According to the data of UniCredit Bulbank Economic Research Team the economic environment of Bulgarian banks will continue to improve in 2018. In the main scenario about the Bulgarian economy considered by UniCredit Bulbank GDP is expected to enjoy a real growth rate up to 4.4% characterized by low inflation and economy near to full employment.

Investment in new buildings, infrastructure, machinery and production equipment

Data shows that GDP growth structure will improve, investments (in constructing new buildings, infrastructure, machinery and production equipment) joining the rapid growth in consumption and export. This will make the growth model of Bulgarian economy more widely-based, hence more sustainable. The analysis shows that apart from strong GDP growth rates the external trade balance will remain highly positive, which will be conducive to further shrinking of external debt, making the economy more resilient to any other shocks.   

Corporate and household loans will see an increase

Against this highly positive background UniCredit Bulbank analysts expect a moderate annual increase of corporate loans up to 5.5%, reversing the effect of the sale of bad loans (the effect from the sale of bad loans has not been reversed for 3.7% – see Table No.1).

This growth is likely to be achieved by SMEs since most large corporations have considerable available cash which will enable them to finance their investments without resorting to loans. A key factor for the higher demand for corporate loans will be an increase in investments up to 5.5% measured by the gross fixed capital formation (GFCF) against the background of 2.7% expected actual growth for 2017. This means not only more investments in construction businesses and new transport vehicles but also in the economic structure with the greatest ability to transform, namely, investments in machines and equipment. “The focus on export-oriented projects won't shift but the production capacity of domestic demand-oriented companies is expected to rise slightly since in the medium-term the Bulgarian economy saw a marked improvement in 2017”, UniCredit analysts point out.

Higher home prices, higher incomes and the increase in employment will result in higher demand for household loans. Household loans will continue to outpace the demand for corporate loans. Once the effect from the sale of bad loans is reversed, household loans are expected to show an increase of about 9% (the effect from the sale of bad loans has not been reversed for 8.1% – see Table No.1).

The analysis of the Economic Research Team of UniCredit Bulbank shows that confidence indicators have nearly reached an all-time high in our new economic history. This shows that households are more confident about the prospects for their income and job. The fact that loans slowly break ground in this sector of the economy in comparison to other CEE countries will further contribute to the increase in household loans, especially when the profit margins in this segment which are still attractive are taken into account.

In the face of fierce competition among banks loan interests are likely to continue falling. According to the analysis this process will be less intensive in comparison to 2017 due to the stabilization of interest rates in the eurozone which is gaining speed.

Loan quality improvement

There are fewer problem loans. At the end of 2017 they reached 11.2% of total loans in comparison to 12.8% in 2016. Further efforts will be needed, however, to accelerate the process of bad loan recycling, including the improvement of legal proceedings for restructuring the debt of problem debtors and the subsequent uncollectible loan market development. 

At the same time according to the analysis it should be taken into account that at a consolidated level capital buffers of Bulgarian banks are considerably higher than those of most European countries. This indicates that system resilience and its ability to absorb losses as a result of new shocks has reached a more comfortable level than those in almost all European countries.   

Property market

Property market overheating poses a major risk to this favourable scenario for the banking sector.

The double-digit rise in prices remains a fairly isolated phenomenon which applies mostly to some of the most popular neighbourhoods in Sofia. The analysis indicates that in the past few months the market may have even calmed down a bit, marking a shift towards price dynamics supported more strongly by fundamental factors. Nevertheless, the current situation has to be monitored closely since higher real property prices can prove to be detrimental to economic growth, the analysis shows.  UniCredit Bulbank economists remind us that when real estate prices rise out of proportion, this may result in a sharp drop quite sufficient to plunge the economy into recession. 

Table No.1 Main scenario of the Bulgarian banking sector development 

Source: National Statistical Institute, Bulgarian National Bank, UniCredit Bulbank Economic Research

* Loans which are 90 days overdue

**Ratio of allocated provisions in 2017 to the average loan amount

Table No.2 Applicable average annual interest rates of deposits and loans, in terms of balances

Source: Bulgarian National Bank, UniCredit Bulbank Economic Research

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