Now Albania has emerged from the financial crisis in relatively sound health, its banks are setting their sights on prudent expansion.
For most Albanians, memories of the civil unrest that began in 1997 remain vivid. Following the collapse of the country's pyramid investing schemes, which saw Albanians lose savings totalling some $1.2bn, the country descended into anarchy, with widespread rioting, looting and killing. In March that year, gangsters used a stolen Type 59 tank to rob a branch of the Savings Bank of Albania - today Raiffeisen Bank - in the southern town of Gjirokastra.
Given the caution engendered by that experience, it came as little surprise a decade later that Albania's banking sector took the global financial crisis in its stride. As turmoil gripped the financial markets elsewhere in Europe, Albania's position as an outlier may have played to its advantage. The country's relatively limited integration into the world economy and the global financial system meant it was barely exposed to toxic assets or bad banks. There was no corporate bond market to dry up, nor was there a functioning stock exchange to collapse.
Furthermore, Albania's 16 banks have a strong retail deposit base - accounting for more than 80% of the sector's assets (as at the end of 2009). Much of the remainder is funded by foreign parent banks, such as Raiffeisen Bank International, Intesa Sanpaolo Bank, and Société Générale, or by stable, long-term international partners such as the European Bank for Reconstruction and Development, the World Bank's International Financing Corporation and Germany's Kreditanstalt für Wiederaufbau.
Above all, Albania's bankers point out that prudent regulation on the part of the Bank of Albania (BoA) kept the second-tier banks sound. As Gazmend Kadriu, CEO of Union Bank, founded in 2006 and majority-owned by Albanian investors, says: "Careful licensing of banks has been the norm in Albania. The regulator did a good job of instilling restraint in the banking sector."
As the wheels fell off the global financial system, BoA governor Ardian Fullani drafted new measures to restrict credit growth and limit problem loans. He established the country's credit registry, with the requirements that banks report terms of all new loans daily, and urged Albania's second-tier banks not to distribute dividends for 2008.
Gazmend Kadriu, CEO of Union Bank
A return to stability
Even so, customers scrambled to withdraw 10% to 20% of deposits as the collapse of Lehman Brothers caused alarm among depositors in September 2008. But given strong liquidity levels, says Bozhidar Todorov, chief executive director of First Investment Bank (Fibank), a Bulgarian-owned institution, "there was no indication that the banks felt any lack of comfort", and by early 2009 deposits had returned to stability.
The Albanian economy grew by an estimated 3.3% last year, outpacing even the 1.7% GDP growth posted by Poland - the only other notable European economy that grew in 2009. That was despite a clear downturn in the Albanian construction sector and a sharp drop in remittances - equivalent to about 12% of the country's GDP in 2009 - sent home by the one-fifth of the labour force that works abroad.
Similarly, total assets in the banking system grew 6.3% in 2009, to Albanian Lk886.3bn ($8.89bn), according to BoA data. Raiffeisen Bank holds 28.2% of the market, as measured by assets at the end of 2009. At the same time, return on equity for the bank system was about 4.2% in 2009, down from 10.3% in 2008, partly as a result of non-performing loan (NPL) levels that accelerated to some 12% for the sector by the middle of this year. Still, half of Albania's banks recorded a net profit in 2009.
Dimitris Santixis, managing director of Tirana Bank, a subsidiary of Piraeus Bank of Greece, and Albania's fourth largest bank by assets with a 9.5% share, says his institution has made every effort to protect the balance sheet and drive profitability in the past two years in order to continue lending. The bank urged retail customers to keep up loan repayments, keeping provisions for bad loans to a minimum.
"We fought. Today, our NPLs are 8.5%, perhaps the lowest in the market. But even in the worst times we continued advertising loans," says Mr Santixis.
Indeed, many of Albania's banks have continued pushing products and services in the past two to three years. In commercial banking, for example, Intesa Sanpaolo Bank Albania, the country's third largest by assets with a 13.3% share, has launched structured finance services. The bank's CEO, Stefano Farabbi, says he aims to fund long-term infrastructure projects such as hydroelectric power plants. And in retail banking, services such as internet banking and structured savings products have emerged, while banks are marketing innovative deals for American Express credit cards and more.
Christian Canacaris, CEO of Raiffeisen Bank Albania
Room for growth
Yet the banking sector's assets remain equivalent to just 77.5% of GDP, compared with an average of 101% for central and eastern Europe, according to Raiffeisen estimates, indicating there is ample room for further growth in Albanian banking. The country's banking sector is also well capitalised, with capital adequacy of 16.2% at the end of 2009, according to the BoA, well beyond the regulator's minimum requirement of 12%.
The sector loan-to-deposit ratio increased to 65% by the end of 2009, although this remains low compared to central Europe, where the average is 106.6%. Some 31.1% of bank loans are to households and most of the rest to businesses.
Mr Kadriu of Union Bank points out that "lending to individuals has been hampered by infrastructure", such as the continued lack of a formal address system in Albania.
"I expect a smooth growth in the loans market of 8% to 10% per annum, more on the business side than on the retail side," says Hubert de Saint Jean, general manager of Société Générale Albania.
But even in commercial lending there are obstacles. Many bankers point out that poor corporate governance and unreliable accounts hinder the degree to which banks can service businesses.
"There is still a lot of informality in the Albanian economy," says Mr de Saint Jean.
Despite these gripes, banks are gearing up to capture further growth in the banking market, first and foremost by expanding lending. Already, year-on-year lending growth had returned to 9.3% by July 2010, according to data from the Albanian Association of Banks.
"One of the main challenges for the banking system in general will be to provide loans to good customers," says Christian Canacaris, CEO of Raiffeisen Bank Albania. "The tough lessons taught by the economic downturn will not be forgotten soon and they will serve to keep all banks attentive to the importance of lending criteria."
To do this banks must beef up their risk management systems and processes. Until now, much lending in the Albanian banking industry has been collateral-based rather than cashflow-based, with personal connections and recommendations also playing a role. Increasingly, bankers expect lending to shift more towards analysis of cashflow, with better risk management.
Better lending
There are already signs of improvement in the lending environment. For instance, the state introduced national identity cards in 2009 and a formal address system may now be imminent. Albania's Parliament this year approved a private bailiffs law, setting the foundation for better servicing of NPLs. Fibank's Mr Todorov welcomes the move.
"Previously, the execution process was slow. But private bailiffs will now force execution and the process will be faster. It will be good for the state, good for banks and good for customers. It will help clean bad loans from the system," says Mr Todorov.
Furthermore, Albania's economy is moving towards greater formalisation, with small businesses now required to install cash registers, while transactions of more than €3000 must be done by bank transfer rather than cash. The government has also introduced a favourable tax regime with a flat 10% tax on corporate gains and income, giving businesses less reason to fudge their accounts. As the economy becomes more formalised, growing numbers of salary payments go through the banking system and credit penetration is likely to accelerate. Still, bankers remain circumspect.
"NPLs are the main issue in the Albanian banking system right now," says Mr Cancaris.
NPLs have risen as portfolios have aged, economic growth has slowed and remittances have dropped. In its July 2010 Albania Outlook report, the International Monetary Fund writes: "It [is] now also time for banks to move to address non-performing loans. In particular, they should begin aggressively seizing collateral of non-performing loans or seek viable loan restructuring."
At the same time, the Albanian Association of Banks is calling for the BoA to ease lending restrictions - in particular, the requirement to book provisions for the full loan amount in cases of problem loans, without regard for collateral. Mr Farabbi of Intesa says he has lobbied the BoA for change but was turned down. Mr Todorov of Fibank is more confident.
"The next year will see some changes in regulation. Some will have a small effect but I hope to see some that have a considerable effect," says Mr Todorov.
