Bulgaria and Romania will undergo a significant deterioration of assets over the next 12 months, with bank loan defaults creeping up to about 15 to 20 per cent of the sector’s total portfolio, according to a new report by Deutsche Bank Research (DBR), the research arm of the German banking heavyweight.

Looking at the economies of Central and Eastern Europe, the Baltic nations, Russia, Ukraine and Kazakhstan, the analysts predicted that non-performing loans would peak in 2010, expecting the deterioration to continue at least until mid-2010 in Eastern Europe.

Stress tests by Bulgarian National Bank (BNB) estimated that bad loans could make up 16.5 per cent of the total by the end of the year, triggering write down costs of between 1.944 billion and 3.305 billion leva. The system capital adequacy ratio of 17.6 per cent could drop to the 14.5 per cent to 11.6 per cent range, comfortably high above the eight per cent regulatory requirement for the EU and the US.

Stress tests on the CEE banks reveal that banks’ solvency would shrink near or even beneath the regulatory requirement in case of a sharp deterioration in the quality of assets, according to DBR. Loan defaults will peak at between 10 and 50 per cent for the different countries.

The report ties up with a recent analysis by UniCredit Group, which forecast that loan defaults in Eastern Europe will hit their worst in 2010. However, the institution pointed out that the currency board mechanism pegging the lev to the euro is guarding Bulgarian banks against steep rises in loan defaults.

Bad and restructured loans accounted for BGN 2.75 billion in end-August, or 7.4 per cent of all corporate and household loans, overdrafts excluded.

Source: Dnevnik.bg