The ratio of NPLs was stable even for July. According to data from the Bank of Albania, this indicator recorded a very slight decrease to 4.68%, from 4.7% in the previous month. On an annual basis, however, the NPL ratio continues to decline. A year ago, this indicator was at the level of 5.28%.

During the first half of 2024, the ratio of NPLs has not shown very large fluctuations and is currently not far from the 4.74% level that was recorded at the end of last year.

However, the fact that the ratio of NPLs is stable, despite the rapid growth of the loan portfolio, is an indication that the amount of NPLs is increasing in absolute terms.

At the end of July, the total loan portfolio for the economy reached the value of Lek 798.3 billion, with an annual increase of 13.3%. Above this value, the total number of NPLs is estimated at approximately Lek 37.3 billion, from around Lek 35 billion at the end of 2023.

The rapid growth of credit for the economy, which on the other hand is not accompanied by a significant decrease in the ratio of non-performing loans, is also worrying for the Bank of Albania.

In the Declaration of Financial Stability approved last week, the Bank of Albania assesses that the risks of the banking sector's activity are presented at controlled levels, but underlines that the growing trend of the financial cycle needs to be moderated.

In the middle of this year, the Bank of Albania decided to apply for the first time a countercyclical addition to the capital adequacy ratio of the banking sector.

According to the decision of the Governor, Gent Sejko, the rate of countercyclical capital addition (KUNC) for Albania will be 0.25 percentage points, from zero which was foreseen in the previous decision. All commercial banks in Albania must complete this supplement after one year, starting on June 30, 2025.

The application of a countercyclical capital supplement is provided for in the 2018 regulation "On macroprudential capital supplements”. Such an addition is aimed at slowing down lending, in case the central bank estimates that it is growing at too fast a pace.

During the first part of 2024, the Albanian economy is in a situation where the reduction of inflation below the objective of the Bank of Albania is combined with the rapid growth of lending. On the other hand, the performance of the banking sector is quite good, with profits that have reached the highest historical values. This is influencing a greater appetite for risk and a high supply of credit.

Such a situation somewhat complicates the future decision-making of the Bank of Albania. The further reduction of interest rates from the current level of 3% may further promote the growth of lending, which the Bank of Albania currently does not encourage, due to the increased risks it may pose to financial stability.