The NPL ratio fell for the second month in a row in October. According to the statistics of the Bank of Albania, this indicator decreased to 5.12%, from 5.24% in September. The ratio of non-performing loans is on a slight increase from the 5% level recorded in the same period last year.
October data confirms a better than forecast performance of the NPL report. The decline of this indicator in recent months is believed to have been positively influenced by the improvement of lending and the expansion of the total loan portfolio. For the month of October, the loan portfolio for the economy expanded by approximately ALL 5 billion.
Expectations were that this year the ratio of non-performing loans could increase, due to the slowdown in economic growth, the increase in interest rates and the decrease in lending. Until now, the increase in the ratio of non-performing loans has been at negligible levels.
Although the economic growth actually slowed down compared to last year, the economy has still managed to amortize well the effects of high inflation and the increase in interest rates. Tourism and the real estate sector made the main contribution.
On the other hand, even the increase in interest rates this year has been more limited compared to 2022. The Bank of Albania has increased the base rate only twice, once in March and once in November. The basic interest rate, at the level of 3.25%, is among the lowest in Europe. Relatively relaxed monetary conditions have been argued with the strengthening of the Lek in the exchange rate and with the restrictive fiscal policy followed by the Albanian government.
The strengthening of the lek in the exchange rate itself is believed to have played a positive role in maintaining the solvency of borrowers with foreign currency loans and local currency income. The Euro-Lek exchange rate this year has reached the lowest historical levels, with an annual decrease that reached more than 14% during the summer season. All these factors have caused the growth of non-performing loans to not experience a significant increase until now.
Maintaining the quality of the portfolio, in parallel with the higher interest rates, has caused the performance of the banking sector to increase significantly. At the end of the 10-month period, earnings in absolute value were at historical highs, while return on equity was at its highest level since 2017.
The increase in profits has helped increase the capital adequacy ratio to the highest historical levels, facilitating the fulfillment of the required additions to the capital adequacy ratio by the Bank of Albania.