Bulgarian Banks Face Tough Year as Bad Loans Rise, Andreev Says

Views on BG | December 10, 2009, Thursday // 12:00|  views

Photo by BGNES

By Elizabeth Konstantinova

Bloomberg agency

Bulgarian banks, 85 percent of which are foreign owned, face a tough year as the deepest recession in 12 years pushes up the number of non-performing loans, said Momchil Andreev, executive director of Raiffeisen Bank Bulgaria.

“We see the next few months as difficult as some companies operate with their last reserves and some will probably close,” Andreev, 45, said in an interview in Sofia late yesterday. “Things will get worse before they get better.”

Corporate bankruptcies will fuel unemployment, hurting purchasing power and eroding Bulgarian bank portfolios, Andreev said. Banks’ total profit fell 46 percent in the first 10 months to 656.5 million lev (4 million), according to the central bank. Bad-loan write offs and provisions increased operating costs, while lending growth slowed to 5 percent in a year.

The European Union’s poorest country is struggling to cope with its first economic slump in 12 years after a three-year lending boom stalled and foreign investment dried up. The economy contracted 5.8 percent in the third quarter as demand dropped, and exports of metals and chemicals fell 30 percent in the first half.

The Balkan nation’s five biggest banks are UniCredit Bulbank AD, the Bulgarian unit of Italy’s UniCredit Spa; DSK Bank, a unit of OTP Bank Nyrt., Hungary’s largest bank; United Bulgarian Bank, owned by the National Bank of Greece SA; Raiffeisenbank Bulgaria and Eurobank EFG Bulgaria. Together they produced around 60 percent of total loan growth in 2008.

Lev Stability

The lev is pegged to the euro in a currency board system, which helped avoid a financial meltdown and the need to bail out banks, central bank Governor Ivan Iskrov said on Dec. 3.

The banking system is well capitalized with a capital adequacy ratio of 17 percent, high liquidity and sufficient buffers, Iskrov said. Banks’ assets rose 1.7 percent in October from a year ago to about 70 billion lev.

“The level of non-performing loans in bank portfolios will depend on the growth rate of new lending and their efficiency in dealing with problem cases,” Andreev said. “This depends on fast and fair court rulings and the emergence of a secondary market for distressed companies.”

Bulgarian non-performing loans are expected to peak in 2010 at 10 percent of total loans, UniCredit Bulbank said in a Nov. 9 study. Non-performing loans accounted for about 6 percent of total loans in October, according to the central bank.

Second-Half Turnaround

“We expect the situation to stabilize in the second half of 2010,” Andreev said. “The level of non-performing loans should decline by the end of 2010. Banks have tightened lending risk assessment criteria since the beginning of the year, which improved the quality of new credits and will lead to a lending expansion next year, as long as there are good projects.”

The year-long global crisis has shown which companies are in good condition, Andreev said. The prices of real estate, the most-used collateral, fell to realistic levels, he said, dropping as much as 30 percent in a year.

A possible crisis in neighboring Greece will have no severe impact on Bulgarian banks, Andreev said. Greek banks own some 20 percent of Bulgarian bank assets. Fitch Ratings cut Greece’s credit rating on Dec. 8 one step to BBB+, the third-lowest investment grade, on concern the nation may struggle to meet its debt commitments as public finances deteriorate.

“Interest rates on deposits may rise as Greek banks will seek to attract more deposits on the Bulgarian market, after the cost of borrowing for Greece increases,” Andreev said.

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Tags: Raiffeisen Bank Bulgaria, banks

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