STORM OF CREDITS BURIES THE BANKS
All quiet on the banking front. Statistical data provided by the Bulgarian National Bank (BNB) for the first half of 2005 show lasting stability of the financial and crediting sector. Within one year - from June 2004 until June 2005, its assets have grown from BGN17.9BN to BGN27.93BN. Banks' profit is up from BGN204.3MN to BGN277.5MN for the same period of time.Deposits of individuals and companies which amounted to BGN11.9BN in June 2004 reached BGN18.3BN twelve months later. Considering these figures, one would have the impression that everything is all right. However, this is just the first impression. Recently a financial analyst who required anonymity because of his senior administrative position told a reporter of the BANKER weekly that banks are quiet, but not stable. He added that in case of a stronger shock in the economy - such as higher inflation, raise of the unemployment rate, or reduction of the prices of major goods that the country exports, may result in a sudden growth of non-performing credits and in serious tests for the solvency of the banking system. A more detailed calculation of the financial indicators of the credit institutions shows that as a whole they are not in exuberant health.The condition of the sector may well be described by Vasili Vereshchagin's picture All Quiet at the Shipka Pass showing a Russian soldier standing on post and his enemies away slowly being buried by the raving storm of snow. Something of the kind is happening to banks in Bulgaria, too. They are solvent, they attract a growing number of customers, yet their liquidity and efficiency indicators are gradually worsening. The reason for that is their crediting expansion that has been going on for two years.In just one year credits launched by banks to individuals and companies have grown by BGN5.7BN - from BGN9.96BN (in June 2004) to BGN15.61BN (as of June 30, 2005). Meanwhile, deposits of individuals and companies (during that period) are up by BGN6.4BN - from BGN11.9BN to BGN18.3BN. It means that BGN0.70 of each lev attracted by the bank are invested in credits. The ratio gets even more unfavourable in the first half of 2005. During that period deposits have grown by BGN1.5BN only, while credits are up by BGN2.3BN. It turns out that all the money attracted from individuals and companies has been used for crediting. Ninety-eight per cent of all deposits are payable in less than a year and about 70% of the credits launched will be paid off in periods longer than two years. It means that if deposits are to be drawn massively from the banks, many of the institutions will face difficulties paying them.Fears for the stability of the banking sector also arise from the fact that the maxim the more the credits, the higher the profit no longer works. Regardless of the sudden growth of credits launched in one year, the indicators for the banking sector's efficiency have become worse. In June 2004, the banks' return on net worth was 9.25% and the return on assets - 1.14 per cent. A year later the figures were 9.15 and 0.99% respectively. It means that banks are earning less from crediting and that may be explained with the reduction of the interest levels.It's worth noting that for the present the share of provisions that banks are obliged to allocate to cover losses from improperly performed credits is not going up. According to the statistics, both in June 2004 and June 2005 provisions were between 3.5 and 3.6% of the total amount of credits. It should be taken into account that most of the credits are to be paid off in more than two years and it is still early to claim they will be paid off properly in the future.Banks' maintenance costs are growing too fast, however. They totalled BGN396.7MN in June 2004 and BGN497.7MN a year later (a growth by 25%). Moreover, all components in the expenses of the banks' balance sheets are going up.The competition for attracting qualified staff forces the crediting institutions to offer ever growing remunerations. That is why the money they have spent as of June 30 on remunerations and social and health insurance amounts to BGN165.9MN, while a year earlier it was BGN148.8MN.Besides, almost all banks are enlarging their networks of branches by acquiring or renting new buildings. Logically, the expenses for maintenance of their fixed tangible assets have grown from BGN77.8MN to BGN87.4MN in one year.The introduction of new information systems that evaluate the crediting, liquidity, market and operating risks as well as the supply of new products and services require lots of money, too - both for acquisition of equipment and for rewarding the companies that create and install these systems. This makes the banks spend more money on foreign services - BGN94.5MN as of June 30, 2004 and BGN135.5MN in the middle of 2005.Considering the situation on the financial market, there are only three banks in Bulgaria that find a place inthe regular ranking of the BANKER weekly. Every quarter since 1998 the newspaper has been ranking the most successful banks in the country on the basis of five indicators - amount of assets, net worth, profit, return on net worth, and return on assets. The institutions placed among the top ten by all five indicators are included in the group of the best banks, too.In the first half of 2005 the leaders list included DSK Bank, UBB and SG EXPRESSBANK. On the other hand, traditional participants in the elite club such as HVB Bank Biochim, Raiffeisenbank (Bulgaria) and First Investment Bank, remained outside. The reason is that their assets growth is much higher than the growth of their profit, which is why they have a very low return on assets. As to BULBANK's dropping out of the ranking, it is explained by the large net worth of the bank and the inadequate growth of its profit. BULBANK is leading a policy of overstability - its net worth amounted to BGN567.6MN as of June 30, 2005 (BGN124MN above the one reported by DSK Bank) and its profit was worth BGN53.2MN. However, the proportion between the two indicators forms the 9.3% return on net worth which puts the bank outside the group of the top ten credit institutions in this aspect.BNB statistical figures show that as a whole the Bulgarian banking sector is getting less efficient. Regardless of the increasing share of credits in the assets of local banks, their return figures are gradually falling. Operating revenues to maintenance costs ratio is still respectable - 55 per cent. But Bulgarian banks are still to make considerable investments in the introduction of the new capital adequacy requirements known as Basel II - for modernisation of the debit and credit cards and for equipment with new chip technologies that will improve their safety. They will also need money in order to meet the new branch security criteria that will lie in the respective regulation of BNB and the Ministry of Interior (171-I). If they find no sources to increase their revenues, the proportion between operating revenues and maintenance costs may reach 60% no later than 2006. And that will not be good reference for the efficiency of the Bulgarian financial sector. There are experts who say that in the very beginning of 2006 crediting institutions in the country will change their policy and instead of throwing huge human and financial resources into increasing their market share by aggressive crediting they will try to diversify the bank services and increase revenues from fees and commissions.They amount to BGN265.2MN as of June 30 - almost a half of the maintenance costs. Some bank experts say that in order for a bank to be stable, its non-interest revenues should cover the money it spends on maintenance. However, keeping such a proportion is quite an ambitious task, as Bulgarians still prefer to pay in cash and use bank services only rarely.BNB and the retiring government are considering amendments to the legislation which will stimulate non-cash payments. As the BANKER weekly informed, the Ministry of Finance is working upon amending the tax laws so that they will ban paying more than BGN10,000 in cash. In turn, banks do their best to increase the number of credit cards and encourage their owners to pay by using them and not using banknotes. However, most traders have no POS terminals at their disposal which is an obstacle for their large-scale usage. If banks manage to cope with this problem and convince shop owners and traders to install POS terminals, that will help for significantly increasing their turnover, the revenues from fees and commissions and the profits of the banks.