ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE

ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE

ALBANIA

Economy and Banking System

by Seyhan PENCAPLIGIL AAB Chairman Budapest, 15 November 2006

ALBANIAN ECONOMY

ALBANIA - Located in Southeastern Europe (Western Balkans)

Economic Policy Framework



Open Market Economy,



No restrictions on profit and capital repatriation,



No exchange rate restriction, floating exchange rate regime,



Albania signed its Stabilization & Association Agreement with the European Union, the first formal step to eventual EU membership (12 June 2006).

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ALBANIA Main Economic Features & Indicators

Macroeconomic performance of the Albanian economy has been good overall, with sustained growth and low inflation.

Annual economic growth has been around 6% during the last 5 years.

Domestic demand mainly driven by migrant remittances (EUR 939 million for 2005, or 14% of GDP) which have significant impact on fiscal revenues and expenditures, as well as by other external current transfers, and rapidly expanding financial intermediation & credit. Services, agriculture and industry share were 45%, 22.8% and 13.8%.

Investments to GDP ratio reached 24.2 per cent for 2005.

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ALBANIA Main Economic Features & Indicators (2)

EU is the main trading partner: 88% of exports and 60% of imports. SEE is the second trading partner: 9.2% of exports and 14.8% of imports.

Exports and imports reached EUR 530 million and EUR 2 billion – Net importer …but more than 60% of the current account financed by FDI.

FDI for 2005 reached EUR 213 million. Foreign reserves were at EUR 1.2 billion, covering 4.6 months of imports of goods and services.

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ALBANIA Main Economic Features & Indicators (3)

Key economic figures and forecasts

Population: 3.2 mn GDP (EUR bn)

GDP growth (% yoy) GDP per capita (EUR at PPP) Industrial output (% yoy) Unemployment rate (avg, %) Inflation rate (% yoy) Gen. budget balance (% of GDP) C/A balance (% of GDP) Public debt (% of GDP) Gross external debt (% of GDP) Official FX-Reserves (EUR bn)

ALL/EUR, avg ALL/USD, avg 2003

6.0 5.8 4,250 3.0 15.0 3.3 (4.9) (7.0) 60.7 20.7 0.8 137.5 121.9

2004

6.0 6.2 4,640 3.1 14.6 2.2 (4.9) (4.7) 55.3 17.8 1.0 127.7 102.8

2005

5.5 5.5 4,860 3.1 14.2 2.0 (3.8) (8.7) 54.9 16.8 1.2 124.2 99.8

2006e

6.0 5.0 5,130 3.5 14.1 3.0 (3.0) (7.3) - 17.0 1.3 123.1 96.1 ALBANIAN ASSOCIATION OF BANKS

ALBANIAN ASSOCIATION OF BANKS SHOQATA SHQIPTARE E BANKAVE

ALBANIA Macroeconomic Environment

POLICIES Moderate rise of consumer prices during 2005 was favored by the fruitful coordination of monetary and fiscal policies.

Fiscal Policy Prudential implementation of fiscal policies, by observing the planned parameters of fiscal indicators, has not transmitted excessive inflationary pressures and has contributed to maintaining price stability.

Monetary Policy Monetary policy of the Bank of Albania has generally had a neutral stance. Lending to the economy has been the main source of monetary expansion during 2005, unlike in the preceding years, when this function had been realized by government borrowing or foreign currency inflows.

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ALBANIA Macroeconomic Environment

Albanian economy experienced significantly higher growth than other transition.

With the exception of 1997 (following the collapse of the pyramid schemes), however, Albania has consistently outperformed the CEE countries.

Source: IMF Source: IMF

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ALBANIA Macroeconomic Environment

Economic Growth Continuous and sustainable economic growth (~6% annually).

Price Stability Price stability is one the lowest within SEE countries (ranging between 2-4%).

8 7 6 2 1 5 4 3

7.7

2000

Economic Growth Rate 2000-2005 6.5

2001

4.7

6

2002

Year

2003

6

2004

5.5

2005

Inflation rate 2000-2005

5 4.5

4 3.5

3 2.5

2 1.5

1 0.5

0

4.2

2000

3.5

1.7

3.3

2.2

2

2001 2002

Year

2003 2004 2005

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ALBANIA Macroeconomic Environment

Income & employment



GDP growth has enabled rise of income per capita beyond USD 2,500 per year, which, however, remains among the lowest figures of the region.



Notwithstanding the ongoing GDP growth in years, employment performance reflects a moderate behavior.



Unemployment rate reduction continues to be insignificant, either in absolute value or in relative terms.

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ALBANIA Macroeconomic Environment

Remittances

   

Albania’s receipts from workers’ remittances are, relative to GDP, among the highest in the world. Remittances are considerably larger than exports (1.8 times), foreign aid (7.3 times), and FDI (4.7 times). Remittances have significantly lowered the current account deficit and helped Albania build a comfortable level of external reserves.

Although the bulk of remittances is still sent through informal channels, the importance of the formal channel has increased significantly in recent years.

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ALBANIAN BANKING SYSTEM

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ALBANIAN BANKING SYSTEM Brief History Genesis

The establishment of Imperial Ottoman Bank (1863) in Albanian territories.

Central banking

Establishment of the National Bank of Albania, jointly with Italian and Austrian banking groups, 4 October 1913.

Mixed Central & Commercial Banking

Establishment of National Bank of Albania (NBoA), 02 September 1925.

Communist era

NBoA was nationalized in 13 January 1945 and the Albanian State Bank (ASB) was established, with both functions as central & commercial bank.

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ALBANIAN BANKING SYSTEM Brief History Market Economy

Two-tier banking system introduced and Bank of Albania established as the central bank of the Republic of Albania (1992).

To date

Albanian banking system has 17 commercial banks.

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ALBANIAN BANKING SYSTEM Main Features

Universal banking system, The dominant sector within Albanian financial system, managing more than 95.5% of total financial assets, Mainly foreign-owned (14 out of 17 banks are foreign-owned), Almost privately-owned (some minor state shareholdings), A highly concentrated banking system, where top four banks have a share of ~ 73% of total assets.

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ALBANIAN BANKING SYSTEM Main Features

Continuous institutional expansion and development… No

1 2 3 4 5

Subjects [1]

Banks and branches of foreign banks Non-bank financial institutions Foreign exchange bureaus Save & loan associations Unions of save & loan associations

2000

13 2 19

2001

13 4 38

2002

14 5 58 113 2

2003

15 7 58 131 2

2004

16 7 54 130 2 [1] Subjects licensed by Bank of Albania.

2005

17 7 58 131 2

Other non-bank financial institutions No

1 2 3

Subjects 2

Insurance Companies Pension Funds Leasing Companies

2000

5 1 1

2001

5 1 1 2/ Subjects licensed by Financial Supervision Authority, except for Leasing Companies.

2002

5 1 1

2003

5 1 1

2004

10 1 1

2005

10 3 2

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ALBANIAN BANKING SYSTEM Main Features More coverage with banking services…

Number of employees Number of outlets Number of employees per:

- bank - bank unit

Number of residents per:

- bank - bank unit - bank employee

2003 2004 2005

2,236 161 149 14 2,816 188 176 14 3,479 250 217 13 206,851 194,971 184,410 20,815 16,593 12,539 1,388 1,108 901

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ALBANIAN BANKING SYSTEM Main Indicators

Performance of total assets Indicator

Total assets (mln EUR) In % of GDP

Asset structure (in %) Dec. ‘01

2,638.8 53.5 Interbank & Treasury Operations Credit Outstanding Securities Operations Fixed Assets

2004 2005

74 17 7 2

Dec ‘02

2,420.1 51.6

Dec ‘03

2,486.2 50.2

Dec ‘04

3,375.1 51.9

Dec ‘0 5

4,050.9 59.5

Steady growth of banking assets…

60 26 12 2 8000

Banking system assets vs. GDP 2000-2005

7000 6000 5000 4000 3000 2000 1000 0 2001 2002 2003

Year

Banking assets

2004

GDP

2005

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ALBANIAN BANKING SYSTEM Main Indicators

Deposits’ growth

Total Deposits (mln EUR) in % of GDP Retail Deposits (mln EUR) in % of GDP

2005 Continuous deposit growth – among the highest in SEE countries.

18.2

Deposits' Composition 2001-2005 46.3

35.5

2004 9.4

59.2

31.4

2001 2002 2003 2004 2005

2,164.0 2,061.3 2,124.0 2,974.6 3,569.5 44.3 45.8 44.1 48.4 51.2 1,229.5 1,137.7 1,106.5 2,581.0 3,069.3 25.1 25.3 23.0 42.0 44.0

2003 6 2002 7.7

2001 8.7

63.4

60.2

59 30.6

32.2

32.3

0 10 20 30 40 Demand Deposits in ALL 50 in % 60 70 Time Deposits in ALL 80 90 FX Deposits 100 ALBANIAN ASSOCIATION OF BANKS

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ALBANIAN BANKING SYSTEM Main Indicators Credit performance

Credit to Economy (mln EUR) in % to GDP in % to total assets Credit/deposit ratio

2001

227.0 4.6 9.2 10.6

2002

275.5 5.7 11.5 13.5

2003

340.9 6.8 13.7 15.7

2004

552.4 8.4 16.9 19.0

2005

1,042.2 14.6 25.1 28.5 Experiencing a credit boom recently, but credit ratios still low compared to EU and SEE standards.

Credit/Deposit ratio 2001 - 2005

4000 3500 3000 2500 2000 1500 1000 500 0 2001 2002

Credit to Economy (mln EUR)

2003

Deposits

2004 30 25 20 15 10 5 2005

Credit/deposit ratio

0

1200 1000 800 600 400 200 0 Credit to economy 2001-2005 2001 2002 2003

Credit to Economy (mln EUR)

2004

in % to GDP

2005 16 6 4 2 0 14 12 10 8 ALBANIAN ASSOCIATION OF BANKS

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ALBANIAN BANKING SYSTEM Main Indicators

Private Sector Loan Structure

Corporate loans (mln EUR) Retail loans (mln EUR)

2001

182 31

2002

238 54

2003

279 89

2004

375 168

2005

666 309

2001 2002 2003 2004 2005

Standard Loans Classified Loans 88.74 11.26 89.89 10.11 92.35 7.65 92.70 7.30 93.86 6.14

Credit quality improving despite credit boom; retail loans in expansion Loan structure 2001-2005 Credit quality 2001-2005 15

32% 68%

2005 13 2004 2003 2002 2001

24% 18% 15% 31% 82% 85% 69% 76%

11 9 7 5 3 1 0% 20%

retail

40% 60%

corporate

80% 100% 2001 2002 2003

classified loans

2004 2005 ALBANIAN ASSOCIATION OF BANKS

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ALBANIAN BANKING SYSTEM Main Indicators

Average Interest Rates

in ALL

Treasury Bills rate 12-M (in%) Deposit Rate 12-M (in%) Lending rate 12-M (in%) Still high interest rate spreads in ALL, despite declining trends in deposit interest rates.

18 16 14 12 10 8 2 0 6 4 2001

10.5 7.80 11.9

2002

12.62 9.30 16.00

2003

9.56 7.62 10.52

2004

8.11 5.99 13.73

Average ALL Interest Rates 2001-2005 2005

6.91 5.57 12.6

2001 2002

Treasury Bills rate 12-M (in%)

2003

Lending rate 12-M (in%)

2004 2005

Deposit Rate 12-M (in%)

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ALBANIAN BANKING SYSTEM Performance Indicators

Liquidity

in mln EUR 1. Short-term Assets 2. Short-term Liabilities 1/2 in %

Capital adequacy

Capital Adequacy Ratio in %

Shareholders’ Equity

in mln EUR Shareholders’ Equity 2003 107 2004 2005 1,101 1,212 1,339 1,027 1,253 1,674 97 80 A highly liquid and solvent banking system 2003 28.5 2004 21.6 2005 18.6 Capital adequacy satisfactory levels at 2003 160 2004 203 2005 266 Well – capitalized banks

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ALBANIAN BANKING SYSTEM Performance Indicators

Profitability

RoAA RoAE in % 2003 1.20 19.5 2004 1.30 21.10 2005 1.40 22.4 A highly banking system profitable

Return on main operations

in % Interest income/interest bearing average assets (1) Interest expenses/interest bearing average assets (2) Net interest margin (NIM) [(1)-(2)] 2003 6.81 3.08 3.73 2004 2005 6.78 3.23 3.55 6.96 3.88 3.08 Banks moving towards more profitable assets within the structure of earning assets.

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ALBANIAN BANKING SYSTEM Exchange Rates

Average Exchange Rates

in ALL

EUR/ALL US$/ALL LEK (ALL) has been appreciated significantly during last years.

150 145 140 135 130 125 120 115 110 105 100 95 90 2001

128.5 143.5

2001 2002

132.4 140.1

2003

137.5 121.9

2004

127.7 102.8

2005

124.2 99.8

Average Exchange Rates 2001-2005 2002

EUR/ALL

2003

US$/ALL

2004 2005 ALBANIAN ASSOCIATION OF BANKS

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ALBANIAN BANKING SYSTEM Electronic Cards

Type Cashtronic Debit Cards Credit Cards Prepaid Cards Total ATM POS 2003 26,736 6,552 806 34,094 93 155 2004 173,161 50,066 2,550 136 225,913 205 779 2005 220,657 70,176 4,245 169 295,247 266 1,073

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ALBANIAN BANKING SYSTEM Regulatory Framework

Law no.8365, dt.02.07.1998 “On Banks in the Republic of Albania”.

Main Licensing Requirements for Credit Institutions



Banks shall be founded as joint stock companies. No discriminatory restrictions in terms of capital participation and formation.



The minimum amount of initial capital required, paid in cash, in respect of a bank, is not less than ALL 700 million (to be raised up to ALL 1 billion);



Administrators having a business or professional history for the past 7 years,



General executive directors of the bank shall be more than two,

Licensing Requirements for bank’s branch office

Similar requirements as those required for Albanian banks.

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ALBANIAN BANKING SYSTEM Regulatory Framework Licensing

 

Preliminary approval or deny, within 3 months from the date of its receipt of the application for a license at Bank of Albania. A bank or branch of foreign bank, which has been granted preliminary approval shall, within one year starting from the day of the preliminary approval, request in writing from the Bank of Albania granting of the final license.

Scope of activity



The range of allowed banking & financial activities a bank may offer differs in relation to the level of paid up capital. A bank with a paid-up capital of more than three times of minimum initial capital is eligible to offer the full range of banking services.

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ALBANIAN BANKING SYSTEM Banking Supervision Prudential Banking Supervision

The supervision process is carrying out through the following instruments:



Periodic data reporting regarding banking financial indicators, through unified reporting system (reporting various balance and off-balance sheet items, as well as other indicators, as the supervision regulatory framework requires);



Ad hoc (special) reporting of various data;



On-site (full scale or targeted) examinations;



Off-site analysis.



CAMELS system is employed during on-site examinations (CAMELS rankings range from “1” – top performance- to “5” – poor performance).

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ALBANIAN BANKING SYSTEM Banking Supervision (2)

Bank of Albania has already approved a set of all necessary and well detailed rules and regulations, whose implementation help to ensure prudential banking supervision, as follows:         Regulation Regulation

“On Capital Adequacy”,

,

“On the amount and fulfillment of minimum initial capital of the allowed activities of banks and branches of foreign banks”

, Guideline

“On Bank’s Regulatory Capital”,

Regulation Guideline

“On Market Risks”, “On the Liquidity of the Bank”,

Regulation Regulation Regulation

“On Significant Risk Management”, “On Open Foreign Positions”, “On Bank Relations with persons related to bank”.

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ALBANIAN BANKING SYSTEM Payment System

The Albanian payment system is run and regulated by Bank of Albania.

Postal service network, part of payment system also, mainly for money transfer ordered by individuals. Bank of Albania is the operator of two payment systems: AIPS (Albanian Interbank Payment System), a real-time gross settlement system (RTGS), which processes all interbank big value (equal to or exceeding ALL 1,000,000 (~USD 10,000)) payments (a SWIFT-based Y-copy service, “live” from January 2004).

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ALBANIAN BANKING SYSTEM Payment System (2)

AECH (Albanian Electronic Clearing House) System, an automated clearing system, for processing banks’ payments to their clients (small value payments; “live” from 2005). The system is fully integrated with AIPS and the net clearing position is settled daily in AIPS.

Both systems are owned by Bank of Albania.

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ALBANIAN BANKING SYSTEM Future Developments & Challenges



Reduction of informal economy,



Expansion of banking retail chains and products, more banking service coverage,



Introduction of new technology: e-banking,



New banking law – February 2006,



Full implementation of IAS/IFRS, by January 2008,



Increasing the beneficial effects of remittances, by channeling most of them through the financial system.

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Contacting AAB

URL: www.aab.al

E-mail: [email protected]

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