Category: News from the Market

Italy’s budget drama and Brexit have created an existential crisis for the European Union. But in the bond market, countries that pursue their dream of joining the bloc get rewarded.

Ascending to the world’s largest single market, and the potential for access to development funds, make it compelling for membership candidates to make sure they meet the entry requirements, which include limits on deficits and debt. The European Central Bank’s negative deposit rate and quantitative easing program tend to drag down borrowing costs for all EU members, regardless of whether they’ve adopted the common currency.

The direction of travel is key. This explains why the debt of some Western Balkan nations can be a relative haven for fixed-income investors, and Albania’s plan to issue debt next month for the first time in three years is well-timed. The EU has committed to have all of these countries become full members, but the timetable depends on each country’s progress toward meeting the entry requirements.

Compare that to the blowup in Italian yields since the populists took center stage in May.

European government bonds suffered a huge risk-off moment as investors took fright at the prospect of euroskeptics taking power in Rome, and the recovery has been somewhat mixed — Spain, Portugal and Greece show the fallout from May’s contagion to varying degrees.

So it’s somewhat remarkable that the debt securities of Albania, Macedonia and Montenegro, which are all rated around B+, are performing as well as they are. The gravitational pull of the European Union has proven itself to be a more powerful force than Italy’s political crisis.

Balkan Comparables

Spreads on new bond deals this year from Albania’s neighbors have tightened since launch

This should give Albania a lift in its plans to issue a new eurobond next month. It is one of Europe’s poorest nations, yet its relative economic weakness won’t be reflected in the low spreads it is likely to secure.

Demand should be healthy as it is only looking to raise up to 500 million euros. The proceeds will mostly be used to retire more expensive debt, including up to 200 million euros of a bond due in 2020 — a nice demonstration of the fiscal prudence that EU members are supposed to show.

The first wave of Eastern European countries to join the bloc are a good illustration.

What Crisis?

Italy’s political crisis did relatively little to stop Albania’s spread tightening.

As there is relatively little sovereign issuance from the region, funds will be keen to participate. Once the sale is complete, it’s pretty likely that it will be included in emerging market bond indexes — and that prospect will only add to demand.

It is logical for Albania to extend its debt maturities — it’s planning a five-year security — while at the same time reducing the overall cost of its debt. Its 2020 security has a 5.75 percent coupon, and now yields about 1.5 percent — in line with Montenegro’s 2020 bonds. Macedonia’s yield is about 1 percent.

Albania will issue at a longer maturity if the market demand is there, Bloomberg News reported. Given that both Macedonia and Montenegro have issued seven-year securities this year, Albania could well find enough interest to consider the same.

At that maturity, the spread on offer will likely be close to 280 basis points more than mid-swaps. Provided the broader market is pretty much unchanged by the time the issue comes, the yield would be about 3.4 percent — in line with the Montenegro seven-year. Compare that to the 5.2 percent yield for a seven-year Ivory Coast bond, or the 5.35 percent yield for a 10-year Senegal security, both of which are in euros.

The fate of the Balkan countries’ borrowing costs depends on whether they keep to the path for EU membership. Though Brexit and Italy could provoke a change in mood on enlargement, what’s more important is that these crises can unite the region against threats to the European project. That could go a long way toward overcoming any doubts member nations may have about the cost of taking new countries into the fold.

Source: Bloomberg

Assets of investment funds have fallen for the second consecutive quarter. According to data from the Financial Supervisory Authority, net asset value at the end of June was ALL 66.5 billion, down 8.6% since the beginning of the year. The market is falling, not only in volume but also in number of members. By the end of June, the number of members fell to about 29,000, from 31,000 at the end of last year. The fall in the market is due to a downward trend in the size of the two larger funds managed by Raiffeisen Invest.

All in ALL, Raiffeisen Prestig’s fund decreased its net assets by 7.7%, while the euro-denominated fund Raiffeisen Invest fell by more than 15.6%. On the contrary, the Credins Premium investment fund has been growing at 44% since the beginning of the year, although this growth has come from a low base. Credins Premium assets have exceeded 10 million euros. This year, the investment fund Top Invest has started, but the market share of the new fund is currently negligible.

After a rapid growth in the first years, investment funds have entered a stagnation phase, coupled with limited investment alternatives, at least as far as ALL assets are concerned. These funds invest mainly in government bonds .The market needs new instruments and potentials are great, especially for corporate bonds, which have been issued with private bidding for years. But regulatory restrictions do not currently allow funds to invest in Albanian company bonds.

Local banks are growing further in 2018, factorizing even more within the financial system, while the largest capital banks in the euro area are still lowering their market share.

According to data provided by the Albanian Association of Banks, in the middle of this year, the National Commercial Bank and Credins (NCB or BKT) continued to grow at high rates, while Raiffeisen and Intesa Sanpaolo further shrunk.At the end of June, NCB owned ALL 402 billion of assets or 27.96% of total banking system assets. The market share of NCB has increased by 1 percentage point in one year.

Meanwhile, Raiffeisen in the middle of this year owned 16.38% of market assets, from 17.93% a year earlier.After the crisis and the strengthening requirements of regulatory capital by euro area regulators, Raiffeisen has started a process of reducing the size of its activity in Albania. Credins Bank has strengthened its position as the third largest bank in the country with a total assets of ALL 185 billion or 12.91% of system assets.

Credins has increased its market share by 1.1 percentage points in a year .It is likely that in recent years within a medium-term horizon, Credins will become the second largest bank in the country. Intesa Sanpaolo bank is right behind and holds a market share of 10.92%, down from 11.25% a year earlier.

Among the euro zone banks, the only ones that have grown in the last 12 months covered by the statistics are Societe Generale, which has reached 5.92% of the market and Alpha Bank, which owns 5.31% of assets. However, the French bank has decided to leave Albania and has just formalized the agreement to sell its shares to the Hungarian OTP bank.

Union Bank, ABI Bank and Fibank continued to increase their market share, confirming each with increasing ambition to get a greater share within the banking sector.

Meanwhile, banks that have transferred ownership have been falling and are moving towards joining new buyers. Veneto Bank, which will soon be merged with Intesa Sanpaolo, fell to 1.38% of the market, from 1.8% in the previous year. Even NBG Bank, newly purchased by ABI Bank, lowered its market share to 2.54%, from 2.83% in the previous year.

The banking system recorded an increasing financial result during the second quarter of the year with progressive profit of the banking system amounted to ALL 11 billion. Bank earnings increased by 2.3 times compared to the first quarter. While for the first half of last year, profit has decreased slightly by 4%.

However, given that 2017 was a record year in terms of profits, it seems that the financial performance of the banking system is still high this year. We must say that profits remain very concentrated only in a few large banks, while for the rest of the commercial banks, the profits are in normal value and some of them are in loss.

This year it looks like the most decisive factor in maintaining high profits, is to improve the quality of bank assets. The banking system has recovered nearly ALL 7 billion previously calculated provisions, for possible losses from loans or other financial instruments.

This implies a lower risk rating for the assets. Also, banking system has managed to steadily reduce the ratio of non-performing loans to the level of 13%. According to the Bank of Albania, at the end of June, the ratio of non-performing loans was 13.27%, from 15.58% a year earlier.

Following the approval from Bank of Albania on June 6, 2018, American Bank of Investments is proud to announce today the successful closing of the transaction for the acquisition of NBG Bank Albania.

NBG Bank Albania has been operating in the Albanian market since 1996 and is known for its innovative individual loans.

The Bank has a broad base of customers and extension of the branch network in the main cities of Albania.

Commenting this latest transaction, Mr. Gregory Katz as ABI Bank’s shareholder representative stated that: “This transaction demonstrates the confidence in the Albanian banking market and in the Albanian economy of one of the largest American investors in Albania and the region. The clients of both banks have welcomed this transaction, which will enable the release of unique synergies between ABI Bank and NBG Bank Albania. These synergies made possible by specialized and dedicated staff will create the largest boutique bank in Albania. The American Bank of Investments, over the past two years has become a success story marking record growth of deposit, profit, liquidity, and capital adequacy. The American Bank of Investments expresses its determination and dedication to the high quality of customer service”.

Kerameus & Partners of Athens, Greece acted as legal counsel to ABI.

Since 1993, NCH Capital is one of the largest regional investors. Companies operated by NCH have been doing business in Albania since 2007. In the field of banking and financial services, NCH Capital has deep experience in Romania, Moldova, Ukraine, and Latvia in addition to Albania.

Bank of Albania has drafted a new project for settling the issue of large non-performing borrowers, which have exposures in several banks that operate in the system.

Announced since last year as Tirana Approach, the project foresees the establishment of a common platform between banks to address these cases.

The project foresees that joint treatment of these cases by banks would take a mandatory form, while previously this was done in co-operation between banks, but without a mechanism that legally binds them to pursue this process up to the end.

According to BoA’s regulation, all commercial banks are obliged to engage in this common platform and the platform is granted the right of to supervise and to impose sanctions against non-cooperative banks.

The issue of large borrowers with exposures to several banks has been one of the most important points of the BoA’s strategy to cope with the ratio of non-performing loans.

Some of the cases were resolved with restructuring, some others with the takeover of assets by the lending bank, while a handful of bad creditors were sent to trial for bankruptcy.

Tirana Approach platform will primarily aim at resolving the remaining cases, which according to unofficial data from the Bank of Albania are less than ten.

The regulation proposed by the Bank of Albania has been sent for consultation to commercial banks and is expected to be approved within September.

According to Bank of Albania’s statistics, the ratio of non-performing loans in the first half of this year has stabilized close to 13.5%, while the operational objectives aim to reduce it to the level of 10% by 2019.

The Bank of Albania has given the green light to the establishment of a national payment system in euro.

The project submitted by the Albanian Association of Banks has been approved and is expected to enable significant reductions of bank commissions for domestic transfers made in the European currency.

Currently, Albania has no payment systems in foreign currencies and foreign currency transfers are carried out through correspondent banks outside Albania.

This brings much higher commissions compared to ALL transfers, which are processed through systems managed by the Bank of Albania.

According to the approved project, the euro payment system will be managed by the central bank.

Banks are obliged to hold a mandatory reserve at the Bank of Albania, at the rate of 10% of the deposits they own in each currency.

The project foresees that banks use the euro account at the Bank of Albania as a bridge for conducting internal transfers in euros.

In the required reserve account, banks will place a surplus, which will be used to make transfers from one bank to another.

Thus, if a customer makes a transfer from bank A to bank B, both within Albania, then the transfer of funds will be made between the accounts each bank holds in the central bank.

Subsequently, the receiving bank will transfer this money from its mandatory reserve account to the beneficiary’s account.

This scheme will avoid the involvement of foreign correspondent banks and will drastically reduce the cost of the transfer.

SCAN TV

Today at June 1^st, 2018, the Albanian Securities Exchange ALSE received the expert from World Bank Mrs. Adriana Tanasoiu, who is assisting the Albanian Financial Supervisory Authority for studying the market related with the central securities depository in Albania. Mrs. Tanasoiu is an expert with a long experience in the securities industry, because of the long term commitment as a top level manager at the Central Securities Depositary in Rumania.

During the meeting it was discussed regarding the opportunities of clearing and settlement process of the securities that will be traded at ALSE, focusing not only at the Government Securities Depositary (AFISaR), which is administered from Bank of Albania, but also for the importance of existence of another depositary which will administer the process of clearing and settlement of transactions with securities issued by businesses (shares, corporate bonds, commercial paper etc.). Likewise, , a special attention in this meeting was given to the schema of clearing and settlement of cash funds through AIPS system administered from Bank of Albania.

At the end of the First Monitoring made after the completion of the program with Albania, the International Monetary Fund has evaluated the progress of the Albanian economy. The country report underlines that Albanian economy has continued to grow, marking a real growth of Gross Domestic Product by 3.8% during 2017.

In the analysis made for non-banking financial markets, IMF report evaluates positively the work done by AFSA and states that “the Albanian Financial Supervisory Authority has made a substantial progress regarding with the improvement and adoption of a new regulatory framework about the supervision of capital markets and funds, improving the new draft rules on administration of Investment Funds Liquidity, transactions with related parties, etc.”.

AFSA is committed to complete all the recommendation given by the IMF report related with:

• The regulatory framework for management of Investment Funds crisis, that actually in collaboration with Ministry of Finance and Bank of Albania is toward completion;
• The creation of a necessary legal and regulatory framework for the new instruments, just licensed Stock Exchange, according to the best international standards.

To read the full report of the Executive Board of IMF, please click here.