ALBANIA. Economy and Banking System

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1 ALBANIA Economy and Banking System 2011

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

2 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 (June 2006), Albania became a member of NATO (April 2009), On 7 October 2010 the European Parliament approved the proposal to waive visa requirements for Albanian nationals. EU Council of Ministers approved the decision in November. Albanians are free to visit Schengen countries since December 10. Albania issued its first Eurobond in November 2010 with 5 year maturity. The coupon is 7.5% and yield was 7.625%. Nowadays (end of March 12), it yields 9.2%.

3 Albanian Political Outlook Strengths Increasing integration with Western Europe, will help anchor policy stability through the medium term. Outbreaks of large-scale religious and ethnic violence are rare, compared to some of Albania s Western Balkan peers. Both major political parties support the broader goal of EU integration providing impetus for parliament to proceed with necessary structural reforms. Weaknesses Tirana s support for ethnic-albanians in Kosovo continues to undermine relations with Serbia, posing a key foreign policy risk in the region. Ongoing problems such as organized crime and endemic corruption weaken the development of the country. The large flow of unemployment Albanians into neighboring Greece and Italy threatens to undermine Tirana s bilateral relations with these key regional trading partners.

4 Albanian Economic Outlook Strengths Bank of Albania has successfully kept consumer price inflation within its target of 3.0%. This should help anchor macroeconomic stability through the medium term. Although GDP per capita remains low by regional standards, strong growth potential through to 2019 will see consumer spending power rise steadily over the long term. Best performing economy in Central and Eastern Europe in 2009 and A relatively sound, if basic, financial sector with little direct exposure to the global financial crisis. Weaknesses A large grey economy continues to limit the government s tax base. Infrastructure throughout the country remains relatively undeveloped, undermining economic development and cross-border trade. Over 220% general Government Debt to Revenue ratio is one of the highest levels among emerging countries of SEE. Albania s export market remains both underdeveloped and undiversified, with 81% of total goods absorbed by only two trading partners (Italy an Greece).

5 ALBANIA Main Economic Features & Indicators Key economic figures f 2013f Population: (mio) GDP (EUR bn-nominal) GDP growth (%yoy) GDP per capita 2,286 2,461 2,808 2,736 2,906 3,429 3,379 3,333 Industrial Output (%yoy) Unemployment rate (avg, %) Budget balance, ALLbn (29.4) (34.1) (60.3) (79.5) (88.1) (46.80) (75.2) (69.5) Gen, budget balance (% of GDP) (3.3) (3.5) (5.5) (6.9) (7.2) (3.5) (5.1) (5.0) Inflation rate (%yoy) Central Bank policy rate, % Current account, EURbn (0.5) (0.8) (1.3) (1.4) (1.2) (1.1) (1.3) (1.4) Current account % of GDP (6.6) (10.4) (15.1) (15.2) (13.8) (11.5) (12.3) (14.6) Total External Debt, EURmn 1, , , , , ,068 1, ,000 Gross external debt (% of GDP) Goods exports EURbn Goods imports EURbn FDI percentage of GDP Official FX reserves EURbn ALL/EUR, avg ALL/USD, avg

6 Foreign Direct Investment (in million EUR) Country % in total Ranking Greece % 1 Italy % 2 Austria % 3 Canada % 4 Turkey % 5 Netherland % 6 Germany % 7 Kuwait % 8 Switzerland % 9 France % 10 Cyprus % 11 Lebanon % 12 International Organizations % 13 U.S % 14 Macedonia % 15 Bulgaria % 16 United Arab Emirates % 17 Slovenia % 18 Norway % 19 Other % 20 Kosovo % 21 United Kingdom % 22 Croatia % 23 China % 24 Hungary % 25 Monaco % 26 Egypt % 27 Montenegro % 28 Spain % 29 Romania % 30 Israel % 31 Czech Republic % 32 Total FDI 1, , , , The table represents the annual stock of FDI in Albania by originating country.

7 Economic Activity in % of Total FDI Agriculture, hunting and forestry % Fishing % Mining and quarrying % Foreign Direct Investment (in million EUR) Manufacturing % Electricity, gas and water supply % Construction % Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods % Hotels and restaurants % Transport, storage and communication % Financial intermediation % Real estate, renting and business activities % Education % Health and social work % Other community, social and personal service activities % Extra-territorial organizations and bodies % Total FDI 1, , , , % This table represents the annual stock of foreign direct investments in Albania by economic activity.

ALBANIA Main Economic Features & Indicators Albania has exhibited strong macroeconomic performance since 1998, growth recovered close to 6 percent between 2003 and 2008.

Albania and Poland are the only countries in Central and Easter Europe, whose economies could generate a growth in real terms in 2009 after crisis. The Albanian economy grew by 2.

8 ALBANIA Main Economic Features & Indicators Albania has exhibited strong macroeconomic performance since 1998, growth recovered close to 6 percent between 2003 and An inflation targeting regime has been successful with Albania recording some of the lowest inflation readings in EM and largely within the BoA s 3% +/- 1% target band. Albania and Poland are the only countries in Central and Easter Europe, whose economies could generate a growth in real terms in 2009 after crisis. The Albanian economy grew by 2.60% in 2011, mainly driven by telecommunication, transport and trade GDP in bn EUR and GDP growth in % f GDP in bn EUR GDP growth in % Annual GDP growth was around 6.0% until Inflation in % f Inflation is one the lowest within SEE countries (ranging between 2-4%)

9 145 ALBANIA Main Economic Features & Indicators (2) EUR/ALL 2003-March 2012 EU is the main trading partner: 72% of exports and 64% of imports In 2011 exports and imports reached EUR 1.4 and EUR 3.9 billion the country is still a net importer Biggest exporters are foreign companies extracting crude oil and chromes with concession agreements. Foreign reserves in 2011 are estimated to be EUR 2.1 billion, covering more than 5 months of imports. LEK (ALL) has significantly appreciated against US$ till 2008, and more stable against EURO. But after the financial crisis, LEK started to depreciate against EUR. Albania s limited integration in global markets was an important buffer; local currency LEK looks to have been tightly correlated to euro during recent years but this may not be the case for the future. EUR/LEK price slightly increased to level in 2011 from level in 2010 and the exchange rate is still at that level.

10 Country Ratings for Albania In December 2011, S&P S affirmed its long and short-term foreign and local currency sovereign credit ratings on Republic of Albania at B+/B. The outlook is stable. In April 2010, S&P S Assigned B+ long-term sovereign foreign and Local Currency Sovereign Rating for Albania. S&P noted that the stable outlook on Albania balances its strong growth potential and the policy anchor of EU integration, with the country s persistent external imbalances, relatively large government debt and unresolved political and institutional issues. In April 2010, Moody s re-affirmed Albania s Country Foreign Currency Debt Rating Ceiling. Moody s re-confirmed Albanian Government debt rating which is B1 with stable outlook while noting that the Albanian economy withstood the global crisis relatively well. In March 2010, JCR Eurasia Rating downgraded its Country Rating for Albania from BB+ to BB With Stable Outlook. JCR downgraded Albania Sovereign rating due to the weakening macro-economic indicators. In October 2008, JCR Eurasia Rating assigned Country Rating to Republic of Albania. JCR Eurasia Rating has assigned a sovereign rating of BB+ to Republic of Albania on the long term scale and B on the short term horizon. All ratings carry a stable outlook.

11 ALBANIA Macroeconomic Environment Fiscal Policy On the fiscal side, in year 2011 the budget deficit came at 3.5% of GDP. Monetary Policy Monetary policy of the Bank of Albania became expansionary recently, BoA decreased the key one week repo interest rate by 25 bps to 5.00 percent (In Sept 11). In November 2011, BoA decreased the repo interest rate by another 25 bps to 4.75, and in January 2012 it decided to further decrease the repo interest rate by 25 bps to In March 2012 BoA cut the key one week repo interest rate once again by 25 bps to 4.25 percent. FX deposits in 2011 accounting for 49% of total deposits. High degree of euro-ization is partly a result of the large remittance flows. This reduces the effectiveness of the domestic interest rate tool and suggests that the exchange rate has a significant influence in the stance of monetary conditions. Repo Rate March

12 Income & employment ALBANIA Macroecoomic Environment GDP growth has enabled rise of income per capita beyond EUR 2,850 (US$ 4,100) per year, which, however, remains among the lowest figures in the region % 14.50% 14.00% 13.50% 13.00% Unemployment % 13.50% 13% 13.80% 13.50% 13.29% Notwithstanding the ongoing GDP growth in years, employment performance reflects a moderate behavior % 12.00% 11.50% 11.00% Unemployment rate reduction continues to be not significant, either in absolute value or in relative terms (Unemployment rate for 2011: 13.29%).

13 ALBANIAN BANKING SYSTEM

14 ALBANIAN BANKING SYSTEM Brief History Establishment of National Bank of Albania (NBoA) Albanian banking system has 16 (private) commercial banks October November To date Establishment of the Central Bank, jointly with Italian and Austrian banking groups Two-tier banking system introduced and Bank of Albania established as the central bank of the Republic of Albania

15 ALBANIAN BANKING SYSTEM Universal banking system; Main Features The dominant sector within Albanian financial system, managing more than 95.5% of total financial assets; Mainly foreign-owned (14 out of 16 banks are foreign-owned); Many international names have presence; namely Raiffeisen, Intesa San Paolo, Societe Generale, Credit Agricole etc. Almost all privately-owned (some minor state shareholdings); A highly concentrated banking system; top three banks have a share of ~ 58% of total assets (Dec-2011).

16 ALBANIAN BANKING SYSTEM Main Features Continuous institutional expansion and development No. Subject Bank and branches of foreign banks Non-bank financial institutions Foreign exchange bureaus Unions of save & loan associations Other non-bank financial institutions No. Subject Insurance Companies Pension Funds Leasing Companies

17 ALBANIAN BANKING SYSTEM Main Features Number of banks outlets was increasing till the end of 2008 but some banks decreases number of their outlets after the crisis period Number of employees 3,479 4,263 5,206 6,479 6,103 5,906 6,710 Number of outlets Number of employees per: -bank bank unit Number of residents per: -bank 184, , , , , , ,000 -bank unit 12,539 10,958 8,077 5,996 6,212 6,530 5,072 -bank employee

ALBANIAN BANKING SYSTEM Main Indicators Performance of total assets Indicator 2004 2005 2006 2007 2008 2009 2010 2011 Total assets (mio EUR) 3,375 4,051 5,072 6,100 6,690 6,424 7,139 8,063 In % of

18 ALBANIAN BANKING SYSTEM Main Indicators Performance of total assets Indicator Total assets (mio EUR) 3,375 4,051 5,072 6,100 6,690 6,424 7,139 8,063 In % of GDP Steady growth of banking assets Asset structure in (%) Interbank & Treasury Operations Credit Outstanding Securities Operations Fixed Assets ,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Total Asset ,051 3,375 5,072 7,139 6,690 6,424 6,100 8,063

ALBANIAN BANKING SYSTEM Deposits growth Main Indicators 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total deposits (mio EUR) 2,124 2,975 3,570 4,151 4,949 5,007 5,032 5,886 6,651 In % of GDP 44.1 48.

19 ALBANIAN BANKING SYSTEM Deposits growth Main Indicators Total deposits (mio EUR) 2,124 2,975 3,570 4,151 4,949 5,007 5,032 5,886 6,651 In % of GDP Retail deposits (mio EUR) 1,107 2,581 3,069 3,343 3,985 4,276 4,296 4,987 5,743 In % of GDP Continuous deposit growth, but the World Bank ranked Albania as the country with the slowest rate of deposit increase in the whole Balkan region Deposit growth ,000 6,000 5,000 4,000 3,000 2,000 1, ,651 5,886 5,743 4,949 5,007 5,032 4,987 4,151 3,985 4,276 4,296 3,570 2,975 3,069 3,343 2,581 2,124 1, Total Deposits in (mio EUR) Retail Deposits in (mio EUR)

20 ALBANIAN BANKING SYSTEM Main Indicators Credit performance Credit to economy (mio EUR) ,042 1,553 2,401 3,136 3,124 3,405 3,822 In % of GDP In % to total assets Credit/deposits ratio Experiencing an extended credit boom, but credit ratios still low compared to EU and SEE standards. Credit to economy Credit to economy in (mio EUR) In % of GDP

21 ALBANIAN BANKING SYSTEM Main Indicators Private Sector Loan Structure Credit Quality Corporate loans (mio EUR) ,040 1,549 2,048 2,214 2,473 2,803 Retail loans (mio EUR) ,088 1,047 1,065 1, Standard loans in % Past due loans in % Fast deteriorating credit quality due to boom and crisis.

22 ALBANIAN BANKING SYSTEM Performance Indicators Cumulative Profit of Banking System In million EUR banks out of 16 had losses by December Capital adequacy Capital Adequacy Ratio in % Capital adequacy is at satisfactory levels Shareholders Equity Shareholders' equity in (mio EUR) Well capitalized banks

23 ALBANIAN BANKING SYSTEM Profitability Performance Indicators in % RoA RoE (IFRS) It does not include some banks data who are in loss because financial report for these banks is not available in Albanian banking association web-site. These banks are Alpha Bank, International Commercial Bank, National Bank of Greece, and United bank of Albania. Return on main operations in % Interest income/interest bearing average assets (1) Interest expense/interest bearing average assets (2) Net interest margin (NIM) [(1)-(2)] Profitability down significantly in NIM is still high but increasing NPLs worsen the profitability.

24 BoA and Government s Measures In December 2011, BoA made important changes on the regulation On liquidity risk management ; ratio of liquid assets against liabilities. Based on this, all liabilities with remaining maturity less than 1-year are included into liquidity ratio calculation. National currency (ALL) and in foreign currency liquidity ratio is decided to be at minimum level 20% (twenty percent); and total balance sheet liquidity ratio is decided to be minimum level of 25% (twenty-five percent). Since Fx regulatory reserves (10% of Fx deposits), kept in BoA are not considered liquid, the effective liquidity ratio in Fx has increased to 30%. BoA decided not to pay any interest as remuneration rate for foreign exchange deposits required reserves. They were used to pay 70% of 1-m Euribor-Libor rates as remuneration rate before the change. For FX denominated Credits given customers with income in local currency, risk-weighting has increased to 150 per cent risk for CAR. By the end of 2008, due to crisis, BoA limited mother bank placement to 10% of equity (from practically 125 per cent). But in 2011, it normalizes the regulation by increasing the ratio to 20%. Albanian Government increased deposit insurance coverage from EUR 5,000 to EUR 20,000. BoA limited exposures towards the OECD financial institutions to 20% of equity (from practically 100 per cent) BoA disallowed dividend distributions for 2008/09 In June 08, after the IMF criticism, the government has passed a new law that endows Albanian banks with more power to sequester and sell immovable collaterals of commercial credits.

25 ALBANIAN BANKING SYSTEM Future Developments & Challenges Reduction of informal economy, Further expansion of banking retail chains and products, more banking service coverage, Introduction of new technology: e-banking, mobile banking, direct debiting, Increasing the beneficial effects of remittances, by attempting to channel most of them through the financial system, Inter-bank Money Market and Securities market is not fully developed. More steps to be taken for deeper inter-bank markets.

Durresi Branch, built on 30 Nov 1925 by Italians, originally housed the

Vlora Branch, constructed in 1925 by Italians.

Elbasani Branch, constructed in 1937, became one of the headquarters of

27 BKT is the oldest bank in Albania. Some of its branches have been operational since the 1920 s. Durresi Branch, built on 30 Nov 1925 by Italians, originally housed the headquarters of the National Bank of Albania. Vlora Branch, constructed in 1925 by Italians. Its initial function was being a branch of National Bank of Albania. Elbasani Branch, constructed in 1937, became one of the headquarters of National Bank of Albania. Korca Branch, constructed in 1935 as a branch of National Bank of Albania. BKT is the second largest bank by deposits, by credits and total assets, representing 19.20% of market share in deposits.

28 13 BKT Assets (US$ Million) , , ,200 1,161 1, Annual average assets growth since privatization in 2000 reached to 23.7%.

14 BKT Deposits (US$ Million) 1600 1,581 1400 1200 1000 799 1,126

330 472 551 171 628 866 848 945 1,098 1,320 0 Retail Corporate &

29 14 BKT Deposits (US$ Million) , , , , , ,098 1,320 0 Retail Corporate & Commercial Annual average deposit growth over the last eleven years reached

15 BKT Loans (US$ Million) 800 778 700 600 500 400 300 200 100 0 0 1 9 30 70 125 229 162 67 494 386 338 350 262 238 100

30 15 BKT Loans (US$ Million) Retail Corporate & Commercial Annual average loan growth since 2005 reached to 35.6% on average.

31 16 BKT Net Profit (000 US$) 30,000 29,415 25,000 25,003 20,000 17,256 19,544 15,000 11,909 13,044 10,000 8,396 5,000 1, ,905 3,962 5,102 0 BKT has always been profitable: its profit reached to US$ 29.4 million in 2011.

32 17 Shareholders Equity (million US$) Average annual return on equity since the privatization in 2000 is 24.0%

BKT Trade Finance volumes (000 US$) 18 18,000 16,000 14,000 15,008 17,051 12,000 2009 2010 10,000 Trade Finance Transactions US$ '000 8,000 6,000 No 5,185 Total Amount No Total Amount 5,953 3,757

33 BKT Trade Finance volumes (000 US$) 18 18,000 16,000 14,000 15,008 17,051 12, ,000 Trade Finance Transactions US$ '000 8,000 6,000 No 5,185 Total Amount No Total Amount 5,953 3,757 4,000 2,385 2, Letters of Credit Letters of Guarantees Letters of Guarantees 21 2, Trade finance volumes are modest for Albania and BKT, nevertheless they increased significantly in 2011.

34 19 BKT Market Share 20.00% BKT Market Share on Deposits 19.20% 18.00% 16.69% 17.14% 16.00% 15.24% 14.00% 13.10% 14.32% 14.60% 12.00% 10.00% 8.00% 8.16% 9.67% 10.58% 9.94% 11.65% Steady increase in market share over the years, despite new entran

35 20 BKT Market Share 16.00% 14.00% BKT Market Share on Loans % 10.00% 9.30% 10.30% 11.10% 9.80% 10.80% 11.77% 8.00% 8.80% 6.00% 6.40% 4.00% 3.50% 2.00% 0.00% 0.00% 0.30%

36 21 90 Branches and Staff Number Branches Staff Albania Kosovo Total Albania Kosovo Total BKT has a nation-wide coverage both in Albania and Kosovo.

37 BKT Key Financial Ratios 22 Financial Ratios FY 2007 FY 2008 FY 2009 FY 2010 FY 201 Return on equity (RoE) 41.80% 29.90% 12.90% 25.76% Return on Assets (RoA) 1.70% 1.60% 1.10% 1.86% 1.10% Cost to Income Ratio 70.80% 78.90% 87.20% 77.55% Capital Adequacy Ratio 17.00% 17.80% 13.20% 13.06% Liquidity ratio 21.90% 20.30% 17.80% 23.74% Loans to Assets Ratio 28.50% 34.20% 37.90% 37.63% Loans to Deposits 30.30% 37.80% 43.50% 43.19% NPLs (par 90 days) 1.59% 3.96% 5.05% 8.47% 5.60% For the soft copies of our latest audited financial reports, please refer to our web-site

38 BKT Network Coverage 23 Outlets in Albania: 57 (30 cities) Outlets in Kosova: 23 (13 cities) First domestic bank in Albania expanding its activity abroad, in Kosovo, the youngest state in Europe.

24 Our Awards Excellence in STP Requirements BKT has been awarded by Deutsche Bank AG and Wells Fargo Bank International with Excellence in STP Requirements prize, respectively for the years 2010 and

39 24 Our Awards Excellence in STP Requirements BKT has been awarded by Deutsche Bank AG and Wells Fargo Bank International with Excellence in STP Requirements prize, respectively for the years 2010 and The Banker Magazine 2011 Chosen as the Bank of The Year in Albania in 2011 by The Banker Magazine. Europe Banking Awards by EMEA Finance Chosen as the Best Bank in Albania in 2010 by EMEA Finance. The Banker Magazine 2010 Chosen as the Bank of The Year in Albania in 2010 by The Banker Magazine. Certificate on Quality Management System ISO 9001: Obtained the certificate on Quality Management System ISO 9001:2008, issued by Italian Institute Certiquality, applicable for banking services (EA 32). The respective certificate (no.15426) was issued on with an expire date on Since the issuing institute is a member of IQNet (International Certification Network), our bank has been also provided with the same certificate from this organization. Finance Central Europe Magazine 2009 and 2008 BKT has been selected consecutively two years in a row Best Bank in SEE countries and Best Bank in Albania and BKT General Manager The Best Banker in SEE and The Best Banker in Albania. Bank of Albania Central Bank of Albania following the last three general inspections performed in July 2005, November 2006 and June 2008, has appraised BKT for the third time and fifth year in a row with the highest ranking 1-Strong. The Banker Magazine Considered between 100 best banks in Europe is accorded the first prize for Albania. BKT, has been chosen Best Bank of the Year in Albania in terms of profits, profitability & taking into consideration its good market position. The Banker Magazine In the top 50 Fastest Growing Central European Banks, Banka Kombetare Tregtare was ranked in the seventh position taking into consideration its capital and assets growth. Banker's Almanac, The Banker, Finance Central Europe 2003 Have ranked BKT as one of the 100 Best Banks in Central, Southern and Eastern Europe.

40 25 Partnerships and Memberships Following thorough selection processes, BKT was chosen to partner and member with strategic national and international groups on important projects. Membership in International Chamber of Commerce, ICC; Partnership with European Fund for Southeast Europe (worth EUR 20 million) for financing working capital and fixed assets of enterprises in all sectors in the economy; Membership in the World Savings Banks Institute (WSBI) and European Savings Banks Group (ESBG), the largest organizations in the world representing savings and retail banks; Membership in the Association of National Development Finance Institutions in Member Countries of the Islamic Development Bank (ADFIMI); Membership in the Global Trade Finance Program of IFC; Co-financing agreement with EBRD; USAID Albania Loan Portfolio Guarantee; Credit Guarantee Facility for Renewable Energies (Ref) in Albania of KfW; Lending Agreement with Ministry of Economy Trade & Energy; 2KR Nutritive Production Growth.

41 THANK YOU FOR YOUR KIND ATTENTION Treasury & Financial Institutions Group

Analysis of Developments in the External Sector of the Economy

B a n k of A l b a n i a Analysis of Developments in the External Sector of the Economy 212 Q4 Olti Mitre, Merita Boka Monetary Policy Department April 213 The views expressed in this material are those