CREDIT PARADISE REMAINED IN 2004
For bankers 2004 was the year of credit paradise and big profits. Within twelve months the aggregate amount of extended loans increased by more than 48%, rising from BGN9BN to BGN13.3BN. The bank sector closed the year with a BGN434MN profit, record high since 1997. In their mad race for attracting clients the banks offered increasingly advantageous terms for drawing credits, especially consumer and mortgage loans, and their strategems regarding deposits, debit and credit cards became smarter and smarter. In fact, a real war began for the free money resources of citizens and firms. Banks made equal efforts to attract both credit receivers (as this business is the most lucrative to them) and depositors (because this is one of the surest ways to finance the growth of extended loans). But all in all, the attempt for quick expansion of the share on the credit market predominated. The bigger banks behind which are powerful foreign investors were satisfying their hunger for financial resources by drawing considerable volumes of credits from abroad. Back in the spring of 2004 Raiffeisenbank (Bulgaria) succeeded to attract a EUR75MN loan from a consortium of foreign banks. DSK Bank did the same in the year-end. It received foreign financing of EUR180MN. The smaller banks which did not have access to big credit lines tried to attract money by offering higher interest rates on deposits. In some institutions they reached 8.5% a year, illogically high considering the fact that some credit institutions extend loans at 6.5%-7% annual interest. The frantic pursuit of wider market positions in crediting resulted in certain so far unseen dependencies in the bank system's balance. The ratio between credits and attracted money from citizens and companies was 66% in the beginning of 2004 and reached 80% in the year-end. That means that from each BGN1 deposited in a bank by a citizen or a firm, BGN0.80 was used for crediting and only BGN0.20 was invested in high-liquidity assets, allowing the financial institution to pay off its liabilities immediately. Such a ratio is too risky for the bank system, especially having in mind that the aggregate amount of all released loans is higher than the money attracted by banks from citizens and companies. Just consider this: in 2004 credits increased by BGN4.3BN, while deposits rose by BGN3.1BN. The bulk of that difference - BGN1.2BN - is financed by attracted loans from abroad. Within a year the foreign credits received by banks for a period longer than three years went up from EUR316.9BN to EUR760BN. Experts from the Bulgarian National Bank (BNB) warn that big-size speculative capitals have been invested in our finance and credit system and they will be drawn out as soon as the yield offered by Bulgarian banks goes down. This, according to BNB's analysts could result in a serious pressure on credit institutions' liquidity. Some of them may even experience a considerable shortage of liquid assets if they do not cut down the growth in crediting and do not set aside more money for deposits in other financial institutions or for the purchase of securities. Still back in the spring of 2004 the BNB undertook a series of measures intended to cool down credit institutions' desire to release loans. But bank execs ignored them altogether. Not because they do not hold the central bank in respect, but because they yield to the high demand for credits, which bring them the highest profits. And profits are the target of any manager, no matter if he runs a company or a bank. Loans were increasing despite the introduction of 4% mandatory minimum reserves on the money attracted for more than two years, despite the doubling of these reserves to 8%, and despite the ban to add the current profit to the equity capital. Results for 2004 showed that thanks to the credit aggression the total return on equity capital of the bank system was 16%, and the return on assets was 1.8 per cent. For some banks that ratio reached 25% and 4.5%, respectively, which is unattainable in Western Europe where banks are glad if their return on equity capital is 10% and the return on assets - some 1%-1.5 per cent. For most domestic banks proceeds from interests, fees and commissions on launched credits reach up to 60% of their total incomes. And their decrease will considerably diminish their profits. In some cases that may even lead to losses. It is interesting, however, that the elite group of the best Bulgarian banks for 2004 (a rating which the BANKER weekly has been preparing each quarter since 1999), includes this time only banks which have laid the accent on consumer crediting. It became their main source of proceeds. We'll recall that 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 elite group includes only credit institutions which are ranked at the top ten positions according to the above-mentioned indicators.