July 12 (SeeNews) - Bulgarian banks' stress test results show that the banking system is vulnerable to the extreme realization of internal and external risks coupled with high level if nonperforming loans (NPLs), the International Monetary Fund (IMF) said in a report.
While the Bulgarian National Bank (BNB) has taken steps to promote reductions in NPLs in the banking system, their level remain high, IMF said in its Bulgaria: Financial Sector Assessment Program report, published on Tuesday.
"Based on the BNB’s own methodology, gross NPL levels at end-June 2016 were a high 19.7% of total gross loans, with most NPLs over one year past due. Using the European Banking Authority (EBA) NPL measure, this, too, shows Bulgaria among those EU countries with higher NPL levels," IMF added.
In the baseline scenario, characterized by a modest economic growth and decline in unemployment, as well as stable and low interest rates, two banks—including a systemic one—exhibit weakness in terms of capital buffers to cope with accumulated losses in the past. These banks experience substantial increase in their NPLs as a result of the asset quality review (AQR) adjustment.
The AQR and stress test of the Bulgarian banking system showed that the sector remains well capitalised and resilient to adverse market conditions, with a CET1 capital ratio of 18.9%, well above the 4.5% regulatory minimum. The tests also showed that Bulgaria's third biggest lender First Investment Bank (Fibank) and the smaller Investbank need to build up their capital buffers.
The fund recommendations for 2017 to the country's central bank include aligning methodology to reflect the latest reforms in the European Union, implementation of comprehensive supervisory strategy for the target banks under the AQR, tighten workload and resources in order to provide further key capacities.
In mid-2014, Fibank and the country's third biggest lender, Corporate Commercial Bank (Corpbank), were hit by a run on deposits. While FIBank was rescued by the government, Corpbank collapsed, triggering mounting distrust in the banking system and the central bank's regulatory practices.