Bulgarian national bank: Credit expansion creates risks

Rapid credit growth can create cyclical risks in the Bulgarian banking system. This is the statement of Bulgarian national bank (BNB), said the report on the banks in the third quarter of 2018. According to the Central Bank, risks may grow in the case of a future raise of an interest rate or a weakening of the economic activity.

Analysts watch the optimistic expectations of households and businesses for their future finances. Combined with low interest rates, this strengthens their willingness to take loans for finance investment and consumption.

According to the BNB, optimism is based on the economic growth – employment, wages and profits are increasing. The risks come from the growing propensity of banks to lend more and more. According to official data, the receivables of the banking system from the non-government sector show the highest growth since the middle of 2009. Activity is stronger in household lending, while mortgage loans growth have led to an increase in property prices. This is again the result of increased demand for loans, which finance property purchases and the round closes, BNB said.

Gross loan portfolio of banks in Bulgaria increased by BGN 1.4 billion to BGN 60.3 billion. These do not include claims on credit institutions. Household and business loans increased in the third quarter of last year compared to the second. The increase for loans to households is BGN 375 million up, for non-financial enterprises – by BGN 537 million. The increase in other financial corporations, excluding credit institutions, is BGN 414 million. Short-term credit expansion has a good impact on the financial performance of banks, but if it is too fast, risks are significant. In the long run, this may have a bad impact on the ability of customers to pay their loans on a regular basis.

According to the Central Bank, a future tightening of the monetary conditions in the Eurozone will shift to the interest rates in Bulgaria. About 97% of the loans granted over the past ten years have a fixed interest rate of less than one year. Increasing of the interest rates will create credit risk. Regular servicing of the loans will also be affected by a change in economic activity.

The BNB reminds that the share of non-performing loans in Bulgaria is above the EU average. Some banks also have high levels of bad loans and lower than average depreciation coverage.  There is also a risk for loose the credit standards under competitive pressure and pursuing business plans for higher market share and financial performance. Last but not least, borrowers may overestimate their ability to take on debt. Also, they may fail to predict probability of a negative effect on the slowdown of the economy. At of the end of September bad loans in Bulgaria declined to 8.5%, compared to 9.3%, just three months earlier. By this indicator Bulgaria ranks fifth in the EU.

See full text of the BNB report: here.