The banks’ capital adequacy ratios are improving due to profit capitalization

The quality of loans will start to improve unless there are some serious shocks to the European economy, said the CEO of UniCredit Bulbank, Mr. Levon Hampartzoumian, at the 2nd Credit Risk Management Conference. According to him, the most important matter now is the way in which Europe will cope with the debt crisis in order to return to sustainable growth.

According to Mr. Hampartzoumian, bad and restructured debts are still not showing any unequivocal signals about their development. After its peak at the beginning of 2010, the monthly growth rate of problem loans started to slow down. At the same time, however, bad and restructured debts continue to account for a growing share of the total amount of provided loans, according to information from the end of September as well. “Nevertheless they are still far from the record highs reached during the Bulgarian financial crisis of 1996–1997“, Mr. Hampartzoumian said.

The expectations of UniCredit, announced by Mr. Hampartzoumian at the credit conference, are that non-performing loans (including loans overdue by more than 90 days) will continue to grow slowly until the end of 2012 or the beginning of 2013, and then will start to improve. The main reason is that the peak of non-performing loans is reached more slowly with loans to individuals compared to the corporate sector.

“The good news is that regardless of the expectations for a few more months of increase in problem loans, the provisions for bad debts are decreasing. The reason is the recognition of bigger collaterals for the loans because of the lowering of the risk“, Mr. Hampartzoumian further explained. Besides, because of the banks’ profit capitalization, the capital adequacy ratios are improving. It is expected that the relatively low levels of writing off of assets from the banking system will increase at the end of 2011 or the beginning of 2012.

A research of UniCredit Bulbank shows that the value at risk was several times lower during the credit boom of several years ago compared to the period afterwards. The biggest boom was exactly in the CEE countries where the cost of risk was most underestimated.

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