Cancer is the only thing other than capitalism that grows for the sake of growth itself. Even for finance gurus not all growth is benevolent and one statistic they dislike seeing on the rise is debt, especially debt owed to them. Unfortunately for Bulgarian bank and non-bank lenders, that is one of the side effects of the crisis. A trend that is likely here to stay and will increasingly eat into their profits.

Over the past months, non-performing loans (NPL) have been doggedly rising, reaching 2.9 billion leva at the end of June. The figure amounts to a mere 5.1 per cent of the about 57 billion leva that has been given in loans and leasing contracts. It was not an unexpected development, but the growth rate – in mid-2008, non-performing loans totalled 1.1 billion leva – has been alarming. Bankers have been closely following the increase for some time and statistics from the past year show that their warnings were sound. Bad forecasts are now further fuelled by the expectations of continued recession and rising unemployment.

How bad?
For now, the non-banking lenders, traditionally dealing with higher risks, look to be affected the worst. According to Bulgarian National Bank (BNB) data, about 10 per cent of their loans were non-performing at the end of June, compared to a ratio of 5.2 per cent a year earlier. The growth of non-performing loans given by banks is similar, rising to 4.7 per cent of the total.

In the business loans segment, the NPL ratio grew from 2.6 per cent to six per cent. About 4.8 per cent of mortgages were not serviced, compared to 2.2 per cent a year earlier, while in the consumer loans segment, the ratio grew from 4.2 per cent to 7.6 per cent in the 12 months to June 2009. The generally accepted level for healthy banking markets is five per cent.

Leasing companies are suffering as well. In June 2008, the ratio was only 1.1 per cent of all leasing finance. A year later, the ratio was 6.6 per cent, but also showing a quarterly decline. Industry sources said that the data was misleading because it should be showing an increase of overdue payments.

"It is not logical for the ratio of non-performing loans in the banking sector to be rising and in the leasing industry to be down," the chief executive officer of UniCredit Leasing, Plamen Minev, said.

The executive director of EFG Leasing and EFG Auto Leasin, Plamen Pavlov, said: "There is a certain increase compared to the first quarter, the number of non-performing contracts is on average in the five to six per cent range."

The big jump in the first quarter was due to data from companies that are not members of the Bulgarian Leasing Association (BLA). "Our data from BLA members show a constant, but more moderate, increase in the number of contracts with overdue payments since the start of the year," Pavlov said.

How stable?
According to BNB’s stress tests, the increasing pace of NPL growth is not yet a reason for worry. An extrapolation of the current trend, assuming that the International Monetary Fund’s forecast of Bulgaria’s economy shrinking by seven per cent this year is true, shows that the NPL ratio will reach 16.5 per cent at the end of the year.

In this scenario, banks would have to put aside between 1.9 billion and 3.3 billion leva aside as provisions, which will lower the capital adequacy ratio in the banking system to between 14.5 per cent and 11.6 per cent. Those figures, however, are still significantly above the eight per cent requirements in force in the US and the European Union.

The latest report from think-tank Industry Watch on the effects of the global economic crisis on the Bulgarian economy had no doomsday predictions for Bulgarian banks. The think-tank’s analysts said that the dangers to the quality of bank assets could be neutralised by the relatively high capital adequacy ratios and, if necessary, by the fiscal buffers built up in the past.

Neither are non-bank lenders panicking yet. "We do not expect surprises, the companies are stable," according to Nedelcho Spassov, chief executive of consumer finance firm EasyCredit. Spasov said that the largest companies have already taken the necessary steps to minimise risks, while the industry’s capital adequacy was strengthened by the good business over the past several years.

"Certainly, the profits of companies in the industry will be affected," the executive director of BNP Paribas Personal Finance, Loic Le Pichou, said. Just how much the companies will be affected will depend on how they will react and adapt to the new challenges, he said.

Everyone is preparing for the worst. "Our forecasts for the economy in the second half of the year are negative and I cannot have optimistic expectations for the leasing market until the end of the year," UniCredit Leasing’s Minev said, an opinion echoed by Konstantin Krustev, executive director of consumer finance firm Credissimo.

Spassov had a more cheerful outlook: "Despite expectations for a harsh winter, spread wide by the media, we are optimistic and believe that the positive signs, seen in August, will keep true in autumn and winter, buoying not only the non-banking lending, but other sectors of the economy as well," he said.

Kapital weekly, issue 33