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Albania’s slow awakening

As the economy continues to expand, foreign banks are gradually moving into Albania, with growth in lending and consolidation. Kerin Hope reports.
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Albania enjoys one of the highest economic growth rates in south-east Europe, but the level of financial intermediation has lagged behind the rest of the region. Lending to the private sector is equivalent to only 9% of GDP compared with a regional average of around 20% of GDP.

But with the economy set to expand by around 6% this year, for the fifth straight year, demand for credit is steadily rising. The private sector contributes more than 60% of output, but apart from a handful of large-scale importers and domestic manufacturers, most businesses are small and family-run.

In July’s general election, Albania’s business community backed the opposition right-of-centre Democratic Party led by former president Sali Berisha, who campaigned on an anti-corruption platform.

The Democrats and their allies, the small Republican party, won a narrow majority, electing 74 deputies to the 140-seat parliament. But after eight years in power, the Socialist party of Fatos Nano, the prime minister, was in no mood to concede defeat. Mr Nano pledged to contest the voting process in a dozen constituencies, including many in the capital Tirana, where the Democrats made most gains. Albania’s electoral commission cannot publish the results of the election until it has dealt with complaints.

Reform pledge

Despite a tense political atmosphere, Mr Berisha vowed to push ahead with his programme, pledging to reform the customs service and the property registration office in his first 100 days. He also pledged to re-examine the latest privatisation – the $125m sale of AlbTelecom, the fixed-line operator, to a Turkish consortium that includes Turk Telekom, the state-controlled fixed-line operator, which is in the process of being privatised. The deal was approved by the Socialist government just one week before the election.

At the same time, Mr Berisha must repair relations with the European Union, so that Albania can sign an EU stabilisation and association agreement (SAA), the first step on the road to eventual membership. The talks were frozen ahead of the elections because of the government’s slow progress with implementing judicial reforms and tackling organised crime.

“The negotiations are essentially over, and the SAA agreement is ready, but the new government has to demonstrate a real commitment to cracking down on corruption, trafficking and organised crime,” said one senior western diplomat. “If that’s forthcoming, the agreement could be signed by the end of the year.”

Eurobond issue

Ardian Fullani, the central bank governor, says Albania is seeking an international credit rating and will launch its first Eurobond issue by December. He says the business environment is improving, but that more needs to be done to promote foreign investment: “We have to open up the economy as much as we can. We’ve made progress but one key change has to be made to ensure we can attract greenfield investment – foreigners must be allowed to own land.”

The banking sector has already attracted strong foreign interest. All six Tirana-based banking operations with a balance sheet of more than $100m are subsidiaries or branches of foreign bank groups. Competition is intensifying as companies seek working capital loans to finance expansion and retail lending starts to take off.

Local acquisition

Raiffeisen’s acquisition last year of Albanian Savings Bank (ASB), the country’s biggest bank with more than 60% of deposits, has raised the stakes. ASB was the only domestic bank to survive the 1997 collapse of a series of fraudulent pyramid savings schemes, with losses to local savers of around $2bn. It served mainly as a repository for deposits. Restricted to lending almost exclusively to the government, ASB held a large portfolio of short-term treasury bills, making up around three-quarters of its assets.

Renamed Raiffeisen Bank Albania (RBA), the bank is expected to drive a rapid acceleration in lending. RBA increased its share of overall private sector lending from 0.8% to 1.3% in the second half of last year, but results reflected the impact of a rapid restructuring. RBA’s share of overall deposits declined to 57%. A rapid increase in administrative expenses was driven by marketing campaigns aimed at promoting lending activity, increasing the cost-to-income ratio to around 38% – still below the sector average of 49%.

Net interest income grew by just 2.4% because of steadily declining yields on government paper. Interest rates on three-month treasury bills fell by more than 200 basis points last year, amid intensifying competition at central bank auctions.

Steven Grunerud, RBA chief executive, says his remit is to create a flagship bank for Albania. “There’s a lot of room for growth. We see the market as underdeveloped; lending should be at around 15% of GDP at least to match the level of the economy.”

RBA has hired and trained 250 loan officers, credit analysts, risk managers, IT specialists and marketing staff. It has installed 100 ATMs after landing the contract for making salary payments to the country’s 80,000 civil servants. “They will become core customers for retail products,” Mr Grunerud says.

RBA also expects to benefit from having a large network, with almost 90 outlets around the country, compared with other foreign-owned banks’ networks of around a dozen branches.

Handling an estimated €800m-€1bn yearly in remittances from about 800,000 Albanians working abroad – mainly in Greece, Italy, Switzerland and the UK – is an important market segment. These inflows provide capital for setting up and operating small businesses as well as underpinning a sustained boom in construction and strong consumer demand.

American Bank of Albania (ABA), the country’s fastest-growing bank, opened its first international branch in central Athens in 2003. But a deal signed this year to transfer workers’ remittances through Agricultural Bank of Greece, which has a network of 450 branches around the country, is expected to have a bigger impact. The majority of the 500,000 Albanians working in Greece are employed in rural areas, while many immigrants working in Athens transfer funds through with National Bank of Greece or Alpha Bank, which both have small networks in Albania.

ABA, owned by the American-Albanian Enterprise Fund, last year increased its customer base by 50% and its loan book by 80%. With a 17% share of the loan market, ABA has pioneered lending in Albania, from syndicated facilities and corporate loans to mortgages and consumer lending.

Last year, ABA arranged a 12-year €33m syndicated loan facility for Tirana Airport Partners, an international consortium led by Germany’s Hochtief group, which is upgrading and managing the country’s only international gateway under a long-term concession agreement. Other lenders included the European Bank for Reconstruction and Development (EBRD), Germany’s DEG and Alpha Bank of Greece.

ABA chief executive Lorenzo Roncari believes there is plenty of scope for project financing to improve Albania’s communist-era infrastructure – seen as one of the main obstacles to increasing foreign investment.

“The big Tirana-based banks have the local knowhow and the flexibility to arrange financing for road, rail and port projects that are critical for sustained growth,” he says. “If the project is viable, we are in position to put together a syndicated facility in a matter of weeks.”

Microfinance market

Microfinance also plays an important role in Albania’s fledgling market. The Frankfurt-based IMI group, a micro-financing specialist, has a 32% stake in ProCredit Bank Albania, part of a global network of 18 banks that finance small businesses in developing markets. Other shareholders include Commerzbank with 20% and the EBRD with 11%.

As its customer base grows, ProCredit has expanded its products to include housing loans, consumer finance and credit cards and has started lending to farmers. It has the country’s biggest portfolio with 27,000 loans outstanding, equivalent to 18% of overall lending.

“This is a market that’s starting to awaken,” says Ralf Reitemeier, ProCredit’s general manager. “We focus on the business, not the collateral but we have a very good quality loan book. Non-performing loans are below 1.5%.”

With 16 private banks operating in Albania, consolidation is seen as the next step. This year’s privatisation of Italian-Albanian Bank, in which Banca di Roma and the EBRD hold equity stakes of 40% and 20% respectively, should mark a turning point.

Two domestic players – ABA and Tirana Bank, a subsidiary of Greece’s Piraeus Bank – are understood to be bidding. Other likely contenders are Italy’s San Paolo and Intesa groups, as well as France’s Société Générale, which already has a strong regional presence.

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Read more about:  Central & Eastern Europe , Albania