Analysis focused on Bulgaria was presented to the media during the 2016 annual meeting of the European Bank for Reconstruction and Development, May 11-12, London

Author: Kristofor Pavlov, chief economist of UniCredit Bulbank

Although relatively slowly, the operating environment will keep improving. This will be due mostly to the accelerating growth of the GDP and the recovery of the economy from the period of low inflation. The growth acceleration in the next few years will be connected most of all with the increasing role of the household sector. This means that more and more stimuli for increase of the loan growth will originate from the household sector, as the labour market is stabilizing, the residential construction industry is stabilizing, the real estate prices are stabilizing. All this is happening after seven years of painful recovery of the household balances, which must have accumulated also some, probably not a little, deferred demand.

These are some of the conclusions from the analysis of Kristofor Pavlov, chief economist of UniCredit Bulbank, focused on the dynamics of the deposits and loans in Bulgaria. The analysis was presented to the media during the 2016 annual meeting of the European Bank for Reconstruction and Development, May 11-12, London.

The loan growth dynamics will depend most of all on the corporate loan, which keeps forming nearly three quarters of the volumes of new loans in the system, thinks Pavlov. The obstacles to the corporate loan growth are still related primarily to the demand. Before the 2009 crisis, the investments of the corporate non-financial sector used to exceed the savings by nearly 6% of the GDP (see graphs 1, 2 and 3). After that, however, the savings rate increased up to 20% of the GDP on average in the period 2010–14 versus 15% in the period 2004–08. At the same time the investments, measured via the gross fixed capital formation, dropped down to 16% of the GDP in 2010-14 versus 21% in the five years preceding the 2009 crisis (i.e. from 2004 to 2008) mostly because of the lower investments in the real estate sector and some vertically integrated sectors, such as construction and manufacture of furniture and house equipment. This change in the savings-investments balance (from savings lower than the investments by an amount corresponding to 6% of the GDP on average for the period 2004–08, to a positive savings-investments balance of 4% of the GDP for the period 2010–14) means that now the companies rely much more on own funds for the financing of their own investments and therefore need less borrowed capital, including less bank loan.

The financial indebtedness of non-financial enterprises is decreasing, underlines Kristofor Pavlov. The loans, as reported in the consolidated balance sheet of the non-financial enterprises, decrease to an amount corresponding to 98.5% of the GDP in 2014 versus the peak of 106.5% in 2010 (see Table 1). The loan granted by local banks after a period of six successive years for the first time dropped below 40% of the GDP in 2014 (to 37.1%). All financial indebtedness ratios in Table 3 have improved over the last few years. Both the total indebtedness and the debt coverage with own funds are indicative of the fact that the indebtedness of the corporate sector, which turned into one of the main sources of economic vulnerability before the beginning of the global financial and economic crisis, is gradually migrating to more manageable levels.

Upon completion of the asset quality review, the buffers of capital and provisions of the banks will be stronger, commented Kristofor Pavlov. This is due mostly to the change in the behaviour of some of the banks, which, after the regulators' decision for a detailed asset quality review, reoriented towards formation of larger provisions and strengthening of their capital positions in order to overcome the lagging behind the others. "Thus our main scenario for the development of the banking sector envisages increase of the equity/total assets ratio up to 14.2% at the end of 2016, versus 13.2% and 12.7% reported in 2015 and 2014 respectively. Similarly, the buffers of provisions will grow to the forecast level of 75% for loan loss provisions at the end of 2016, in comparison to 68% and 58% in 2015 and 2014 respectively.", commented Pavlov.

According to the economist, with an equity/assets ratio of over 14% at the end of 2016, the Bulgarian banks on a consolidated level will have much higher capital coverage than the banks in the USA and Western Europe, where the same ratio is around 6% and 4% respectively. This is positive news also for the loan growth, as the strengthening of the buffers of provisions and capital is supposed to further stimulate the banks to lend more. A great leap, however, cannot be expected because the obstacles to accelerating the loan growth are still due to the demand rather than supply.

More information for media:

UniCredit Bulbank, Identity & Communications Department

Viktoria Blajeva, Phone: + 359 2 9264 993, wjlj/ebwjepwbAvojdsfejuhspvq/ch

Beatris Nikolova, Phone: +359 2 9232 528, cfbusjt/ojlpmpwbAvojdsfejuhspvq/ch