BANK STABILITY ENDANGERED BY CREDIT EUPHORIA
But the experts are always eager to see BNB's annual report because it is gives a true picture of the situation in the bank sector. Of course, no banks' names are quoted in it and no specific deals are described, but even financially uneducated people can understand how healthy the finance and credit sector is from the summarized conclusions.
According to the data of BNB's report about 2005, published two weeks ago
domestic banks have got cold
What is more important, however, is that if it is not cured in due time, it might worsen, turning into a serious flu with lethal outcome for certain institutions. All problems arise from the credit euphoria which continued to seize most banks despite of BNB's restrictive measures undertaken in 2005. Statistics show that within a year the loans released by them rose 33%, or by BGN4.4BN-plus. More than 50% of that increase was due to mortgage and consumer credits. It's alarming that the newly attracted deposits from citizens and firms are almost BGN1BN less than the newly allocated credits. In other words, each new BGN1 of deposit was invested in a credit, which is the riskiest asset by the bank supervision definition. That would not pose any problem if the size of problematic loans was not increasing. But according to BNB's analysis that is not the case and
the drama is entirely connected with the loans to citizens
The credit risk in 2005 was characterized by a fair and stable level of quality regarding loans to firms, and an increased problem level regarding consumer and mortgage credits. There are reasonable apprehensions that households' increasing indebtedness raises their sensitivity to various shocks, such as changes in the interest rates of already release credits, in the prices of real estates and rents, reduction of incomes as a result of higher inflation, etc., BNB's annual report reads. And this conclusion is supported by specific figures.
In end-2005 the loans whose servicing was problematic totalled BGN1.42BN, representing 7.7% of all allocated credits. A year earlier, in end-2004, these loans amounted to BGN974MN, accounting for some 7.1% of all credits.
In essence, the system does not maintain classified assets besides the loans which is an indicator of the credit risk's significance, BNB's experts point out.
BNB warns against the venturesome policies
observed by it in certain credit institutions.
The reviewed period was also characterized by the presence of excess optimism when evaluating assets' risk, weaknesses in the planning and management of capital growth, reflecting in delayed reactions on the part of some banks' managements. They allowed too frequent fluctuations of their capital adequacy around the minimum admissible levels and in some cases the requirements of some regulators were violated, BNB's report says.
We'll recall that the capital adequacy according to the international banking standards, known as the Basel requirements, reflects most accurately the financial state of a bank. It is formed by dividing the size of the equity capital (including shareholder capital, reserves set aside, and undistributed profit) into the aggregate risk component (total risk), by which all bank assets are assessed. For Bulgaria the minimum size of the capital adequacy indicator is 12% and if a bank drops below that level it means its stability has been upset. In such a case the BNB is obliged to intervene and introduce restrictions for the respective credit institution, such as a reduction or suspension of crediting, requirement for an increase of its equity capital, and placing the bank under special control in more serious cases. And the BNB is obliged to revoke a bank's licence if its capital adequacy is negative. In fact that was exactly what happened in mid-2005 with International Bank for Trade and Development, in which curators were appointed first and the court declared it insolvent afterwards.
BNB's report makes it clear that
several banks have had problems with their stability
Of course, their names are not mentioned because if the credit institutions in question are personified in such a document that would certainly bring about their quick and irreversible death. But central bank experts have unambiguously underlined there are financial players on the Bulgarian market which are facing serious problems.
Although they have not experienced liquidity problems, there are institutions deserving attention for the following reasons: comparatively limited access to the financial market, heightened sensibility to the impact of various factors, e.g. negative publications or change of the shareholder structure, more problematic than the usual quality of assets and unstable proceeds as a result of that..., BNB's report reads.
It is disagreeable that the reasons for the instability of those institutions are mainly violations in the sphere of crediting. In fact, that is a major weakness of the entire bank sector. At least, the inspections made by central bank experts have showed that. In 2005 they effected 108 inspections and problems in the process of crediting were established in 89% of them.
The more serious violations concern improper reporting in lower-risk classification groups of credits with a higher risk profile, and incorrect reporting of credits to economically connected groups of persons, bearing a common risk, experts from BNB's Bank Supervision department say in the report. They have made one more conclusion that causes uneasiness.
Some banks are conducting an imprudent policy
by crediting companies which are financially linked with the major shareholders and thus deliberately evade the restrictions about the maximum admissible size of internal credits. The management of such loans is usually connected with accepting unreliable guarantees and multiple renegotiation of the principal repayment instalments immediately prior the term for their repayment. A frequent practice is to spend these credits - entirely or partially - not for the specified purpose. Subsequently, through a series of transactions between a limited circle of firms that money goes to the benefit of juristic persons akin to the owners of bank institutions which have released the credits, the central bank's report specifies. In fact, that is quite a cautious description of all these violations. It should be born in mind that exactly such financial manoeuvres are among the major reasons for the collapse of the entire financial and credit system in 1996. Obviously, some managers have not learnt their lesson from that cataclysm or the past ten years have already wiped out the nightmares.
All conclusions in BNB's report come only to confirm the words of a high ranking financier in the beginning of 2005 who said in a narrow circle: Remember, the Bulgarian bank system is calm, but not stable. This means that any occasion for panic among the depositors would cause the collapse of several domestic banks. And such an occasion could be provoked by just one big bank's temporary difficulties in servicing its liabilities. The conclusions in BNB's report for 2005 in fact explain why it introduced strict restrictions to crediting and it is already clear they won't be lifted until the percentage of problem loans does not begin to decrease.