Lend and let live

  What a difference does 12 months make. On Day of the Banker, December 6 2008,

the leitmotif throughout the statements made by Bulgarian bankers was stability and how Bulgaria had it. With the world still reeling from the bankruptcy of Lehman Brothers, the near-collapse of AIG and the billions in government bailout money handed out around the world, the fear that Bulgaria was headed for a second major banking crisis in 12 years was very strong and bankers were doing their best to dispel it.

Naysayers have been proven wrong so far, but no one is ready to argue that Bulgaria is over the hump as December 6 2009 dawns on the calendar. A year earlier, lenders showed their confidence in the underlying fundamentals of their loan portfolios by continuing to give out loans, albeit under tighter conditions.

Twelve months later, the annual lending growth rate has slowed down to a snail-like pace of 4.2 per cent at the end of October, about a 10th of the figure recorded in October 2008 – the credit crunch on global markets and the end of the era of cheap re-financing has achieved what the restrictions imposed by the Bulgarian National Bank (BNB) could not. Just two years after imposing stricter mandatory reserves requirements to curb lending, the central bank now faces the opposite problem – stimulating new loans.

Wait and see
The recurring theme for this year’s Day of the Banker, one that could dominate a good part of 2010 as well, is the question of when will credit flow again.

"Lending could recover in two months or in one year. Fears are strong right now, both with banks and businesses," the chief executive of Belgian financial group subsidiary CIBank, Petar Andronov, told Kapital weekly in November.

Assen Yagodin, executive director at Eurobank EFG’s Bulgarian unit Postbank, was more forthright: "You might as well be asking me when the sun will stop shining".

"It boils down to how interested clients are in taking a loan and their willingness and ability to go into debt given the expected rise in unemployment in the coming months," he said.

The central bank, in its latest economic review quarterly report in November, was more optimistic, forecasting moderate growth at the start of 2010. Until then, both the corporate and retail lending segments would grow at declining rates.

BNB attributed the slowdown to the more stringent lending requirements adopted by local lenders, which were predictably hit by the economic downturn, and the decreased demand for loans, as businesses shelved investment plans and households became more concerned with job and income security than consumption.

The first signs that the credit crunch might be abating came in early September, when several banks cut interest rates, prompting forecasts that this would boost lending volumes. However, most of the lending growth in September came from Bulgarian banks buying back loans that they sold during the boom years – October figures showed a much slimmer increase in the loan portfolio of local lenders.

Eyes on Government
The Cabinet cannot order banks to lend money, Prime Minister Boiko Borissov said in November, but the Government does have its part to play, bankers said.

Bulgarian lenders were busy restructuring loans given to firms that are owed money by the state, whether as subsidies, European Union financing or public procurement, Kapital said on November 28.

"We are modifying and restructuring loans blindly, because no one knows when the payments will come, which means that no one knows when and if the overdue loan amounts will come in," the newspaper quoted one banker as saying.

Speaking after a Cabinet meeting on November 25, Borissov said that Government payments would resume in December – "we are not deliberately delaying any payments" – adding that he was hopeful that the backlog would be cleared by February 2010.

In cases where the Government could not pay what it owed, it would send letters to banks, asking the lenders for further postponement in loan repayments.

Loan restructuring and loan modification are phenomena that Bulgaria’s fledgling market, fresh from its first lending boom, is only now seeing gain widening acceptance. The reason for that is the increase in non-performing loans, which have reached 8.5 per cent of the total portfolio at end-September.

That trend is only going to become worse in 2010, with BNB stress tests showing that the ratio could double and reach 16.5 per cent of all loans. Through the first three quarters, Bulgarian banks wrote down 1.84 billion leva, according to central bank statistics.

The good news is that the banking system will not collapse under the weight of non-performing loans, as the same stress tests forecast the capital adequacy ratio falling no lower than 11.6 per cent, comfortably above the EU and US regulatory requirements of eight per cent.

The bad news, analysts say, is that what liquidity the banks have, they will continue keeping in reserve as cover for the continuing surge of bad loans.

More good news is that banks have been willing, so far, to restructure and modify loans, according to MKB Unionbank planning department head Emil Vouchkov. "Banks have been understanding about the worsened situation caused by the financial crisis and are ready to give clients with temporary difficulties the opportunity to continue servicing their loans, so that companies continue operations and maintain jobs," he said, as quoted by Kapital.

Construction, real estate and tourism, the sectors that grew the fastest during the lending boom, were also the first to begin feeling the loss of business and the first to ask for loan restructuring, according to Petar Slavov, chief executive of ProCredit Bank Bulgaria. By December, however, there were no economic sectors left untouched by the crisis, he said.

Where to?
In its quarterly review, the central bank said that it expected loan and deposit rates to flatten out in coming months, setting the stage for their much-anticipated gradual decline.
Since the autumn of 2008, stiff competition between lenders to draw savings has propelled interest rates to an annual nine to 10 per cent for term deposits in leva and seven to eight per cent for deposits in euro.

Interest rates were expected to decline, but the reliance of Bulgarian lenders on domestic deposits would not, according to Postbank chief executive Anthony Hassiotis. With cheap foreign credit no longer freely available, lending growth will depend on banks’ ability to attract funds at home, he told an annual meeting of businesses and Government officials in November.

High liquidity in the banking system and the diminishing lending activity will push down interest rates on loans in 2010, BNB said. The flagging lending has been dampening demand by banks for financing for their lending operations, which will eliminate the need to maintain high deposit rates and, correspondingly, high loan rates, the central bank said.

Making money
Despite the slowdown in lending and the rising ratio of non-performing loans in the portfolio of Bulgarian lenders, which have triggered an increase in the size of provisions banks have to maintain, the banking system as a whole remains profitable, BNB statistics showed.

For the first 10 months of the year, banking system profit was 656.5 million leva, including 34.9 million leva in October.

The figures, however, are well below those reported in 2008. October profit was down 70.2 per cent compared to the 117.2 million leva recorded in the same month of 2008, while the figure for the year so far was down 46.1 per cent compared to the same period of the previous year.

For the full year 2008, Bulgaria’s banking system reported a net profit of 1.39 billion leva, the highest for the past decade, according to BNB data. The central bank asked lenders at that time to pay no dividends and instead capitalise the profit as reserves against the expected increase in non-performing loans. So far this year, BNB is yet to make a formal request that banks do so again.

                 Source: sofiaecho.com