BULGARIA: Consolidated banking

Though Bulgaria’s economy is likely to remain in the slow lane for the rest of this year, the country’s banking sector continues to show resilience in the face of global economic contraction. There are concerns, however, that increasing levels of bad loans carried by some lenders could add to pressures on the sector.

Most analysts, including the European Bank for Reconstruction and Development the European Commission and the World Bank are either predicting no growth or a slight contraction of the Bulgarian economy this year, with forecasts usually carrying the caveat that even this weak outlook is dependent on the fiscal health of the country’s main trading partners. With the European debt crisis casting a lengthening shadow across the continent, Bulgaria is seeing a slowing in its exports trade, a trend that if continued could push its domestic economy further into the red.

Despite the risk of a dip into the red for the wider economy, the Bulgarian banking sector is for the most part still solidly in the black. Since the economic crisis broke in 2008, most of Bulgaria’s banks have worked to consolidate their positions through cutting back on loan activities and bolstering their deposit levels to cushion themselves against any future shocks.

Figures issued by the Bulgarian National Bank (BNB) in early July showed that this strategy was working, with a steep year-on-year increase in private bank deposits as of the beginning of June. According to the BNB, household deposits totalled $16.6bn, up 13.2%, though the rise in corporate deposits was far flatter, with the annualised increase being just 0.5%, with deposits coming to $7.8bn.

In the prevailing tight credit climate, this sluggish corporate deposit growth was understandable, says Emil Vuchkov, the director of product and market policy at MKB Unionbank. While corporate deposits were static at their 2009 levels, this was normal given that companies were utilising their own finances to fund activities, compensating for the reduced credit resources, he said, commenting on the central bank’s report on July 7.

Deposits may be up, but so too are bad loan ratios, which will remain an underlying cause of concern for the foreseeable future. As of the end of May, banks held $3.7bn worth of bad or non-performing loans, up by $243m from the month before, according to a report issued by the BNB on June 28. Of the May total, $2.1bn represented loans to the corporate sector, with consumer credits accounting for $750m and housing loans a further $730m.

Combined, the banking sector’s exposure to bad loans stood at just over 14% of its total credit portfolio, which Stilian Vatev, the CEO of United Bulgarian Bank (UBB), said was high enough to cause concern but should not have any major impact on banks’ profitability for this year.

Though non-performing loans may not dent bank’s bottom lines too much this year, they will keep their lawyers busy. Local media has reported a surge in the number of court cases opened by banks against defaulting clients, with more than 1500 claims being lodged with the judicial system a month, though daily Standart noted in a report at the end of June that most of the cases involved consumer loans of between $330 and $3300.

While local banks have adequate resources to cover their bad debt ratios, thanks to built-up deposit levels, a number of Bulgaria’s leading lenders are also looking at staging formal capital increases to further reinforce their positions. UniCredit Bulbank announced on July 23 it was planning a capital increase in September, while other banks such as Piraeus Bank Bulgaria, MKB Unionbank, EIBank and Emporiki Bank Bulgaria have already gone down this path.

Though more liquid, it may be some time before Bulgaria’s banks start lowering their prime lending rates, which are among the highest in the EU, with some lenders charging up to 14.12% for a five-year consumer loan. To a large degree these high rates and paucity of new loans reflect a caution in the sector over medium-term prospects.

According to Levon Hampurtsumian, the CEO of UniCredit Bulbank, though the financial crisis may have hit bottom, the rebound will be slow in coming.

“The depression following the economic crisis may very well last longer than we have expected,” Hampurtsumian predicted in an article carried by the Standart at the end of June. “Bulgaria has lifted off the bottom of the crisis but has settled into an economic depression.”

Many experts predict that the Bulgarian economy will return to positive growth in 2011, with the government itself projecting expansion of some 3% next year. If these predictions come true, and consumption and investment shake off the black dog of depression that is weighing them down, Bulgaria’s banks will be in a strong position to cash in on any improvements in economic sentiment.

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