“Albanian economy, too euroized” - IMF: Banking sector has been transformed. Risks remain from securities
Over the last decade, the Albanian banking sector has undergone a remarkable transformation. The International Monetary Fund estimates that from 25% of the level of non-performing loans in the banking sector in 2014, where we had a weak macroeconomic performance, large government arrears and others, bad loans accounted for less than 5% of total loans in the first quarter of 2024, thanks to financial reform and a strong macroeconomic environment.
In terms of bank ownership, the degree of foreign ownership has declined significantly, with the share of assets owned by foreign banks falling from 90% in 2013 to 65% in the first quarter of 2024, reducing the system's vulnerability to risks that may arise from external shocks. Banking supervision has also been continuously strengthened.
According to the International Monetary Fund, the sector has weathered a series of recent shocks well. Despite the banking system facing multiple internal and external shocks in recent years (such as the 2019 earthquake, the pandemic, the Russia-Ukraine war), it has remained resilient. Banking sector profitability has been stable with an average return on assets of around 1% between 2019 and 2022, which increased to an average of 1.7% in 2023 and 2024, as a result of higher interest income, which has come as a result of high lending rates.
However, the banking system remains vulnerable to several risks. Albania continues to rank among the top countries in Europe in terms of bank holdings of securities, presenting risks stemming from the financial relationship between the government and the country's domestic banking sector.
Local currency government bond markets and money markets remain illiquid, which could complicate banks' ability to generate liquidity during stress episodes. The economy remains highly euroized, and while unhedged foreign currency lending has declined as a share of total foreign currency loans, two-thirds of unhedged foreign exchange loans are concentrated in the real estate sector, which has seen rapid credit growth in 2024 and continued price increases.
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