Bulgaria is unlikely to see significant loan growth in the near future, according to an analysis of the country's banking system by Standard & Poor's agency.

Bulgaria's banking sector has remained in the black partly due to initiatives from the Bulgarian National Bank (BNB) and financial support for Bulgarian subsidiaries from international parent banks, says the rating agency.

"We believe that the asset quality of Bulgarian banks could nevertheless deteriorate sharply, particularly in light of relatively unseasoned loan portfolios and the ongoing effects of economic recession," said Standard & Poor's credit analyst Magar Kouyoumdjian.

"We estimate the current level of stressed loans, including restructured loans, to have reached 25%-30% of total loans. However, a low level of write-offs and shrinking loan books, in our view, overstate the asset-quality issues."

The outlook on Standard & Poor's ratings on Bulgarian banks remains negative.

The agency reports points out that about 28% of the system's funding in Bulgaria stems from foreign parent banks, which raises concerns about likely repercussions if these banks were to stop supporting their Bulgarian subsidiaries.

However, the analysts say that the funding lines have so far remained in place, and they believe foreign parent banks are unlikely to reduce the level of financial support in the short term.

"Funding from parent banks based outside Bulgaria played a significant role in fueling credit growth during the years before the crisis," said Kouyoumdjian.

"Nevertheless, we see the possibility that Bulgarian subsidiaries may not be able to rely on their foreign parents to fund future growth. Consequently, we don't expect to see significant loan growth in the near future."

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