Banks in Central and Southeastern Europe (CESEE) have weathered the financial hit of the COVID-19 pandemic so far, but they may be tested by the withdrawal of government help to companies, noted the six-month report of Vienna Initiative on the banks in the region. Risks are rising particularly as infection rates begin to soar again. 

According to the latest NPL Monitor, which observes 17 countries, the average rate of non-performing loans (NPLs) in CESEE is 3.2% as of 30 June 2021, compared to 2.3% average ratio in the EU and European Economic Area. This marks an improvement over March, though at a slower pace than in the previous period. At the end of last year the average NPLs ratio was 3.6%, which put it only slightly above the EU average of 2.9%. 

Bulgaria is the only country in the region with NPL rates more than twice above average in the region for the first half of the year. Of the neighboring countries North Macedonia is the only one below average (see the map). 

“The COVID-19 crisis has not yet fully materialised into a significant worsening of banks’ asset quality as initially feared”, the report said.

 

NPLs volumes fell 7.8% in the 12 months from the second quarter of 2020 to the same period of 2021. The region’s overall NPL coverage ratio has also remained stable since 2018 and stood at 64.5% as of 30 June. This indicator measures the proportion of NPLs, covered by provisions. Bulgaria has a relatively low level of coverage – below CESEE average, but this doesn’t mean instability, but may indicate lower level of risk in many loans, which doesn’t require setting aside huge reserves. 

In the background of good indicators in the banking sector, experts of Vienna Initiative warned that many economies “remain fragile and significant disparities in performance can be observed”. It also pointed out that the next few months will be critical.

“The full impact of pandemic effects on private sector resilience and the quality of firm balance sheets might yet emerge into full view in the period to come, with direct impact on lending activity and the need for resolute forward-looking action,” said Boris Vujčić, Governor of the National Bank of Croatia (HNB), in remarks to the Full Forum meeting of the Vienna Initiative in October 2021.

The decline in NPL stocks was most significant in Hungary, North Macedonia and Estonia, where they fell 28%, 23% and 22% respectively during the period. The largest contributor to the decline in absolute terms was Poland, where the stock of NPLs declined by almost €2bn, or 14.6%.

The declining trend of NPLs was “in large parts due to the success of measures implemented to support borrowers, banks, and the economies, such as payment moratoria and public guarantee schemes”, the report says.

However, most measures have now expired or about to end in the coming months. The effect of the crisis might therefore still be felt, the Vienna Initiative warns. In addition, the recent surge of infection rates has again made the introduction of drastic restrictions to protect public health a possibility.

“The industries most impacted by the short-term liquidity shocks of the crisis, such as food, accommodation and entertainment, may see issues arising in 2022 as the benefits of support measures begin to wane,” the report says. “These sectors will remain vulnerable to any further shocks caused by the pandemic, which could jeopardise the viability of already weakened businesses.”

In Bulgaria the concerns of regulators at this stage are dictated by the sharp increase in real estate prices and misgiving of forthcoming price correction. The fears of the real estate bubble have been a hot topic in the last few weeks. For now, Bulgarian National Bank reassures that there is no bubble, but sees a tendency to create one. In the latest report BNB warned of the possible slight increase in NPLs after the expiration of the credit moratoria at the end of the year. 

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