Банкеръ Weekly



Bank assets increased by almost a quarter (24%) from June 2002 to June 2003, BNB's statistics show. According to central bank's data for the period, credit institutions' assets went up by BGN2.96BN - from BGN12.4BN to BGN15.36BN. This growth was chiefly due to individuals' and firms' deposits, whose amount jumped from BGN8.75BN to BGN10.7BN, marking a 22% increase. Deposits of financial institutions in Bulgarian banks rose by about BGN500MN.The fair financial performance also helped the increase of bank assets. The aggregate amount of local credit institutions' equity capital went up by BGN395.1MN (23 per cent) - from BGN1.71BN in June 2002 to BGN2.1BN in the end of the first half of 2003. In other words, the banks' own assets cover almost 20% of their liabilities to other financial institutions, to firms and citizens, which is a very good indicator. Despite the above-mentioned good results, the situation in the bank sector is not so rosy as it seems at first sight. The profitsof most credit institutions are not increasing as quickly as their balance sheet value. In end-June 2003 local banks' profits totalled BGN218MN. Consequently, the coefficient of return on assets of many big local banks was considerably lower in the end of the first six months of 2003 than in the end of the same period of last year. This is the reason for many of the credit institutions that had been for a long time in the group of bank leaders according to the BANKER weekly's ranking, to drop from it. Although the BANKER has been rating local banks each quarter since September 1999, we'll recall the principles for nominating the leaders in the bank sector. All credit institutions are ranked according to five indicators: balance sheet value, equity capital, profit, return on assets, and return on share capital.BANKER makes a list of the top 10 credit institutions on the local bank market, which have best perfomance according to these criteria. However, the weekly's June 2003 ranking shows that BULBANK and United Bulgarian Bank (UBB) are the only local credit institutions in the team of leaders according to all five indicators.BULBANK rates first according to its balance sheet value (over BGN2.7BN), equity capital (more than BGN498MN) and profit (about BGN73.4MN). Although its assets did not go up quickly - the increase was BGN238MN (9.5% as compared to June 2003), the bank's profit rose by some BGN22MN (almost 25% growth) within a year. In other words, the credit institution's managerial team increased the proceeds from its operations. The return on BULBANK's share capital was 44.11%, which ranked it second according to that indicator, and the return on assets was 2.68%, placing the bank third according to that criterion. BULBANK's fair performance was entirely due to its policy of focusing on credits. Within a year (from end-June 2002 to end-June 2003) the aggregate amount of loans it allocated to companies went up from BGN350MN to BGN674MN, while housing and consumer credits increased from BGN22.7MN to BGN42.8MN. Proceeds from interests amounted to BGN64.2MN in end-June 2003, accounting for two thirds of BULBANK's revenues, up from BGN50.8MN for the same period of 2002. At the same time, the bank's expenses for payment of interest totalled BGN10MN. BULBANK's managerial team succeeded to settle the problem regarding two of its most problematic debtors. In the spring of 2003 the USD7MN credit, allocated to the private joint-stock company Zografsky AD in 1994, was entirely paid off. In the beginning of summer AKB Corporation repaid all overdue installments under its USD10MN debt to BULBANK and is presently regularly servicing the loan. The successful collection of problematic receivables allowed the credit institution to transfer BGN44MN (set aside for provisions under these credits) to its profit.The balance sheet value ofUBBdid not increase significantly within a year (from June 2002 till June 2003). Its assets (the indicator according which UBB ranked third) rose by BGN150MN (10.19 per cent). In June 2002 they totalled BGN1.47BN, and in the end of the same peiod of 2003 they reached BGN1.62BN. However, UBB's profit (third in the local bank sector) went up by 125% within a year from BGN11.1MN in mid-2002 to BGN25MN in June 2003. Crediting is the main source of UBB's proceeds. The total amount of loans released by the banks within a year increased by almost BGN398MN (84.6% growth), from BGN470MN to BGN868MN. The aggregate volume of company loans went up by 61% - from BGN406.1MN to BGN653.8MN. However, the allocation of consumer and housing credits is the main business, towards which the bank has directed its attention and from where it expects most of the proceeds. From June 2002 till June 2003 their amount rose more than 3.2-fold - from BGN61.2MN to BGN192.2MN. Despite the high interest rates, fees and taxes, that UBB charges from its clients, it manages to attract new customers, which is an indicator of the high efficiency of its operations. The bank ranked sixth according to return on share capital and tenth according to return on assets. According to that indicator UBB is in front of all other big financial institutions, such as DSK Bank, Biochim Commercial Bank, First Investment Bank (FIB), Bulgarian Post Bank, SG EXPRESSBANK, and HEBROSBANK. DSK Bank, FIB and SG EXPRESSBANK, were always in the leaders' club from 1999 till June 2003, but now they have failed to satisfy the criteria for membership.

DSK Bankstill maintains a high growth of its assets. Within a year they increased by BGN582MN (38.1 per cent) - from BGN1.6BN in June 2002 to BGN2BN in the end of the frist half of 2003. The bank ranks second after BULBANK according to its balance sheet value, and occupies the same position according to its profit of BGN27.3MN. But the growth of this indicator is only 11.1% and is much lower that the speed of the increase of its assets, which shows a decline in the efficiency of the bank's deals. In end-June 2003 the return of DSK Bank's share capital was 29%, and the return on its assets was 1.22 per cent, i.e. lower than in end-June 2002. According to the return on assets DSK Bank even remains outside the list of ten best performing Bulgarian banks according to that indicator. Therefore, DSK Bank is not presently on the list of the top 10 leaders in the local bank sector. The managerial team ofSG EXPRESSBANK

should also undertake measures for increasing the efficiency of its operations. Within the June 2002 - June 2003 period the bank increased its assets by BGN94MN (17.4% growth) - from BGN543.6MN to BGN637.97MN. According to this indicator the bank rates eighth in the finance and credit sector. At the same time, its profit rose from BGN6.43MN to BGN9.73MN, placing it fourth in the local bank sector. Nevertheless, the profit is not sufficiently high to ensure SG EXPRESSBANK a good return on assets (which is only 1.18 per cent). According to that indicator the Varna-based financial institution remained outside of the best performing banks in end-June 2003. It is clear that in order to bring GS EXPRESSBANK back into the leaders' club its managers should increase the volume of profit-making deals and reduce the losses from overdue payments under released credits. The executives of FIBare facing the same challenges. The credit institution's balance sheet value rose by some BGN130MN (almost 20.2 per cent) in June 2002 - June 2003, from BGN643.3MN to BGN772.9MN. FIB's profit went up by almost 46.6% within the same period - from BGN7.7MN to BGN11.3MN. But even that increase was insufficient to ensure the bank a good return on assets, which was only 1.46% in end-June 2003. It is this indicator that prevents FIB from ranking among the ten banks with the highest return on assets. FIB could improve it by increasing the proceeds from its operations. Moreover, the bank could also reduce the funds it sets aside from its positive financial result (the so-called provisions), earmarked to cover its losses from overdue receivables.Biochimwill have to overcome the inevitable problems which usually go hand in hand with the privatisation of any bank, its merger with another credit institution (in this case HVB Bulgaria) and the restructuring of its operations. Biochim is practically the first local bank that faces such challenges. On October 7, 2002 it was sold to Bank Austria, and a month later the procedure for its merger with HVB Bulgaria was launched. As of the beginning of 2003 Biochim began changing from a bank, entirely directed to companies, into an institution that offers an increasing number of services to the citizens. However, the new bank products require expenses for the development of the info system, for training of personnel, for restructuring of the operation of branches, etc. Moreover, Biochim (like SG EXPRESSBANK) periodically faces problems with some of its big corporate clients, who do not service regularly their liabilities. In such cases (the most recent one was when Energocable fell into insolvency) the bank has to make additional expenses in order to cover the losses, inflicted by debtors. This has a negative impact on the credit institution's financial results. In mid-2003 Biochim reported a profit of BGN13.71MN. Considering the balance sheet value of BGN1BN (almost twice up from June 2002), this profit ensures quite a small return on assets (1.3 per cent). Thus, the bank remained outside the list of the ten credit institutions with the highest return on assets. The results of the bank sector in end-June 2003 show that profitability of operations is one of the greatest challenges which banks will be facing over the next few years. This concerns mainly big credit institutions that are burdened by a huge and clumsy administrative structure, requiring considerable maintenance expenses. As a rule the quality of services in these banks is worse than compared to that of smaller and more flexible credit institutions. In larger banks, where operations are bigger both in volume and number, its more difficult to manage various kinds of risk (credit, operational, liquidity). As a result there is a higher danger of losses and this requires provisions of greater amount. The latter reduce the financial result. In addition, bank managers should take into account the fact that as time passes by the big margin between interest on credits and low interest on depsoits will be gradually decreasing. Due to the increasing competition on the market the fees and taxes will be also reduced. For all these reasons the net proceeds of credit institutions in Bulgaria will be going down if their managers do not undertake steps for raising the money turnover and the number of clients they service.

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