Банкеръ Weekly



The expansion of the credit perimeter has become an obsession for most Bulgarian bank managers in 2005. However, expansive credit policy is mainly followed by big credit institutions, which laid the accent on loans to citizens. Immediately after the first BNB measures for credit restriction were enforced in the beginning of April 2005, a real war was waged on the market which reached its culmination in the end of the summer and the beginning of autumn. The BANKER weekly called it the war of interests because in their desire to attract as many clients as possible the banks entered into a crazy race, offering lower and lower interest rates on mortgage loans. Even zero promotional interest for the first year of these credits' repayment was offered, but that will hardly be the most relieved terms, to be proposed for mortgage loans. The banks will be still reducing the fees, commissions and interests, charged after the first year of housing credits' repayment. Competition between them will result in a decrease of the fees, commissions and interests on the other loans, too - consumer and corporate.
For the first nine months of 2005 the amount of released credits rose by BGN3.17BN (23%) - from BGN13.81BN to BGN16.98BN. That increase is a fact despite the serious restrictions imposed by the BNB. The aggregate amount of loans extended to firms went up by BGN1.39BN (14.7%) - from BGN9.44BN to BGN10.83BN. According to some financial analysts, that growth is much higher, but cannot be reported by BNB's statistics, because in order to fit into the set restrictions banks transferred some of the corporate loans they have allocated to their foreign owners.
Consumer credits
still enjoy the special interest on the part of big banks. Firstly, because they are the most lucrative assets, and secondly - because the borrowers continue to service their liabilities comparatively regularly. Within the first nine months of 2005 consumer loans increased by 36.9%, or a little more than BGN1BN - from BGN2.79BN to BGN3.82BN. And the average interest rate on them in 2005 was in the range of 13.5-12.5 per cent. These are the highest interests, collected by banks on extended loans. Nevertheless, demand for such credits on the part of citizens is still high.
According to Hans Flickenschild, IMF Mission Leader to Bulgaria, the growth of consumer loans is just one of the reasons for the increased imports of consumer goods, which directly reflects on the current account deficit and the balance of payments. The IMF was one of the initiators for BNB's restrictive measures on the crediting, imposed in end-March 2005. During its recent visit to Bulgaria in end-October 2005 the IMF Mission again succeeded to convince the central bank to impose restrictions on consumer loans especially. Bank managers had a foreboding about that and still in the summer of 2005 began restructuring their assets, laying the accent on
mortgage credits
They won't come under the new BNB restrictions and the requirements of the bill on consumer credits, which is under draft, won't concern them. Mortgage credits are much better guaranteed as compared to consumer loans and avail the banks to lend their money for a long term and more profitably. These are the advantages which would make bank managers start to impose them on the market. The results of that expansion are a 72.5% increase of mortgage credits. In the beginning of 2005 their total volume was BGN1BN, and within nine months they rose by BGNB728MN, reaching BGN1.73BN in end-September.
For five years now the BANKER weekly has been assessing the banks' credit activity according to three indicators: volume of extended loans, their share in the total amount of assets, and credit growth. The institutions, ranking among the ten first according to all three criteria enter the group of the best crediting banks in the country. In end-September 2005 its members were: DSK Bank, United Bulgarian Bank (UBB), and Bulgarian Post Bank.
In fact, most of the banks in this country will continue to increase the volume of the loans they lend, independent of BNB's restrictive measures. The reason is that credits are the most certain source of proceeds. And the owners of credit institutions in Bulgaria expect from their managers to increase the profits. The analyses of huge West European bank groups (such as UniCredito and Bank Austria) underscore the fact that their subsidiaries in Eastern Europe account for more than a third of the groups' profits. For West European bankers it is clear that such huge profits could be realized in East European countries, until the financial intermediation (total banking sector assets to GDP) in them reaches the level of West European countries. According to some analysts that will happen within the next five years. That is also the term during which banks in Eastern Europe will be able to report big profits, ensuring them over 1.5% return on assets and over 15% return on equity. After that period the indicators will gradually become equal with those of the banks in Western Europe where the average return on assets is less than 1%, and the return on equity - around 10 per cent.
However, the quick growth of crediting and foremost of loans to citizens, is a serious risk. In case of an economic crisis, even caused by stagnation in the global economy, regular servicing of a big part of the credits extended to citizens may cease, and from a source of proceeds they could result in huge losses to banks. Financial experts believe that hazard could be diminished if banks maintain balanced credit portfolios and discontinue their current practice of investing in loans each new lev they have attracted as deposits from their clients.

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