Bulgarian households’ analysis by Unicredit Bulbank: Less than 5% of the households have two thirds of the deposits

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Financial assets of households increased by a healthy 12.2% YoY in 2010, led primarily by savings in deposits, perceived as safe heaven and made more attractive by the banks through appealing interest rates offered. Still, these dynamics were driven primarily by the wealthiest savers, as bank accounts with the highest deposited amounts registered the fastest growth, while those with the lowest balances actually saw a negative flow of funds. In fact, at the end of 2010 just 4.8% of total bank accounts were responsible for 68% of the total deposited amount at banks, according to the Bulgarian National Bank data. Lower net worth households are likely to feel to larger extent also the rising inflation effects (consumer price inflation reached 5.2% YoY in February). Increasing food prices should have the most significant impact, as 36.5% of expenses by average households in the country went to food and beverages, according to the latest numbers from the National Statistical Institute for Q4 2010. Further evidence about the worsening households’ finances is the declining income per capita, which went down by 3.7% YoY in Q4, while unemployment increased meaningfully in 2010 to reach levels above 10%, where it is expected to remain also through 2011.

Pension funds also contributed positively to overall financial assets growth in 2010. Significant steady flows of obligatory pension contributions along with improved return on investments, due to favourable market dynamics, led to a meaningful 26.3% YoY growth in total net assets. Insurance technical reserves more than doubled, but methodology adjustments appear to be responsible for most of the increase.

Two smaller contributors to overall financial assets, but with meaningful growth in 2010 are also worth mentioning: mutual fund assets of foreign owned funds marked an hefty 50.6% yearly increase, as foreign financial markets outperformed the domestic one significantly; and government securities expanded by 13.2% YoY, as they continued to be perceived as safer investment alternative.

Other instruments such as domestic mutual funds, direct investments in listed shares and corporate bonds experienced double digits negative growth mainly due to large net outflows backed by very poor results in the local financial markets.

Looking forward, bank deposits should retain and even slightly expand their dominating share. Pension fund asset are also likely to enlarge their pie, while growth will be somewhat negatively affected by partial nationalization of one of the schemes, with estimated effect on total managed assets of around BGN 120 million for 2011. On the other hand, investments in shares and mutual funds are likely to increase only marginally.

On the liabilities side, 2010 was the only year in the past decade to register a decline (although a marginal one) in overall household obligations, on the back of a roughly flat dynamic in the previous year. Following years of hectic debt accumulation with leverage ratio approaching the level of 70% in 2008, the trend was reversed in the following two years, falling to the current level of close to 55%.

Bank mortgage balances increased nevertheless in the past year, due to expanding foreign loans mainly in EUR currency, while bank consumer loan balances declined on the back of weak dynamic in consumption. On the positive side, non-bank financing institutions increased both mortgage and consumer financing, although at low single digit rates. In contrast, overdraft lending by banks and particularly leasing financing activity registered the sharpest drops, as high financing cost in the former and sharply reduced car related financing needs in the latter did not play favourably amid constrained household finances.

Looking ahead, growth in household indebtedness should gradually return to positive growth, although at a lower pace relative to the pre-crisis period. Overall, growth in indebtedness level should remain below that of financial assets, leading to further consolidation of household’s balance sheets. Mortgage lending should continue to outperform the consumer variety, and to gradually gain majority share.

Overall, households are likely to remain cautious in their finance decisions and consumer behaviour in the short-to-mid term, with elevated unemployment levels, soft income growth, higher food and transportation expenses, and depressed housing market all likely to constrain confidence and affect purchasing decisions.

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