BANKS MAY BEND DOWN UNDER CREDIT LOAD
The bank sector expands dramatically, BNB statistics shows. In the October 2003 - end-September 2004 period the aggregate amount of bank assets rose by 30%, reaching BGN20BN. A fair idea about that growth could be obtained by the fact that the balance sheet value of credit institutions was just BGN8.2BN in 1999.The steep increase of bank assets would not be alarming if it was due to attracted money from citizens and firms. But statistical data show something quite different. In the last twelve months the accounts of individuals and companies increased by only BGN2.6BN (slightly over 19%) up to BGN13.6BN. At the same time credits rose by BGN3.7BN (more than 49%) and reached BGN11.2BN. That means that all newly attracted money has been released as creditsThis is quite a dangerous policy, having in mind that according to the regulations of the BNB and the Basel Committee on Banking Supervision, loans are the riskiest assets. Another alarming fact is that on October 1, 2004, BGN0.83 of each BGN1, attracted by citizens and firms, was invested in credits. A year earlier the ratio was better - BGN0.68 per BGN1. In other words, banks do not set aside even part of the newly received money for investments in less riskier assets such as government securities and deposits in first-class credit institutions, that would guarantee their solvency at any time. So, the question where else do banks find money resource to finance the increase of extended credits would be quite logical. The answer could be found in the numbers, showing the indebtedness of Bulgarian banks towards other financial institutions. Within a year it increased by more than 75% - from BGN1.2BN (as of October 1, 2003) to BGN2.1BN (as of October 1, 2004). In the language of financial experts that means that Banks risk profile has worsenedi.e. an economic crisis could much easier shake their stability than a year ago. BNB's officials claim that many banks have already come close to the minimum required 12% capital-to-assets ratio and will fall down beyond that limit if they go on with the credit expansion. The central bank will then have to sanction them. In an interview for the BANKER weekly in mid-October 2004 BNB Vice Governor Emiliya Milanova said: If ordinary credits are provisions by 5% and those under supervision - by 30% (this is the lowest rate of worsening the quality of credits), 19 banks' capital-to-assets ratio will drop under the required 12% minimum, and four of the credit institutions will have a negative capital-to-assets ratio. The head of BNB's Bank Supervision department explained also that seven of the domestic financial institutions whose capital-to-assets ratio is close to the required minimum have signed with the BNB an agreement for increasing their equity. Despite that measure, however, Ms. Milanova did not expect credit expansion to slow down. That could be easily explained, having in mind that loans are still banks' most profitable assets, and they need to increase their proceeds and net profits. The reason is that in the next two or three years banks will have to make considerable expenses for the introduction of new info systems, in compliance with the requirements for capital-to-assets-ratio of Basel II, which are expected to enter into effect as of the beginning of 2007. According to BNB experts, in their willingness to report highjer profits some credit institutions conceal the fact that they have extended big or internal loans through various financial and accounting tricks.In that situation it is quite difficult to make an objective rating of banks in Bulgaria, as only BNB's Bank Supervision department knows which credit institutions have manipulated their results by not calculating the required provisions. And this is one of the most strictly kept secrets in the central bank. Therefore, the BANKER decided to trust entirely BNB's statistics in preparing its traditional quarterly ranking (since 1998) of the best banks in this country. The weekly's methodology for ranking the credit institutions includes five criteria: balance sheet value, equity capital, profit, return on assets, and return on equity capital. The the elite groupincludes only credit institutions which are ranked at the top ten positions according to the above-mentioned indicators. Unbiased numbers showed that as of October 1, 2004 that term was met by: United Bulgarian Bank (UBB), DSK Bank, HVB Bank Biochim, Raiffeisenbank (Bulgaria), SG EXPRESSBANK, and EIBANK.