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Rapid expansion of credit in South Eastern Europe: a cause for concern? Dubravko Mihaljek Bank for International Settlements* Presentation at ICEG EC conference South Eastern Europe after EU Enlargement and before Accession Budapest, 4 April 2005 * The views expressed are those of the author and not necessarily those of the BIS. 1 Overview 1. Two views of credit expansion i. Benign view ii. Reasons for concern 2. Composition of bank lending 3. Mortgage lending and housing prices 4. Real estate markets in SEE 2 1. Two views of credit expansion Basic facts: • Cumulative expansion of bank credit to the private sector over 2002-04: > 200% (nominal) in BG, RO, SCG 90-170% in AL, HU, TR, Baltic states 40-75% in BH, HR, MK, SI • Real growth > 20% p.a. in 8 countries 3 Bank credit to the private sector, 2002-04 300 45 38 37 250 38 40 33 35 34 28 200 30 26 25 20 150 18 20 16 100 13 10 15 12 10 50 5 3 2 0 5 0 SCG ROM BUL LAT LIT TUR ALB EST HUN BIH HRV SVN MAK POL SKA CZE EUR Nominal growth (cumulative, in percent) (lhs) Real growth (compound rate, % per year) (rhs) Sources: IMF, International Financial Statistics; national data; BIS estimates. 4 Benign view of credit expansion • Recent growth mostly reflects low base, low levels of financial intermediation R (credit growth, credit/GDP) = -0.5 • Banking sector indicators improved • Banking reforms advanced in SEE 5 Developments in bank credit to private sector Countries 1 In nominal terms 2002 2003 2 2004 In real terms 2002 2003 Credit/ GDP 2,3 2004 M3/GDP 2003, in per cent Croatia 30.2 14.6 11.8 27.4 12.5 8.8 57.8 66.8 Slovenia 15.0 15.7 17.1 6.7 10.7 11.8 43.2 66.0 Hungary 21.9 34.3 17.7 16.3 27.1 11.6 41.7 47.3 Bosnia-Herzegovina 27.7 20.3 13.2 27.4 19.6 13.7 41.7 45.2 Poland 10.0 8.1 3.0 9.2 6.3 –1.4 32.4 41.7 Czech Republic –6.6 9.3 12.2 –7.1 8.2 9.1 31.0 69.2 Bulgaria 43.2 48.3 42.6 38.0 40.4 37.1 27.6 48.1 Slovakia 1.5 15.0 1.4 –1.7 5.3 –4.2 27.4 62.5 Macedonia 4.7 15.3 17.8 3.7 12.5 18.9 19.6 30.0 Romania 51.1 69.5 38.0 28.3 48.5 26.3 15.9 24.2 Turkey 19.4 31.8 49.3 –7.9 1.4 37.2 13.6 43.5 Serbia-Montenegro 64.7 31.9 64.1 43.5 22.6 46.8 10.3 10.7 Albania 41.0 31.0 23.4 38.6 26.8 20.7 6.8 60.2 4.1 4.7 3.5 1.7 2.7 1.1 97.7 83.3 Memo: Euro area 1 2 Ordered according to the private sector credit/GDP ratio. Annual changes, in per cent. 2004 figures based 3 on latest available data. Deflated by consumer prices. Sources: IMF, International Financial Statistics; national data. 6 Benign view of credit expansion (cont) • Banking sector indicators improved • Lower NPLs • Kept high capital adequacy • Increased profitability • Banking reforms advanced in SEE (privatisations in AL, SCG; consolidation in BH; better supervision in MK,TR) 7 Banking sector indicators Non-performing 1 loans 1999 Bulgaria Croatia Czech Rep. Hungary Poland Romania Slovakia Slovenia Turkey Average Memo: Austria 1 2003 29.0 11.8 22.0 3.6 13.2 35.4 23.7 5.2 10.5 14.6 1.7 2 4.2 5.1 4.9 3.2 22.2 3.4 9.6 9.4 11.5 6.6 1.5 Capital 2 adequacy 1999 43.0 20.6 13.6 14.9 13.2 17.9 29.5 14.0 8.2 18.7 13.9 Return on equity 2003 1999 22.0 16.2 14.5 11.6 13.6 21.1 20.7 11.5 31.0 16.8 14.5 20.9 4.8 –4.3 7.1 12.9 –15.3 –36.5 7.8 33.1 4.3 6.9 2003 15.6 14.5 23.6 19.8 5.9 15.6 13.8 12.6 14.7 14.9 7.2 Return on assets 1999 2003 2.5 0.7 –0.3 0.6 0.9 –1.5 –2.3 0.8 3.3 0.6 0.3 2.0 1.6 1.3 1.7 1.0 2.2 1.1 1.0 2.2 1.5 0.4 2 As percent of total loans. Risk-weighted capital-asset ratio. End-2000. Sources: Central bank publications and websites; ECB (2004); Bank Austria (2004). 8 But there are reasons for concern 1. In BG, HR, TR credit has expanded by 5% of GDP or more p.a. for 5 years (benchmark signalling potential for crisis; Demirguc-Kunt and Detragiache, 1997) In the last two years credit growth has exceeded this benchmark also in BH, HU, and RO (and Baltic states) 9 Bank credit to the private sector, 2000-04 (Increase in percent of GDP, annual average) 8.5 6.0 6.0 5.1 5 4.5 4.3 4.0 3.9 3.6 2.7 1.9 0.9 0.9 0.6 0.1 0 -3.1 -3.2 CZE SKA -5 LIT BUG TRK HRV EST ROM LAT HUN BIH SVN EUR ALB POL MAK SCG Sources: National data; BIS estimates. 10 But there are reasons for concern 2. Lending expanding faster than deposits banks borrow from foreign HQs rising foreign liabilities of banking system external indebtedness central banks in BG, HR, RO taking precautionary measures 11 100 Commercial bank liabilities, 2002-04 (annual pct change, quarterly average ) 80 60 40 20 0 Time, savings and foreign currency deposits Foreign liabilities -20 ROM BUG SKA LIT HRV EST SVN LAT HUN POL TRK MAK Source: IMF; BIS estimates. 12 CZE Reasons for concern (cont) 3. Loans extended during the boom have yet to mature NPLs could increase 4. Rapid expansion of foreign currency lending bank customers exposed to FX risk, banks substitute credit risk for FX risk 13 2. Composition of credit growth • Much faster growth of credit to households than to enterprises • Negative correlation: R (household, enterprise credit growth) = -0.75 14 Real credit growth to enterprises and households, 2003–04 Albania Bosnia and Herzegovina Bulgaria Croatia Czech Republic Estonia 1 Hungary Latvia Enterprises 35 64 72 7 2 57 21 63 Households 172 77 173 38 68 111 92 212 Lithuania Macedonia Enterprises 68 19 -4 52 50 -16 34 35 Households 212 129 35 356 227 56 25 132 Poland Romania Serbia and Montenegro Slovakia Slovenia Simple average 1 Cumulative percentage changes from 2003 to latest available data for 2004; deflated by consumer prices. Source: National data. 15 Real growth of credit, 2003-04 (cumulative growth rate, in percent) 85 BUL ROM BIH 65 SCG Enterprises ALB SVN AVG 45 TRK HUN 25 MAK HRV 5 POL -15 300 CZE SKA ROM SCG 250 200 BUL ALB TRK 150 Households AVG MAK HUN 100 50 0 Source: National data; BIS estimates. BIH SKA CZE HRV SVN POL 16 Composition of credit growth (cont) • Composition of lending still far from that in mature market economies (except in HR) • Lending to households (after years of neglect) welcome, profitable • But household indebtedness rising fast (84% of disposable income in HR) central banks in HR, CZ, HU issued warnings 17 Composition of commercial bank lending1 Government 1999 Bulgaria Croatia Czech Republic Hungary Poland Romania Slovakia Slovenia Turkey Average Euro area 2003 21 21 6 43 5 35 29 22 3 19 … 8 8 31 13 6 9 49 22 4 16 11 2 Corporate 2004 –3 8 25 9 7 5 49 22 4 12 11 1999 65 65 83 49 62 62 64 52 86 66 … 2003 67 68 45 57 53 68 37 57 76 59 41 Household 2004 70 42 45 57 46 68 34 55 71 56 41 1999 14 14 12 8 33 3 7 26 11 15 ... 2003 2004 25 25 25 30 31 23 14 21 20 25 48 33 50 30 32 46 27 17 23 25 32 49 1 In percent of total credit, excluding interbank credit and credit to non-bank financial institutions. End of period or 2 for 2004, latest available period. Net claims on government for most countries. Sources: Central banks, ECB; IMF. 18 3. Mortgage lending and housing prices • Mortgage lending fastest rising component of household credit in many countries • No excessive growth in housing prices so far • But where data exist, clear correlation b/w housing loans and housing prices 19 Mortgage lending and residential property prices1 (annual percentage changes) 20 15 House price 10 HPRICE =-2.4 + 0.14 HLOAN 5 2 R = 0.33 0 -10 10 30 50 70 90 110 130 -5 -10 Housing loans 1 Based on quarterly data for Croatia, Hungary and Poland, 2000-04. Sources: Central banks; BIS estimates. 20 4. Real estate markets in SEE • Still underdeveloped – high owner occupancy ratios – many properties do not have clean titles – supply of good quality properties constrained • But property prices rising rapidly in big cities and coastal areas demand by non-residents how fast should SEE countries open up their real estate markets to EU residents 21