Transcript Rapid expansion of credit in SEE

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
R2 = 0.33
5
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