ALBANIA Economy and Banking System by Seyhan PENCAPLIGIL AAB Chairman Budapest, 15 November 2006...

ALBANIAEconomy and

Banking Systemby

Seyhan PENCAPLIGILAAB Chairman

Budapest, 15 November 2006

ALBANIAN ASSOCIATION OF BANKSSHOQATA SHQIPTARE E BANKAVE

ALBANIAN ASSOCIATION OF BANKS

SHOQATA SHQIPTARE E BANKAVE

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).



ALBANIAMain 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.



ALBANIAMain 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.



ALBANIAMain Economic Features & Indicators (3)



Key economic figures and forecasts 2003 2004 2005 2006e

Population: 3.2 mn GDP (EUR bn) 6.0 6.0 5.5 6.0 GDP growth (% yoy) 5.8 6.2 5.5 5.0 GDP per capita (EUR at PPP) 4,250 4,640 4,860 5,130 Industrial output (% yoy) 3.0 3.1 3.1 3.5 Unemployment rate (avg, %) 15.0 14.6 14.2 14.1 Inflation rate (% yoy) 3.3 2.2 2.0 3.0 Gen. budget balance (% of GDP) (4.9) (4.9) (3.8) (3.0) C/A balance (% of GDP) (7.0) (4.7) (8.7) (7.3) Public debt (% of GDP) 60.7 55.3 54.9 - Gross external debt (% of GDP) 20.7 17.8 16.8 17.0 Official FX-Reserves (EUR bn) 0.8 1.0 1.2 1.3 ALL/EUR, avg 137.5 127.7 124.2 123.1 ALL/USD, avg 121.9 102.8 99.8 96.1

ALBANIAMacroeconomic Environment

POLICIES

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

Fiscal PolicyPrudential 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 PolicyMonetary 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.



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

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

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



Economic Growth Rate 2000-2005

5.5

6

64.7

7.7

6.5

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004 2005

Year

in %

I nflation rate 2000-2005

22.2

3.3

1.7

4.2

3.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2000 2001 2002 2003 2004 2005

Year

in %


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.




Remittances

Albania’s receipts from workers’ remittances are, relative to GDP, among the highest in the world.

Remittances are considerably largerthan 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.




ALBANIAN BANKING SYSTEM




Brief History

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

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

Mixed Central & Commercial BankingEstablishment of National Bank of Albania (NBoA), 02 September 1925.

Communist eraNBoA was nationalized in 13 January 1945 and the Albanian State Bank (ASB) was established, with both functions as central & commercial bank. ALBANIAN ASSOCIATION OF BANKS



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

To dateAlbanian banking system has 17 commercial banks.




Brief History

Universal banking system,

The dominant sector within Albanianfinancial 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.




Main Features

Continuous institutional expansion and development…

Other non-bank financial institutions



No Subjects[1] 2000 2001 2002 2003 2004 2005

1Banks and branches of foreign

banks13 13 14 15 16 17

2 Non-bank financial institutions 2 4 5 7 7 7

3 Foreign exchange bureaus 19 38 58 58 54 58

4 Save & loan associations 113 131 130 131

5 Unions of save & loan associations 2 2 2 2[1] Subjects licensed by Bank of Albania.

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

No Subjects2 2000 2001 2002 2003 2004 2005

1 Insurance Companies 5 5 5 5 10 10

2 Pension Funds 1 1 1 1 1 3

3 Leasing Companies 1 1 1 1 1 2


Main Features

More coverage with banking services…




Main Features

2003 2004 2005

Number of employees 2,236 2,816 3,479 Number of outlets 161 188 250 Number of employees per:

- bank 149 176 217 - bank unit 14 14 13

Number of residents per: - bank 206,851 194,971 184,410 - bank unit 20,815 16,593 12,539 - bank employee 1,388 1,108 901

Performance of total assets




Main Indicators

Indicator Dec. ‘01 Dec ‘02 Dec ‘03 Dec ‘04 Dec ‘05

Total assets (mln EUR) 2,638.8 2,420.1 2,486.2 3,375.1 4,050.9 In % of GDP 53.5 51.6 50.2 51.9 59.5

Asset structure (in %) 2004 2005

Interbank & Treasury Operations 74 60

Credit Outstanding 17 26

Securities Operations 7 12

Fixed Assets 2 2

0

1000

2000

3000

4000

5000

6000

7000

8000

mln

EU

R

2001 2002 2003 2004 2005Year

Banking system assets vs. GDP 2000-2005

Banking assets GDP

Steady growth of banking assets…

Deposits’ growth

Continuous deposit growth – among the highest in SEE countries.




Main Indicators

2001 2002 2003 2004 2005 Total Deposits (mln EUR) 2,164.0 2,061.3 2,124.0 2,974.6 3,569.5

in % of GDP 44.3 45.8 44.1 48.4 51.2 Retail Deposits (mln EUR) 1,229.5 1,137.7 1,106.5 2,581.0 3,069.3 in % of GDP 25.1 25.3 23.0 42.0 44.0

Deposits' Composition 2001-2005

8.7

7.7

6

9.4

18.2

59

60.2

63.4

59.2

46.3

32.3

32.2

30.6

31.4

35.5

0 10 20 30 40 50 60 70 80 90 100

2001

2002

2003

2004

2005

in %

Demand Deposits in AL L Time Deposits in AL L FX Deposits

Credit performance

Experiencing a credit boom recently, but credit ratios still low compared to EU and SEE standards.




Main Indicators

2001 2002 2003 2004 2005 Credit to Economy (mln EUR) 227.0 275.5 340.9 552.4 1,042.2

in % to GDP 4.6 5.7 6.8 8.4 14.6 in % to total assets 9.2 11.5 13.7 16.9 25.1 Credit/ deposit ratio 10.6 13.5 15.7 19.0 28.5

Credit/ Deposit ratio 2001 - 2005

0

500

1000

1500

2000

2500

3000

3500

4000

2001 2002 2003 2004 2005

in m

ln E

UR

0

5

10

15

20

25

30

in %

Credit to Economy (mln EUR) Deposits Credit/ deposit ratio

Credit to economy 2001-2005

0

200

400

600

800

1000

1200

2001 2002 2003 2004 2005

mln

EU

R

0

2

4

6

8

10

12

14

16

in %

Credit to Economy (mln EUR) in % to GDP

Private Sector Loan Structure

Credit Quality

Credit quality improving despite credit boom; retail loans in expansion




Main Indicators

2001 2002 2003 2004 2005 Corporate loans (mln EUR) 182 238 279 375 666

Retail loans (mln EUR) 31 54 89 168 309

2001 2002 2003 2004 2005 Standard Loans 88.74 89.89 92.35 92.70 93.86 Classified Loans 11.26 10.11 7.65 7.30 6.14

15% 85%

18% 82%

24% 76%

31% 69%

32% 68%

0% 20% 40% 60% 80% 100%

2001

2002

2003

2004

2005

Loan structure 2001-2005

retail corporate

Credit quality 2001-2005

1

3

5

7

9

11

13

15

2001 2002 2003 2004 2005

in %

classified loans


Main Indicators



Average ALL Interest Rates 2001-2005

0

2

4

6

8

10

12

14

16

18

2001 2002 2003 2004 2005

mln

EU

R

Treasury Bills rate 12-M (in%) Lending rate 12-M (in%) Deposit Rate 12-M (in%)

Average Interest Rates

Still high interest rate spreads in ALL, despite declining trends in deposit interest rates.

in ALL 2001 2002 2003 2004 2005

Treasury Bills rate 12-M (in%) 10.5 12.62 9.56 8.11 6.91 Deposit Rate 12-M (in%) 7.80 9.30 7.62 5.99 5.57 Lending rate 12-M (in%) 11.9 16.00 10.52 13.73 12.6


Performance Indicators

Liquidity A highly liquid and solvent banking system

Capital adequacy

Capital adequacy at satisfactory levels

Shareholders’ Equity

Well –capitalized banks

in mln EUR 2003 2004 2005

1. Short-term Assets 1,101 1,212 1,339

2. Short-term Liabilities 1,027 1,253 1,674

1/ 2 in % 107 97 80

2003 2004 2005

Capital Adequacy Ratio in % 28.5 21.6 18.6

in mln EUR 2003 2004 2005

Shareholders’ Equity 160 203 266





Profitability A highly profitable banking system

Return on main operations Banks moving towards more profitable assets within the structure of earning assets.

in % 2003 2004 2005

RoAA 1.20 1.30 1.40

RoAE 19.5 21.10 22.4

in % 2003 2004 2005

Interest income/ interest bearing average assets (1)

6.81 6.78 6.96

Interest expenses/ interest bearing average assets (2)

3.08 3.23 3.88

Net interest margin (NIM) [(1)-(2)] 3.73 3.55 3.08


Performance Indicators



Average Exchange Rates 2001-2005

90

95

100

105

110

115

120

125

130

135

140

145

150

2001 2002 2003 2004 2005

in A

LL/F

X u

nit

EUR/ALL US$/ALL

Average Exchange Rates

LEK (ALL) has been appreciated significantly during last years.

in ALL 2001 2002 2003 2004 2005

EUR/ ALL 128.5 132.4 137.5 127.7 124.2 US$/ ALL 143.5 140.1 121.9 102.8 99.8


Exchange Rates




Electronic Cards

Type 2003 2004 2005

Cashtronic 26,736 173,161 220,657

Debit Cards 6,552 50,066 70,176

Credit Cards 806 2,550 4,245

Prepaid Cards 136 169

Total 34,094 225,913 295,247

ATM 93 205 266

POS 155 779 1,073




Regulatory FrameworkLaw 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.

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. ALBANIAN ASSOCIATION OF BANKS




Regulatory Framework

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).




Banking Supervision

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 “On Capital Adequacy”,, Regulation “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 “On Market Risks”, Guideline “On the Liquidity of the Bank”, Regulation “On Significant Risk Management”, Regulation “On Open Foreign Positions”, Regulation “On Bank Relations with persons related to

bank”.




Banking Supervision (2)

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).




Payment System

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.




Payment System (2)

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.



Contacting AAB

URL: www.aab.alE-mail: [email protected]



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ALBANIA Economy and Banking System by Seyhan PENCAPLIGIL AAB Chairman Budapest, 15 November 2006...

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