Vienna Initiative: Non-performing loans in CESEE decreased, but are at risk of further increase

Between 2017 and 2023 most of the Bulgarian banks recorded a decline in non-performing loans (NPL) level, but it remained above the regional average. This notes the latest report of the Vienna Initiative organization, which examines bank assets condition in Central Eastern and Southeastern Europe (CESEE) as of June 2023. The restructuring of corporate portfolios from the Bulgarian banks has a significant effect, partly because overdue loans in Bulgaria are concentrated in this segment, the report says.

In the region of CESEE bank NPL level is 2.2%, with a 0.3 percentage point decrease year-to-year. As a value decrease was 7% to EUR 27.9 billion. In Bulgaria 3.8% of bank loans were overdue. The NPL share is larger in Albania, Bosnia and Herzegovina, Croatia and Montenegro, as well as Greece, but the country has seen extremely strong growth since the global financial crisis. Greece and Bulgaria are the countries with the biggest decline in non-performing loans at the end of June last year compared to June 2022. Ukraine recorded a very serious increase with almost 39% in a year, but we have to take into account the war, which has a strong impact on the financial system.

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A survey among the banks shows that in recent months they expect an improvement in asset quality in all segments, most in corporate and least in retail debt. However, the banks’ forecast is for a deterioration in NPL level in the next six months. The reasons are the deteriorating economic outlook, including tighter financial conditions and high interest rates.

The parent companies of the Bulgarian banks (most of the biggest are owned by foreign groups) note that the local market has medium or high potential. The return on their assets in Bulgaria remains higher than or equal to the group’s total return. Moreover, half of the parent banks operating in Bulgaria consider their current market positioning to be optimal, the survey shows. Credit demand remains positive and supply remains neutral. The worsening outlook will have a negative impact on credit demand, lending and loan quality in the next six months, according to the Vienna Initiative study.

EU risk assessments point to a potential decline in asset quality for most credit segments. Rising interest rates and persistent inflation could adversely affect over-indebted households and companies by hampering their ability to service debt, the Vienna Initiative said.

At risk of deterioration are real estate loans, unsecured consumer loans, as well as those, which are linked with the support measures during the pandemic. The real estate sector is also exposed to additional risk as interest rates affect both asset valuations and borrowers’ access to funds.

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