The trend of decrease of external financing in the banking sector continues

This year loans to small and medium-sized enterprises will grow significantly. This is what Kristofor Pavlov, Chief Economist of UniCredit Bulbank, said at a press conference where the bank presented its forecasts for the banking sector. SME financing in 2013 will be at a much better level due to the start of several initiatives related to EU funding.

“If we want to improve, there need to be systematic reforms, continuous effort, because the better the business environment, the better place our country will be for people to live in”, Levon Hampartzoumian, CEO of UniCredit Bulbank, commented.

“In the conditions of a still low demand for loans by households and a preserved moderate growth of loans to companies, the improvement of liquidity will manifest itself mainly in a further decrease of interest rates”, Kristofor Pavlov explained. Growth of corporate loans will remain at approximately the same levels as in the previous year. Besides, according to the analysis of UniCredit Bulbank, loans related to the agricultural sector will continue to grow at two-digit rates in 2013 as well. To a certain extent this will be compensated by the ceasing of the effect of certain one-off factors which supported the growth of corporate loans in the past year – notably the investments in renewable energy sources and the completion of several big trade centers for which a funding commitment was made before the crisis started.

The expectations of the bank’s analysts for the development of this sector in the country are for a decrease of interest rates on both deposits and loans. This will be due to an improvement of the economy of Bulgaria and of Europe in general.

“Although more limited, there will also be a certain growth in loans in support of measures for energy efficiency improvement, as well as a certain increase in working capital loans for export-oriented companies especially in the second half of the current year, when growth in the Eurozone will start to accelerate”, the chief economist of the bank says.

Financial indebtedness will continue to decrease in most countries of the EU. This is valid both for companies and households, and for governments, however, a significant period of time will be needed before this process is complete.

What puts Bulgaria into a more favorable position is that despite the crisis leveraging in the public sector not only did not increase but even continued to go down, and also the fact that deleveraging of the household sector is already in its final stage. Highest remains the leverage in the corporate sector. The reason for this is the high concentration of debt in some sectors of the economy at the start of the crisis, as well as the fact that the deleveraging process is by definition slow. Another reason for that is also the refusal of the state to undertake measures aiming at activating the process of financial restructuring of bankrupt companies.

“Bad debts will remain high in 2013, but their level will be such that is manageable and will not lead to rescuing banks with funds of the Bulgarian taxpayer”, Kristofor Pavlov further commented. The cleaning of balance sheets accelerated at the end of 2012. This became possible after the significant reduction of the vulnerability of banks in the course of the past few years, especially in 2012. Now the cleaning of balance sheets seems easier because the confidence in banks is stable and banks are at the final stage of the loss absorption process, and a single write-off of even a big loss is easier to swallow. According to the analysis of UniCredit Bulbank, the cleaning of losses resulting from the burst of the real estate bubble and the recession of 2009 will end about the end of 2014.

In the upcoming months bad loans as a percentage of all loans provided will move in different directions and at the end of 2013 will remain without any significant change compared to the previous year. Provisions for the whole year are expected to reach BGN 1.17 billion. This way the profit after tax of the banking system will decrease by 17% on an annual basis to BGN 471 million. Thus the return on capital will remain lower than the cost of capital for a fifth year in a row.

In 2014 there will still be higher provision levels, but from 2015 onwards the cost of risk will level off to 1.2 - 1.3% (compared to the 2.2% average in the previous 6 years). Thus in two years’ time the banking sector is going have a return on capital after tax which exceeds the cost of capital on a consolidated level for the first time after the start of the crisis in 2008.

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