CREDIT GROWTH ABOVE 25% IS UNDESIRABLE
The Bank Supervision Department of the Bulgarian National Bank (BNB) concluded last week its meetings with the eight largest Bulgarian banks. The BNB Deputy Governor Emilia Milanova talked with the managers of BULBANK, DSK Bank, United Bulgarian Bank (UBB), HVB Bank Biochim, who informed her about their plans for the banks' development in 2005. They also made forecasts for the growth of assets, attracted funds, and capital basis. The attention of the bank managers was particularly drawn to the increase of the credit portfolios.According to bankers who attended the talks, the credit institutions were warned that their credit growth should not exceed 25% and that this indicator would be watched on an annual base. It means that BNB will check whether the banks have gone beyond that limit every month or quarter. The indicator will be calculated by comparing the amount of loans launched in the first quarter of 2005 to the amount reported for the same period of 2004. The credit aggression of those who fail to meet the requirements will be treated by special measures.Most managers declared that in 2005 the total amount of loans they launch will increase by 20 to 25 per cent. DSK Bank was the only one to declare more ambitious plans. It intends to register a 30% increase while concentrating on the development of corporate crediting.Now it is BNB's turn again. The Bank Supervision Department is preparingspecial restrictive measuresfor institutions that demonstrate extreme ambitions on the credit market. Several options for restrictions are being considered, but the experts are still keeping silence about the specific measures. They will become clear by the end of February, when the analyses of the 2004 crediting are prepared. The only thing that is sure now is that an individual approach will be applied when choosing punitive measures. It means that not all of the banks will suffer, but only the ones which credit growth goes beyond 25% on an annual base.Some financiers are convinced that BNB will prefer the other measure that is discussed: to raise the liquidity coefficients of the more aggressive credit institutions. These banks will have to increase the money they are obliged to keep in accounts in BNB by the amount of excess above the maximum 25% credit growth. The money kept in these accounts does not bring profit, so it's not profitable for the banks to raise its amount. In case these banks remain within the 25% limit, they will be allowed to withdraw from BNB the additional money they have been sanctioned to put.Despite the declared intentions of the eight big banksthe forecasts of BNB's analysts arethat the 25% limit will be exceeded by mid-2005. The reasons are visible even now. There are only two years before the country's accession to the EU, when the strict European requirements on competition and capital-to assets ratio as per the Basel Capital Accord II will be imposed on the Bulgarian finance and credit system. Within that period the managers of the eight biggest banks, which with the exception of First Investment Bank (FIB) are owned by foreign capitals, will try to draw maximum profits from the domestic financial market. The quickest and easiest way to do that is by extending loans, as they bring higher yields to the creditor. The conflict of interestsThe necessity for banks operating on the domestic market to be licensed by the BNB will be eliminated after Bulgaria joins the EU. Therefore, till 2007 the credit institutions in the country will try to increase and redistribute their market shares. This cannot be done by a conservative credit policy. On the contrary, it is the right moment now for each institution to win as big a segment of the market as it can. Ultimately, the success of that undertaking will to a large extent determine the profits and the market price of each bank in the future, which is extremely important to the foreign owners of Bulgarian banks.The rising demand for all kinds of credits - for investments, turnover capital, purchase of goods and housing - is a clear signal for the growth of their volume. Banks, of course, will tighten their requirements when checking the clients' solvency, but will by no means refuse credits to those who satisfy their terms. BNB's statistics show that in mid-2004 the total volume of credits - BGN11.3BN - was about 49% higher than their amount - BGN7.6BN - in mid-2003. According to analysts of some banks, despite the restrictions to be undertaken by BNB, by mid-2005 the volume of loans will be at least 30% higher than in mid-2004.