BANKS ARE CHOKING WITH CREDIT ACTIVITIES
Bulgarian banks profit potential seems to be already exhausted. Although they offer aggressively credit facilities and other financial products, their net incomes for the first half of the year are not considerably higher than in 2003. At the end of June credit institutions profit was BGN214.7MN, while in the first six months of 2003 it was BGN210.8MN.Bulgarian National Bank (BNB) statistics shows that during the 12 months till the end of June the total amount of loans, which are the most profitable banking assets, has risen by 44% - from BGN6.8BN to BGN9.8BN. Credit interest incomes have grown by more than 50% - from BGN358.2MN (in mid-2003) to BGN526.1MN at the end of June, 2004. There are several reasons for this growth according to balance-sheet accounts of the banks. Banking costs for paid interests have increased by roughly BGN40MN. And while interests, which banks pay on individual and firm deposits were 20% up, those paid on long-term funds attracted were 58.5% bigger. In other words, banks already realize the real price of credit lines received from abroad. Expenditures on provisions which cover banking losses from bad loans have also grown by about BGN92MN. In the first half of 2003 credit institutions have managed to collect some of their overdue receivables, to free provisions and to increase their financial result by BGN48MN. Now we have the opposite situation - the net amount of costs need to provide for expired payments are BGN44MN. This change is quite reasonable because of the frenzied credit expansion. More loans mean more overdue payments on them and higher expenses for their covering.Credit institutions spend most money for maintenance costs - salaries and insurances, external services and for using long-term tangible assets. Banks paid BGN330.8MN for their maintenance in the first six months of 2003 and BGN396.8MN one year later. Expenses for salaries have risen from BGN123MN to BGN148MN and for external services - from BGN66.8MN to BGN94.5MN. Problems here come from the heating competition and the lack of qualified staff, which will go on pushing up these expenditures in future and will have a negative impact on the final financial results of the credit institutions. If banks cannot manage to increase their profits, they will be urged to limit their most profitable activity on extending loans in order to observe the requirement for 12% capital adequacy. The main cause here is the credit risk assessed at 100% of the loan nominal value. As it is well known, the capital adequacy ratio is calculated through dividing the total amount of equity capital to the total risk size of all assets. The more the credits extended by the bank, the higher risk for covering and bigger equity capital needed. This capital could be increase through accumulated profits or through shareholder payments. So a kind of circle emerges - in order to maintain its credit activity the bank should earn more profits, which will grow only in case of more loans launched. Competition does not allow interests, fees and commissions on credits to be increased and interests on individual and firm deposits to be decreased. So it seems the only way for banks to rise their efficiency and profits is to lower their maintenance costs. Thus, there is nothing strange in the present configuration that financial institutions like BULBANK, Biochim, and DSK Bank, which have traditionally been among the best Bulgarian banks in the BANKER weekly classification, prepared every three months since 1998, are not in the June 2004 list. The BANKER weekly rates all credit institutions registered in Bulgaria (except foreign banks branches in the country) in terms of five indicators: balance sheet value, size of equity capital, profits, returns on equity capital, and returns on assets. In the banking elite are those credit institutions, which are among the first ten in terms of all five above-mentioned criteria. BULBANK, Biochim, and DSK Bank have released one of the highest profits, but related to their huge equity capitals they are insufficient for the list of the best in terms of returns on equity capital. BULBANK was not among the best in terms of returns on assets either. However, in the Bulgarian banking elite club are United Bulgarian Bank (UBB), Raiffeisenbank (Bulgaria), SG EXPRESSBANK and, surprisingly EIBANK.The presence of UBB among the best is reasonable. The credit institution is actively performing services for both firms and individuals. Its balance sheet value has risen by 15.3% - from BGN1.62BN in June, 2003 to BGN1.87BN in the middle of 2004. In terms of this indicator, as well as the size of equity capital it ranks third, with BULBANK at the top.UBB profit in the first half of this year is BGN32.63MN, mainly from incomes on loans, which make up 63.2% of it assets. The bank has received BGN65.3MN in interest on credits - 65% of all its revenues. In addition to launching all types of loans to individuals and firms familiar to the Bulgarian market, UBB extends particular credits to small and middle-sized enterprises and is among the most active financial institutions in dealing with stocks. In spite of its big capital and relatively high profit, its executives Stilyan Vutev and Radka Toncheva think that maintaining the present high annual growth in crediting (36.3%) would be a rather difficult task. It will only happen in case UBB manages to increase the pace of individual and firm deposit attracting, which is now 15.8% annually, to the level of credit size growth. Raiffeisenbank (Bulgaria) is naturally in the group of the best Bulgarian credit institutions for a sixth month in a row, as it is eventually the most aggressive in extending loans. In March, 2004, their total size reached 76% of its assets. In the next three months, however, Raiffeissenbank (Bulgaria) managed to negotiate several credit lines for more than EUR100MN. Thus the bank both secured its financial resources and its balance-sheet value reached BGN1.19BN (fifth place according to this indicator). At the same time the share of its loans decreased to 65.5% of all assets, while in nominal terms the total amount of extended credits increased from BGN425MN in June, 2003, to BGN779.53MN in the middle of 2004.Thanks to the revenues from credit activity the bank is rated fifth in terms of profits - BGN13.63MN, or 54% up from the same period of last year. Raiffeisenbank (Bulgaria) return on equity is 15.2% and it is at the first place in terms of this criterion, while its return on assets of 1.14% ranks it ninth. Experts, however, think that the bank's capital (BGN89.8MN) is already insufficient and it should increase it as to maintain its present aggressive credit policy.SG EXPRESSBANK is already a traditional member of the elite banking club in Bulgaria. Because of its active policy of extending credits to individuals and firms the bank managed to compose a good portfolio of solvent clients. Loans form 70% of the banking assets, which in June were BGN704.4MN. Incomes from credits were BGN27.5MN - 65% of all revenues. The equity capital of SG EXPRESSBANK is BGN97.3MN, while its profit stood at BGN11.25MN. Its return on equity is 11.56% and return on assets - 1.6 per cent. No mater that compared to its balance sheet value the banking capital is relatively big, in coming months its management should activate its policy on attracting deposits from individuals and firms. Their total amount at the end of June was BGN558.1MN - by only BGN91MN more than credits launched (BGN487MN). If the bank intends to fight the competitors on the credit market and to go on with extending loans, it should inevitably increase funds attracted from non-financial institutions, launch bonds or take a credit line from abroad.Surprisingly, in the middle of 2004 EIBANK joined the group of the best credit institutions in Bulgaria. It took only one year for the financial institution, controlled by Tzvetelina Borislavova and Svetoslav Bozhilov, to increase its balance-sheet value by 62% - from BGN414.1MN in June 2003, to BGN670.8MN in the middle of 2004. EIBANK profit is BGN7.13MN and is mainly due to the steep increase of its credit portfolio, which in the 12 months to end of June more than doubled - from BGN120.5MN to BGN283.3MN. This growth comes mostly from company loans with their total amount reaching BGN282.5MN (from BGN127.1MN). The bank made its blow in the March-June, 2004 period when the total size of its corporate credits increased from BGN162.1MN to BGN283.3MN. Only BNB knows which companies received those loans. More important, however, is whether credits will be served regularly and whether they will bring enough incomes to EIBANK. Otherwise, it will be urged to provide them which will burden it will additional expenses. The answer of these questions will be known in the end of the year when provisions are published.As a whole, expectations are that banks will have to put aside more money for credit provisions. Some analysts think that credit institutions will inevitably have to increase their expenses which will be strenuous for some smaller banks. They will be either urged to close or to be taken over by bigger banks or sold to foreign investors.