site.btaUPDATED European Investment Bank: Bulgarian Banks Expect Loan Market Downturn

On December 6, 2022, the European Investment Bank (EIB) published the Bank Lending Survey with a focus on Central, Eastern and South-Eastern Europe (CESEE). The survey examines data collected in September 2022 and outlines the expected trajectory for the next six months vis-à-vis credit demand, supply conditions and credit quality.

EIB expects the resilience of lending activities to be tested over the next six months with tighter supply conditions and potential increases in non-performing loans.

Bulgaria’s market is seen by parent banks to have medium or high potential and has recovered substantially following the large deterioration in credit demand and supply during COVID-19. However, the worsening outlook is expected to negatively affect credit demand, supply, and credit quality. 

A large share of the Bulgarian banking sector is controlled by foreign banks with a strong foothold in the region (such as UniCredit, OTP, KBC and ProCredit), the EIB report says. 

All foreign banks operating in Bulgaria consider the country as a market with medium (80%) or high potential (20%), and regard their market positioning as satisfactory (40%) or optimal (60%). 

In line with this high level of satisfaction with market positioning, 80% of banks reported that returns on assets and equity in Bulgaria are higher than or equal to overall group returns.

Demand for loans in Bulgaria picked up in the first half of 2021, and the proportion of Bulgarian subsidiaries reporting rising demand has steadily increased since then. However, demand may stagnate over the coming six months, as equal shares of banks respectively forecast increasing and decreasing demand. For comparison, a net 15% on average expect increasing demand in the wider region. 

Overall loan demand was assessed as increasing over the last six months by all respondents in EIB's report. Loan demand increased in every market segment. These findings are in line with growing private consumption spending in the first half of 2022.

In the retail markets, consumer credit demand rose for all respondents and mortgage demand increased for a large majority (80%). Banks expect loan demand to stagnate over the next six months in most market segments, with declining demand forecast for house purchases and consumer credit.

Loan demand for fixed investments has increased during the last six months (net 20% of respondents). Demand for loans to finance working capital has also grown over the last six months (net 80%). In the next six months, however, a net 40% of respondents expect declining demand for investment loans and a net 20% forecast lower demand for working capital loans. 

Collapsing consumer confidence and elevated uncertainty explain the expected declines in household demand for loans going forward.

In the last six months, supply conditions continued the positive trend that started following a brief deterioration in the first half of 2020. These improvements in recent years resulted from the strengthening of economic activity and banking sector balance sheets, which allowed Bulgarian banks to relax loan conditions. Over the next six months, however, supply conditions are expected to deteriorate (by a net 40% of respondents), and the overall loan approval rate is expected to decline by a net 40% of respondents, driven by the deterioration of every market segment except consumer credit.

In the next six months, local market conditions are expected to deteriorate significantly (net 40%), as are local non[1]performing loan figures (net 20%). conditions.

The recession following the global financial crisis and the bursting of the real estate bubble in Bulgaria resulted in very high non-performing loan ratios.

Access to funding for Bulgarian subsidiaries has improved over the last six months, continuing a trend that started in the second half of 2013 and was not interrupted by the pandemic.

This improvement is expected to be maintained in the next six months, as the European Central Bank and local monetary authorities are committed to maintaining open credit channels while increasing policy rates, the report says.