Bulgarian Banks Risky, Vulnerable - Fitch Director

Romanian, Hungarian and Bulgarian banks are the most vulnerable in eastern Europe to any renewed crisis as the volume of bad loans remains high and sluggish economic growth curtails lending, Fitch Ratings said.

“Banks are not doing so well, specifically in terms of banking asset-quality data, in Romania, to some extent Hungary and to a lesser extent Bulgaria,” Michael Steinbarth, a senior director at Fitch in London, said in an interview. “Romanian, Hungarian and Bulgarian banking systems also display weaker features because of macroeconomic imbalances.”

East Europe’s banks, including units of Milan-based UniCredit SpA, Vienna-based Erste Group Bank AG and Paris-based Societe Generale SA, struggled to roll over debt, including foreign-currency mortgages and consumer loans, during the credit crunch. Romanian and Bulgarian banks are also at risk of contagion from the Greek debt crisis, and Hungary’s temporary bank levy is cutting into profits.

Hungary and Romania needed International Monetary Fund bailouts to avoid defaults during the crisis. While the region is recovering from its deepest recession since adopting free- market policies two decades ago, government austerity measures are keeping growth rates subdued as the European Union seeks to prevent continent’s debt crisis from escalating.

In Romania deficit-reduction efforts over the next several years will curtail economic growth, Steinbarth said Oct. 12. Prime Minister Emil Boc is cutting jobs and wages to meet an IMF-backed goal of narrowing its shortfall to 6.8 percent of gross domestic product this year from 7.2 percent last year.

Hungary Bank Tax

Hungarian Prime Minister Viktor Orban has pledged to cut the deficit to less than the EU limit of 3 percent next year, a goal the country hasn’t reached since joining the bloc six years ago. Bulgaria has to bring its budget shortfall to the EU limit next year from 4.8 percent or face EU penalties.

“The various governments have taken measures to reduce” economic risks “but more needs to be done,” Steinbarth said. “Most economies are still going through the economic cycle.”

Emerging European economies will expand an average 3.7 percent this year, according to the IMF’s Oct. 6 global forecasts. Hungary’s GDP will grow 0.6 percent, while Bulgaria’s economy is stagnating, the IMF said. Romania’s economy will shrink 1.9 percent, according to the IMF.

Hungary’s bank tax, the largest in Europe, will impede the recovery “because banks are likely to try to pass it on to customers,” Steinbarth said.

The tax is 0.5 percent on assets of more than 50 billion forint ($223 million). It will raise 187 billion forint annually, or about 0.6 percent of GDP.

Negative Outlooks

Fitch has negative outlooks on 15 of 44 banks it rates in the region, signaling possible rating cuts. Six are in Bulgaria and four in Poland.

“Contributing factors include the impact of the unwinding of bank credit booms as well as foreign-currency debt on balance sheets of banks and some reliance on funding from European parent banks, including Greek parent banks for Bulgaria and Romania,” Steinbarth said.

Greece’s fiscal crisis, which led to an EU-led bailout in May, raised funding costs for the country’s banks, increasing the risk they would fail to repay debt at Balkan units. Almost a third of Bulgaria’s banks and 12 percent of Romania’s are owned by Greek parents such as Piraeus Bank SA and Alpha Bank SA.

Greek-owned banks in the Balkans will receive 630 million euros ($871 million) of loans from the European Bank for Reconstruction and Development, the lender said Oct. 5.

Delinquent Loans

Delinquent loans in Bulgaria were 12.6 percent of lending in June, almost twice the year-earlier figure, central bank data show. Hungary’s ratio was 7.5 percent in June, the financial regulator said. Romanian loans at least 90 days overdue were 11.3 percent of the total in August, the central bank said.

“Non-performing loan ratios are likely to remain high in 2010 and also loan impairment charges with some reduction expected for next year,” Steinbarth said.

There are still lessons to be learned from the crisis, such as the need to reduce foreign-currency lending, Steinbarth said. In Hungary, Romania and Bulgaria, loans in euros and Swiss francs, popular during the boom years to escape high interest rates, are about two-thirds of outstanding credit.

“Rapid credit build-up is unlikely to be repeated in the near term,” Steinbarth said. “Foreign-currency lending is an issue that needs to be addressed.”

The risks prompted some banks to leave the region. Allied Irish Banks Plc is selling a 70 percent stake in Poland’s Bank Zachodni WBK SA to Banco Santander SA as regulators force it to bolster its balance sheet. Germany’s BayernLB, which needed 10 billion euros from the state of Bavaria, may sell its 89.8 percent stake in Hungary’s MKB Bank. Austria’s Hypo Alpe, nationalized last year, plans to sell assets regionwide.

“The Austrians, Unicredit and some others are still the strategic players in the region and they are committed to staying,” Steinbarth said. “In the medium term, central and eastern Europe have better growth prospects than the more developed European markets.”