FINANCIAL CONGLOMERATES HOT ON THE MARKET
The bank system in Bulgaria will change its appearance for the second time over the last eight years. In the 1997-2005 period foreign capitals got command of almost the entire finance and credit sector in this country. As a result of all the 29 banks only ten - First Investment Bank (FIB), EIBANK, DZI Bank, Central Cooperative Bank (CCB), Municipal Bank, Corporate Commercial Bank, UNIONBANK, INVESTBANK, TEXIMBANK and Encouragement Bank, remain in Bulgarian hands. The aggregate size of their balance sheet value is BGN6.6 billion and accounts for just 24% of all bank assets in the country. A new trend in the finance and credit sector began as of 2003. Banks are gradually turning into big financial groups with specialized companies in the sphere of insurance, pension and healthcare insurance, leasing, and assets management. Bulgarian legislation makes a distinction between a bank and a financial group. And it depends on the parent company. When a credit institution owns the remaining subsidiaries, it is a bank group. If an insurance company (as in the case of DZI) is the owner of several financial firms, it is a financial group. There are also cases when companies, registered under the Commercial Code hold several firms, operating in the finance field. Examples in that respect are TBI Bulgaria and CCB Group Assets Management. Both of them have several companies, operating in the sphere of insurance, pension insurance, assets management and investment brokerage. Experts from the Bulgarian National Bank (BNB), the Commission for Financial Supervision (CFS), and the Ministry of Finance, are presently drafting a bill on financial conglomerates, intended for such groups. Under its provisions, any company shall be a subject of supervision by a specialized body if more than 40% of the aggregate assets of its subsidiaries are in the sphere of finance - credits, mortgages, pension and healthcare insurances, deal in securities, and mutual funds. The emergence of bank and finance groups in Bulgaria, and of financial conglomerates as well in fact follows the model of development, established in Western Europe where specific financial services have been entrusted to specialized companies which are banks' subsidiaries. In addition to its credit institutions all over Europe, the Italian UniCredit Group, for instance, is also the owner of specialized structures for assets management and financing of big corporate projects: UniCredit Private Banking, UniCredit Microcredito, UniCredit Banca d'Impresa. The Italian group is also the owner of the Pioneer mutual fund and of the leasing arm Locat.The subsidiaries of the French group Societe Generale fill as many as six pages in its consolidated annual report. Such broadly branching financial networks of credit institutions are aimed at embracing the entire spectrum of financial services and increasing their revenues, and at the same time distribute more evenly the risk, connected with the various financial operations. Figuratively speaking, the policy of setting up bank groups is subordinated to the mottoEverything under the skyHungary's OTP, which purchased 100% of DSK Bank in end 2003, was the first one to declare it would be developing the Bulgarian financial institution as a financial group. Therefore, in the beginning of 2004 the bank got rid of its 36.36% share in the capital of its insurance arm Bulstrad DSK Life, selling it to its majority shareholder TBI.On April13 of the same year the BNB granted DSK Bank a permission to possess 26% of the equity capital of the newy;y established DSK Guarantee AD. The balance of 74% remained in the hands fo the Hungarian insurer OTP - Guarantee, 100% owned by OTP Bank. The company's main line of activity is closing Life insurances for all mortgage and consumer loans, extended by the bank to its clients. Those who get the credits, however, do not pay a separate fee for that insurance, because it is calculated in advance in the commissions and interests which the bank collects from citizens who draw consumer and mortgage loans. Therefore, the motives for the establishment of DSK Guarantee are quite transparent - it is a pretty good business, ensured through the bank structures. As way of an example - in mid-2005 the total number of credits, released by the savings institution to citizens exceeded 1,000,000, and their aggregate size amounted to BGN2.1BN. Well, part of this money flows into DSK Guarantee, which is a way to restructure taxes. In addition to the insurance business, DSK Bank and its Hungarian owner OTP, are trying to expand into the social insurance business. Rodina - a savings, cooperative pension insurance company in which DSK Bank holds a 98% stake - operates on that market. The company's assets, as well as those of the insurance company, are managed by DSK Assets Management, set up on December 22, 2004, in which the bank holds a 66% share, and the remaining 44% are in the hands of OTP Assets Management, a subsidiary to Hungary's OTP Bank. In the summer of 2005 DSK Bank stepped onto the leasing market. Together with the Hungarian Mercantile Bank (a subsidiary to OTP), it set up DSK leading in which each of the two institutions holds 50% of the BGN200,000 equity capital. The leasing company will be initially financing purchases of new and second-hand (but not older than five years) cars, and after a while will start offering leasing of machines and equipment, and of real estates. The appearance of the DSK Group is complemented by its subsidiaries DSK Transsecurity and DSK Tours. The former has specialized in in cash collection services. For the time being its operation is almost entirely connected with servicing of bank's own branches, but its future development will to a large extent depend on whether it will succeed to close contracts for delivery of valuable consignments to other credit institutions as well.DSK Tours owns and manages DSK Bank rest houses and is hoped to step into leisure industry. DSK Bank's owners realize that investment are needed for the renovation and refurbishing of the company's rest houses in order to attract Bulgarian and foreign guests. In any case, it is already clear that DSK Bank won't be investing in DSK Tours. Some of OTP Bank's subsidiaries will probably undertake that.UBBis another credit institution making an appearance of a bank group. In 2004 it set up UBB Assets Management, 100% owned by the bank. It will be managing the assets of UBB Balanced Fund and of UBB's two insurance companies, which are presently in the process of establishment. The credit institution's Board of Directors has made a decision to set up two insurance arms - UBB General Insurance and UBB Life Insurance. According to UBB's Executive Director Christos Katzanis, a special scheme for distribution of the shares in the two companies' capital is presently under draft. The bank's future share will be known only after the scheme is ready.For the time being UBB does not intend to set up a leasing arm of its own, as it works successfully with Interlease (a subsidiary to the National Bank of Greece), which has been operating on the Bulgaian market since 1995.The merger between HVB Bank Biochim and HEBROSBANKwill certainly lead to the merger of their identical structures as well. HVB Bank Biochim holds 20% of Biochim Leasing Bulgaria, whose majority owner is Bank Austria Creditanstalt Leasing, and HEBROSBANK is the owner of Hebros Leasing - a firm with an equity capital of BGN550,000, acquired from Orel G Holding in 2002. Through Hebros Leasing the bank owns as well Hebros Auto, offering car leasing. It is also a majority holder of Optima Financial Services OOD, which will be supplying banknotes and coins to the bank branches and will be offering security services. The most recent bank group in this country is that ofRaiffeisenbank (Bulgaria)The credit institution fell into that category after getting BNB's permission on September 1, 2005 to set up Raiffeisen Assets Management, with a BGN250,000 equity capital. This is the bank's second subsidiary and by its establishment the institutions became a bank group. The first one is Raiffeisen Leasing, entered in the Commercial Register in 2004. However, bank groups are not the only business structures on the financial market. The most developed holding companies in Bulgaria are in fact the so-called finance groups, whose core are not banks, but other finance firms. DZIis one of these groups. The company is owned by Contract Sofia AD (controlled by financier Emil Kyulev), which purchased 80% of the shares in the then state-run insurance company against EUR21.5MN in August 2002. Through it Mr. Kyulev acquired DZI General Insurance, DZI Life, DZI Consult Leasing, DZI Invest, and DZI Rest and Tourism. DZI Pension Insurance was set up in July 2003, and DZI Healthcare Insurance Company was established a few months later. On November 27, 2003 DZI acquired 60% of ROSEXIMBANK's capital, by purchasing part of the shares in other firms, owned by Mr. Kyulev. After that operation the credit institution was renamed to DZI Bank. The group currently manages assets exceeding BGN2BN and is trying to establish itself as a leader on the domestic market of financial services. Allianz Bulgaria Holdingis the core of another financial group. The powerful German insurer Allianz owns 67% of its assets. The general insurance company Allianz Bulgaria, the life insurance arm Allianz Bulgaria Life, and the insurance and reinsurance company Energy, are also in the hands of the holding company. It is also the owner of the majority package of shares in the pension insurance company Allianz Bulgaria, in the eponymous bank, in the insurance broker Blgaria Net, and in Allianz Bulgaria Financier. All above-mentioned groups are under the supervision of either BNB or the CFS. However, there are some powerful structures in Bulgaria, whose parent companies are not by law under the regulations of the central bank or the CFS. Such a structure isTBI Bulgariawhich holds a network of companies, specialized in financial services. It is the owner of the insurance companies Bulstrad, Bulstrad Life, Bulstrad Healthcare Insurance, and of the Doverie Pension Insurance Fund. TBI Bulgaria has a majority share in TBI Invest, TBI Assets Management, TBI Credit, and TBI Leasing. the mutual funds TBI Eurobond and TBI Dynamic are also within its structure. Holdings of TBI Bulgaria's type are very common in the highly developed European countries and in order to ensure unified supervision on their operation the European Commission issued a directive on financial conglomerates. As we have already mentioned, it will be applied in Bulgaria by passing a special law, which is presently under draft by experts of the BNB, CFS and the Finance Ministry. It will stipulate that any company shall be treated as a financial conglomerate if 40% of the aggregate assets of all its subsidiaries are connected with the financial markets. TBI Bulgaria certainly complies with that requirement and its operation will be strictly controlled by the supervising authorities after the approval of the draft bill. In fact, the preparation and adoption of that legislative act (expected to become a fact in mid-2006) will make possible a stricter control over all financial structures on the domestic market: banks, insurance companies, etc.The law will allow to calculate the capital base of a financial group, the level of market, credit, forex and operational risk which all its subsidiaries undertake, and to trace the transactions effected between them. The aim is to establish in time and intersect any attempts at transferring money between the companies within the conglomerate in order to temporarily fill in capital holes in any of its structures. Thus, the stability of all companies within the group and the interests of its clients would be guaranteed.