted in this quarter its contribution to the interest rate of loans for liquidity to enterprises is minimal. Compared to 2017 Q1, the interest rates are lower for both loans for liquidity (by 0.6 p.p.) and loans for investments (by 0.3 p.p.).

The interest rates on loans to enterprises have been on a downward trend for a long time, evident mostly in loans for investments. Interest rates for investment loans are falling since the beginning of 2013. In 2017 Q3, they averaged 5.6%, remaining close to the level of the previous quarter, and being -0.4 p.p. lower than 2017 Q1 and 1.2 p.p. lower than 2016. Interest rates on loans for liquidity remained volatile and were affected by non-typical loans, being the main source of volatility in the interest rate on lek loans as well. However, they too have started to show a downward trend in the second and third quarters of this year. In average terms, they resulted at 6.9% in these two quarters, being 1.1 p.p. lower than in 2016.

The average interest rate on euro loans to enterprises resulted at 4.1% in 2017 Q3, decreasing from the average of the four previous quarters of 4.9%. Interest rates resulted lower for all types of loans, but the rate on loans for equipment purchase decreased the most. Compared with the 2016 average, the interest rates on loans for liquidity, particularly those for working capital decreased the most.

3 The calculation of the average rates for 2017 Q2 excludes an overdraft loan with a particularly low interest rate granted in April.

Chart 4 Interest rates on lek loans to private enterprises


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Banks remain selective and prudent regarding loans to enterprises. After keeping lending standards unchanged in 2017 Q2, banks tightened them slightly in Q3 for large enterprises and for investment loans. However, this tightening reflects the behaviour of few banks in the system, driven also by specific factors related to financing these segments. The other banks overall kept the standards for those two segments unchanged. Amongst non-price lending standards for enterprises, the maximum size of loans decreased and collateral requirements increased further, thus contributing to the tightening side, while the maximum maturity of loans remained unchanged. Amongst price standards, in addition to decreasing interest rates, banks also decreased commissions; on the other hand, they applied higher margins of interest on loans with higher risk.

Chart 5 Interest rates on euro loans to private enterprises in %


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Chart 6 Lending standards for enterprises, balance of responses, pp


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4Loans to households accelerated their growth in Q3. Eased lending standards and growing demand from this segment supported the expansion of this portfolio. The interest rates on both lek and euro loans to households remained close to the minimal levels of the previous quarter, while non-price lending standards eased further for this segment. Banks do not expect to change the lending standards for households, but the credit demand by this segment will continue to grow.

The portfolio of loans to households increased by ALL 2.1 billion in Q3, further improving the pace of growth of this portfolio at 6.8% against 6.5% registered in Q2. Loans to households reached 12.1% of GDP. The portfolio of loans to households is dominated by mortgage loans, which account for around 64.4% of loans to households. Unlike in the previous quarter, the quarterly growth of loans to households is supported more by loans for house purchase. This portfolio accelerated the growth pace at 4.5% against 3.9% registered in Q2. As confirmed by banks, the better performance of this portfolio reflects the increased demand of households to invest in the housing market, the active promotions of banks for this product, as well as the increase of qualitative residential buildings in this market. Also, banks say that local government subsidies for interests on mortgage loans granted to newly-married couples have also provided a positive contribution.

4 Crediti to household data are adjusted for the impact of writte of loans.

2. LOANS TO HOUSEHOLDS4

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


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Consumer loans also showed positive developments in this quarter. They registered a high growth of 12.4%, supported by the further easing of lending standards, such as easier collateral requirements, the longer maturity of loans, as well as higher loan’s size. Banks’ standards for these loans have had an easing trend for several years, thus boosting demand for this product. The share for consumer loans against total loans to households has been on an upward trajectory for more than two years. At the end of September, consumer loans accounted for 29.9% of loans to households against 28.4% in the previous year. The positive performance of consumer loans reflected the improvement of consumption and confidence, the positive developments in the labour market, and the easing of the banks’ financial standards.

By currency, the positive developments of the portfolio of loans to households are driven by loans in lek. These loans grew on average by 10.6% in this quarter, against 11.3% in the previous quarter. Meanwhile, the share of loans in lek against the total of loans to households registered a further growth at 58.7%, standing slightly higher than the end of 2016. Foreign currency loans to households took an upturn in this quarter, but their performance remained weak.

INTEREST RATES AND OTHER LENDING STANDARDS

The average interest rate on lek loans to households in 2017 Q3 resulted unchanged from the average rate in Q2, at 7.3%, and slightly lower than the 7.5% rate registered in 2017 Q1. Changes in Q3 rates against Q2 rates are not significant, across all types of loans as well. Also, compared with the average for 2016, the total interest rate on loans to households is almost unchanged. A slight increase of interest rates for overdraft loans was offset by the decrease of the interest rates on consumer loans. These minimal fluctuations in the last two years suggest that the interest rates on loans to households overall have reached a stable level.

Chart 8 Loans to households by currency and purpose


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The average rate on euro loans to households resulted 3.8% in 2017 Q3, unchanged from the previous quarter, as well as very close to 2017 Q1. By purpose of use, the increase of interest rates for overdraft loans was offset by the decrease of interest rates for consumer loans. Interest rates on mortgage loans have not changed from the previous quarter. Compared with the average of 2016, the interest rate on euro loans is around 0.5 p.p. lower, with interest rates being higher for overdraft loans and lower for the other types of loans.

The spread between interest rates on loans in lek against those in foreign currency in the households segment remains at 3.5 p.p. in 2017 Q3, the same as in 2017 H1. It was 0.5 p.p. higher than 2016, reflecting the decrease of the interest rates on loans in euro, whereas loans in lek have remained almost unchanged.

Chart 9 Interest rates for lek loans to households in %


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The positive approach of banks towards loans to households continues. In 2017 Q3, they eased again the lending standards for this segment, for both mortgage and consumer loans. All non-price standards were eased further in this quarter, with collateral requirements easing the most.

Chart 11 Lending standards for households, balance of responses, pp


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Lending in the CESEE region followed the growth trend that had started in 2017 Q2. Demand continues to be perceived as high5. Lending standards have been reported unchanged, with expectations on the easing side for 2017 H2, narrowing the gap between demand and supply. In geographic terms, the performance of lending is less segmented, particularly in the enterprises’ portfolio, with the majority of countries recording an increase. The performance of loans to households continues to appear consistent.

Credit to the private sector continued to improve the growth rates shown in 2017 Q2. In July and August, growth averaged around 3.9%, annually, compared to 3% in Q2. According to the latest semi-annual bank lending survey in the CESEE countries, banks expect further growth of demand for 2017 H2, by both enterprises and households. In addition to demand, expectations for easing of broad-based lending standards seem to have positively affected lending in the countries of the region during this period.

The growth rates of loans to enterprises expanded further, recording 3.5% on average in July and August in the CESEE region. According to the bank lending survey in these countries, expectations for demand growth by enterprises are significantly higher in 2017 H2 compared to H1. This demand will be oriented mainly towards loans for investment purposes, led by the small and medium-5 The bank lending survey in the CESEE region for 2017 H1 includes 2016 Q4 and 2017

Q1, provided in the following link. H2 includes 2017 Q2 and Q3. http://vienna-initiative.com/wp-content/uploads/2017/05/economics_cesee_bls_2017_

h1_en.pdf

3. TRENDS IN LENDING IN THE COUNTRIES OF THE REGION

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

*Demand and supply data on the right-hand chart refer to the data taken by the EIB survey and express the net balance of answers on the performance of standards and lending demand.Source: Bank of Albania, region’s countries banks, European Investment Bank (EIB).

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sized enterprises segment. In geographical terms, loans granted to enterprises during this period reflected its improved performance, particularly in some of the Balkan countries. The Central European countries are characterized by consolidated growth pace of loans to enterprises. In Albania, these loans also recorded growth in 2017 Q3. It was mainly supported by the growth of loans for investment purposes. Loans for liquidity also contributed to growth, but they are more volatile, depending on the short-term needs of enterprises for liquidity.

Loans to households continued to expand at a stable pace. The households’ credit demand is expected to be higher than in 2017 H1, supported by the positive developments in the housing market and the improvement of consumer confidence indicators. According to the EIB survey, the demand for consumer loans is expected to almost double, compared to the demand registered in

Chart 13 Loans to enterprises

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Chart14 Loans to households

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18 Bank of Albania Bank of Albania PB

2017 H1. These expectations are reflected in the further expansion of this portfolio in July-August, which grew on average by around 4.1%, year on year. In geographic terms, the expansion of loans to households is driven by the Balkan region. Serbia and Romania continue to register rapid growth for this portfolio. Similar to the developments in the region, loans to households in Albania have registered stable growth, supported by both consumer and mortgage loans.

trends in lending - bank of albania · lending to enterprises, although some of them have begun to...

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