SMALL BANKS INFECTED BY CREDIT FEVER, TOO
In the first three months of 2005 banks showered a flow of credit proposals on their clients. The reasons for that are clear: banks aim to maintain their market positions and conquer new ones independent of the hindrances set by BNB's restrictions.As a result, the aggregate amount of extended loans increased from BGN13.8BN in the beginning of 2005 to BGN17.9BN in end-March. This BGN4.1BN growth for just three months is a bit lower than the rise of banks' portfolio - BGN4.4BN - for the entire 2004. The situation seems even more striking when the figures about corporate credits are analysed. It turns out that from the beginning of 2005 till end-March company loans went up by BGN3.2BN while their increase for the entire 2004 was BGN2.7BN.There is hardly anyone, keeping track of the business news in Bulgaria, who is not aware of the actual reason for the steep rise of loans in the first three months of the year and who has not learned that it is mostly due to the credits entered in accounting books in the last days of March, totalling BGN1.7BN according to BNB's reports. That was due to the banks' desire to increase maximally the volume of released loans as their size in March was to be the base for calculating the limits of their future growth. In order to achieve their purpose bank execs used all known methods, unbanned by law. And the panoply is quite rich. Moreover, bank managers used such tricks with the silent approval and sometimes the active support of their foreign owners. Rumours spread in financial circles that Hungary's OTP has not only actively assisted the steep credit expansion of its Bulgarian subsidiary, but has also transferred a substantial package of its credits, totalling some BGN170MN, to DSK Bank. According to pundits,the Hungarians have transferred these loansfor a period of three months. The Bulgarian credit institution has to transfer them back to the parent bank in Budapest several days before the end of the first 3-month period when the BNB is to report the fulfilment of the imposed restrictions. The latter stipulate that the loans released by any bank should not go up by more than 5% from end-March till end-June. The growth will be calculated on an average daily basis. The credit institutions which have surpassed that limit should deposit additional minimum reserves at the central bank. Such a threat does not seem to exist for DSK Bank, as before the end of June it will have returned the loans received by OTP in end-March, and will be able to extend new credits without that resulting in additional growth. The crazy release of loans and the application of various schemes for raising the credit base have so much distorted the banks' indicators, that the Governing Board of the BNB decided not to publish their balance sheetsand the reports for their proceeds and expenses for the first quarter of 2005. The research of the BANKER weekly showed that DSK Bank gained ground as the top creditor in Bulgaria as a result of its aggressive behaviour on the market in end-March. The loans allocated by it in the end of March totalled BGN2.78BN, or twice the amount for the same period of 2004 - BGN1.37BN. Credits to private persons went up by BGN800MN year-on-year, from BGN1.1BN to BGN1.9BN, and those to corporate clients rose three-fold, from BGN300MN to BGN903.9MN. These figures are of course a result of the applied schemes for a quick increase of the credit base. But even if we deduct BGN400MN (claimed to be fictitious loans), the annual growth of money borrowed from DSK Bank by citizens and firms is still impressive. In the end of March the financial institution was 7th in terms of the credits in the total amount of its assets, which was 68.71%, and in terms of the growth of released loans - 102.68% - the bank was fourth. The leading positions in terms of these two indicators, however, are occupied by credit institutions, whose balance sheet figures do not exceed BGN500MN. This means that the credit hysteria has spread over small and medium-sized banks, tooThe novice in the Bulgarian financial system - Bank West-East, set up two years ago - has increased the amount of loans extended by it more than ten-fold. Credits already account for 78.13% of its assets while a year ago this ratio was below 60 per cent. Nearly 90% of the loans have been allocated to firms. Some of them are guaranteed by mortgage and others - by special pledges on assets. Commercial Bank D (the former Demirbank (Bulgaria) has also made considerable efforts to expand its market positions. Within a year the loans released by it went up by 162.55 per cent, but they account for just 50% of its assets,vs the 60% average indicator for the Bulgarian bank sector. This shows that the financial institution has sufficient potential to follow an aggressive credit policy. UNIONBANK and Central Cooperative Bank also report a quick increase of extended loans, but their share in the institutions' assets is below the average for the bank system. Therefore, they have opportunities for a credit expansion, too. The credit rush of the entire bank sector will be curbed after the enforcement of BNB's restrictive measures. This will affect most sensibly small and medium-sized institutions, for which the only way left to expand their market niche seems to be the offering of attractive terms for borrowing loans. And the time for doing that is limited - till Bulgaria joins the EU. After that any European bank will be free to open a branch on our market if it assumes that would be profitable for it. Small and medium-sized banks will then find it very difficult to compete with both big Bulgarian financial institutions and western banks. Moreover, as the BANKER weekly has already written several times, the players in the domestic financial sector will have to make significant expenses over the next one or two years in order to meet the capital-to-assets ratio requirements known as the Basel Capital Accord II, for the new chip-cards, and for the introduction of the Paneuropean settlement system. These expenses should be of course compensated by an increase of proceeds. And where else could they come from but from crediting, at that from loans released at interest rates that will be slowly but surely going down. By imposing its restrictions, however, the BNB seems to have half-closed the tap of that source of proceeds. The central bank undertook restrictive measures in order to guarantee the stability of the country's financial and credit sector, but they will probably have another effect too - speed up the consolidation processes in it. Because if they don't have the opportunity to expand their operation and profits, the owners of small banks will hardly have another choice but sell them to the bigger players or to foreign investors.