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Bulgaria CDS Cheap As National Bank Reports Tripling In Bad And Restructured Loans

Tyler Durden's picture




 

Several weeks ago we urged readers to consider CDS of Greek neighbors Bulgaria and Romania. Even as spreads of the two countries have widened materially over the last 10 days, especially following last week's news in which a Romanian court found pension cuts critical for IMF loan procurement unconstitutional, there appears to be much more pain to come. In a report from Moody's, the rating agency confirms our worries, in a piece titled "Continued deterioration of loan quality pressures Bulgarian banks." In the report, analyst Elena Panayiotou notes: "Last Wednesday, the Bulgarian National Bank released figures for problem loans at Bulgarian banks, showing a tripling in the percentage of bad and restructured loans to 11.4% of total loans at the end of May 2010, compared with 3.66% a year earlier and 10.7% in April. This is credit negative for Bulgarian banks, as the recent increase in problem loans will further impact the banks’ net profitability, given the requirements to set aside higher provisions for such loans." Since the Bulgarian currency is pegged to the Euro courtesy of the IMF's currency board, the country is effectively as powerless to inflate its way out of troubled bank balance sheets as its eurozone members. With Bulgarian CDS at 360, and with the country about to experience the double whammy of the collapsing Greek economy, and deteriorating asset value, we firmly believe a fair target this spread is at least half of where Greek 5 Year protection trades.

From the report:

As Exhibit 1 shows, institutions that are retail-focused are especially vulnerable, as the percentage of bad and restructured loans in that sector reached 12.9% in May. Banks that typically serve corporate customers were also plagued by problem loans, with the percentage of troubled corporate loans reaching 10.4% in May. The high borrower concentration and the predominance of corporate loans primarily on the balance sheets of smaller banks suggest that rising delinquencies and credit losses in these banks’ corporate portfolios will continue to pressure their performance.


Although Bulgarian banks overall have adequate earnings capacity and have strong capital buffers to absorb future losses in their balance sheets, their asset quality and bottom-line profitability have been under pressure in recent quarters because of the adverse impact of the global financial crisis on the Bulgarian economy. Bulgaria has been in recession since the third quarter of 2009, which resulted in the country reporting negative GDP growth of 5.4% last year. At the same time, recent data show that unemployment remains high, having risen to 9.95% in April from 6.27% in December 2008. This has impacted the loan payment ability of retail customers and reduced households’ disposable income. At the same time, foreign direct investment (FDI) levels in the country, which peaked in 2007, dropped 66% through 2009.

The recent data showing a sustained rise in problem loans in the system confirm our concerns about the weakened credit quality and profitability of Bulgarian banks and is in line with the negative outlook on the banks’ ratings, especially those whose stand-alone Bank Financial Strength Ratings are higher, in the D+ to D- range. In addition, while we expect recurring earnings to remain adequate, we note that the banks’ revenue will be constrained by weak credit demand, the cautious approach of banks toward extending new credit (as shown in Exhibit 2), and very limited lending opportunities under current economic conditions.


A steady increase in problem loans could possibly affect the banks’ capitalisation. However, we expect the banks’ solvency to remain at good levels, with the country’s banking system capital adequacy ratio standing at a comfortable 18.24% at the end of March 2010.

 

 

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Mon, 06/28/2010 - 16:01 | 439566 AnAnonymous
AnAnonymous's picture

Courtesy of the IMF board? No, courtesy of the US tax payer.

Funny how the IMF is US when 'bailing' the rest of the world and something foreign when inflicting pain.

A bit of consistency would be welcome but much less funny.

So, no, lets stick with the inconsequent claims.

Mon, 06/28/2010 - 16:06 | 439573 sheeple
sheeple's picture

trying to compute some data here ... gauging any possible -ve basis arb in the 15-30bps region [fuck the bootstrap I'm ghettoing the PD for this one]

Mon, 06/28/2010 - 16:08 | 439575 jkruffin
jkruffin's picture

Looks as bad as those sick Fannie Mac loans we see here in the U.S.

Mon, 06/28/2010 - 16:11 | 439583 RobotTrader
RobotTrader's picture

Yet another clean breakout for gilt-edged, AAA-rated, U.S. Confetti.

30-yr. yields about to get a 3 handle.

And throw in high grade corporates to boot.

Mon, 06/28/2010 - 16:13 | 439587 Tartarus
Tartarus's picture

Greek banks make up a quarter of the market in Bulgaria. That means loan deterioriation there hurts Greek banks as well. The IMF must be kidding themselves if they think 10 billion euros is all they'll need to backstop the Greek banking system. It also goes to the lack of attention being given to the Greek banking system in all this. There is a reason problems in Greece have led to a tightening of credit for every single European bank and it isn't market panic. Follow the money.

Mon, 06/28/2010 - 16:18 | 439600 Sudden Debt
Sudden Debt's picture

I've heard from a good friend of mine in shipping that there is a hughe shortage in containers and that also the shipping rates are about the blow up to the skies as ships under contract are sailing slower because of rising oil prices. This will cause more ships to sail the sees and also jack up prices.

This should be the time to get into container and drybulk shipping stocks which are now at a bottom price.

http://www.sailwx.info/shiptrack/shiplocations.phtml

You can see in the upper pic that there are a lot of ships right now in the European seas and low traffic in China.

Mon, 06/28/2010 - 16:26 | 439642 Cleanclog
Cleanclog's picture

And pay attention to Romania and Hungary with the creep in area and that nails the Austrian banks.  

Throw in the Ukraine and this chapter comes to a close.

Mon, 06/28/2010 - 16:26 | 439643 Whizbang
Whizbang's picture

Who would've thought it. Eastern Europe seemed like such a safe place for my money...

Mon, 06/28/2010 - 16:40 | 439672 Village Idiot
Village Idiot's picture

Eastern European CDS?  Got that.

Mon, 06/28/2010 - 16:40 | 439675 kaiserhoff
kaiserhoff's picture

I'm glad Tyler has the energy to track this shit, er, (high grade corporate and sovereign debt swaps), but since no exchange enforces payment, there are no margins posted, and since AIG blew up, why does anyone believe these bets will be paid off?

What I'm asking is simple.  Is lack of credibility in the CDS market moderating (holding down) some of these rates?  Anyone have a handle on that?

Mon, 06/28/2010 - 18:21 | 439869 Cheeky Bastard
Cheeky Bastard's picture

http://en.wikipedia.org/wiki/Credit_Support_Annex

The rest is just about how good you are at hedging counterparty risk.

+

 

A Collateral Agreement (or CSA) is a standard ISDA contract negociated with each counterparty individually as a means to mitigate credit risk exposure. The principle is that client and/or counterparty can call on a reduction of their credit exposure (a margin call), if the exposure hit some specified limit. The terms of the contract are defined by the following parameters: Collateral Balance Collateral amount received/posted as of today T=0. Threshold Level of collateral amount to breach, to trigger a margin call. Independant Amount Amount added to exposure, after margin calls apply. Minimum Transfer Minimum margin call amount; No transfer occurs if the call is too small. Rounding Unit All transfers have to be a multiple of the rounding unit. Initial Margin Margin call to apply from the start of the deal. Frequency Frequency by which the exposure is compared to the CSA terms. Truncation Specifies that exposure to remain flat after 2.5 months. The collateral algorithm employed for computing PFE takes account of a 5 days lag in the delivery and return of collateral by the counterparty. The rationale for this assumption is that it is likely that a counterparty facing default will not deliver collateral when requested, and that it may hold on to collateral posted by the bank. It is common practise to provide a grace period on collateral delivery before closing-out the portfolio. It may take several more days to close out the transactions. During this period, the exposure can grow, increasing the loss in the event of default.

Mon, 06/28/2010 - 18:06 | 439845 Tartarus
Tartarus's picture

I don't see this posted on Zero Hedge but last week Credit Agricole said it expected to record nearly a 1 billion euro loss on its Greek subsidiary with its non-performing loans standing at 18% and projected to rise as high as 28% by the end of the year. With other Greek-owned banks having operations in Bulgaria and Romania as well it looks like they will be suffering some big losses this current quarter.

Mon, 06/28/2010 - 18:21 | 439871 denarii
denarii's picture

hmm bulgaria, thats the country that used tohave a 35% CA deficit, right?

Mon, 06/28/2010 - 20:28 | 440156 Zina
Zina's picture

Ivandjiiski, you will lose your Bulgarian citizenship! Stop it, man!

Do NOT follow this link or you will be banned from the site!