Reversing of the negative tendencies in relation to credits – both in terms of growth and quality – in the near future is what UniCredit Bulbank Chief Economist Kristofor Pavlov predicted at the 9th International Financial Forum “Banks, Investment, Money”.

The Growth of Household Credits – Guided by Consumer Credits

„After reaching the bottom in the middle of 2010 the credit growth began to normalize,” Kristofor Pavlov said. As he put it, the process of normalization of household credit growth is guided by consumer loans, while the newly released mortgage and, particularly, overdraft loans are lagging behind.

Overdraft and short-term loans are leading in the newly-released corporate loans, while there is still a downward tendency, albeit minimal, regarding long-term ones. According to Pavlov, however, the demand for corporate loans, has proved more sustainable than that for household loans for the period of drop of the real economy. He quoted data about the average monthly volumes of newly-extended loans – corporate and household - showing that the lowest average monthly volume of newly-extended loans is only 4% below the long-term average one. At the same time, the lowest volume of newly-extended household loans are 28% below the long-term average one.

„With the emergence of an increasingly higher number of sectors from the recession, we expect a boost of the demand for corporate loans as that would gradually extend to long-term loans as well,” Pavlov projected.

Credit Quality Also Sees Improvement

According to the economic team of UniCredit Bulbank, the deterioration of the credit quality has not ended yet but there are already signs of a reversal of this negative tendency towards the year’s end.

This is certified by the fact that the number of re-structured loans is falling and at the beginning of 2011 it accounted for about 3% of the total number of loans, compared to slightly over 4% in the middle of last year. The pace of increase of bad and restructured loans is dropping. This is typical mostly of household and consumer loans. “If the pace of increase of bad and restructured loans – observed in the past few months – is extrapolated, they will receive their peak levels as a share of all consumer loans only in a few months. The mortgage loans are lagging behind and, if the same approach is applied, we should expect the process of deterioration of the quality of mortgage loans to exhaust its dynamics towards the end of the current year, after which the relative share of bad and restructured mortgage loans, as a share of all mortgage loans, should begin to drop,” Pavlov explained.

In the corporate loans segment it will take somewhat more time for bad and restructured loans to reach their peak, which, if the above approach is used, should happen towards the beginning of 2012. “We continue to think that bad debts, being reported under Ordinance No. 9 of the National Bank of Bulgaria, will reach levels of 14% - 15% of all loans either in the end of 2011 or in the beginning of 2012. Besides, by the present moment, we confirm our forecast for total consolidated losses of the banking sector of about 4,000 million BGN for the 2009-2012 period, inclusive,” said Pavlov.

In 2009 and 2010 the banking sector absorbed losses in the form of provisions against bad loans of a total of 2,400 million BGN, as provisions for another 1,600 million BGN are expected to be allocated in the course of the current and next year.

Reduction of External Financing

Although the currently reached levels may already be described as sustainable, according to the UniCredit Bulbank analysts, the process of reduction of the external financial indebtedness will persist for a certain period of time as the pace of growth of deposits of residents will keep on exceeding the one of loans at least during the current and next year.

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