THE WAR OF INTERESTS
The battle between banks to attract clients is heating up every week and the participants in it bitterly exchange interest jabs with the speed of lightning. United Bulgarian Bank (UBB) has announced it will automatically transform the contracts of all its customers who have drawn mortgage loans to lower interest contracts without charging any fees for the service.
And Post Bank has joined the competition for clients by announcing a reduction of the interest for the first year of mortgage loans' repayment from 4.8% to 3.75 per cent. The real hit, however, was blown by HVB Bank Biochim, which launched a completely new product on the credit market - mortgage loans in Swiss francs with a promotional interest of 2.9% for the first year of repayment, and 6.9% for the remaining term of repayment. In the words of the bank's managers, the new product has caused a furore in countries like Croatia, Serbia and Poland. However, the problem which arises is if there is not a risk that the euro and the BG lev which has been pegged to it could steeply depreciate. Such concerns are logical because most Bulgarians who draw credits in Swiss francs receive their incomes in levs. And an eventual depreciation of our national currency vs the Swiss franc would additionally make the loan's servicing more expensive. HVB Bank Biochim's managers, however, believe that the citizens who draw a credit from that financial institution are insured against such a danger.
The Swiss franc has been acknowledged as one of the most stable currencies in the world thanks to the conservative policy of the Swiss National Bank. For the last five years the deviation of its value vs the BG lev is just 10%, while the US dollar's deviation vs our national currency is 40 per cent. HVB Bank Biochim gives the client who has drawn a mortgage loan in Swiss francs the opportunity to transform it at his discretion into other preferred currencies, said Maria Ilieva, executive Director of the credit institution.
However, the management of Raiffeisenbank (Bulgaria) knocked down the rivals by announcing on Wednesday (September 19) it will be extending mortgage loans in levs and euro at a promotional interest rate of 1.8% for the first year, and 8.5% interest for the remaining period of repayment. The announcement is accompanied by a principle comment by Momchil Andreev, Chairman of the credit institution's Management Board, that interests for housing loans in Swiss francs are not entirely risk-free for the borrowers.
By the new promotion, to be valid till December 31, 2005, Raiffeisenbank (Bulgaria) offers the most advantageous terms for mortgage credits in euro and BG levs, available on the market at present. In that way we encourage our clients to draw loans in these currencies in order to avoid the currency risk which is typical for the credits in US dollars and Swiss francs. A mortgage loan is a serious investment and presupposes long-term relations. Therefore, we do not advise clients to make a decision, based on the banks' advertising messages alone. On the contrary - any client gets an expert, technical and legal consultation in Raiffeisenbank (Bulgaria), Mr. Andreev commented.
The battle for clients will force the banks cut down their interest rates on loans and they might well fall down to below 1.5% by the end of 2006. The reason is that the market is mercilessly forcing bank managers to seek yet newer and newer possibilities for profit-yielding use of their free money resources.
Consumer loans that we extend are repaid very quickly. Therefore, we try to reinvest the funds, freed from them, in much longer-term mortgage credits, Maria Ilieva commented in a conversation with a reporter of the BANKER weekly. In fact, most of the other credit institutions' managers face that challenge, too.
The race for reducing the interest rates on loans, however, results in a paradox which hardly exists in any other European country. It is that if one draws a mortgage credit and puts the money in a long-term deposit,
the proceeds from that deposit will be sufficient to cover the instalments for the loan's repayment
The experts of HVB Bank Biochim have calculated that if a citizen draws a 25-year mortgage loan of CHF 30,940 (equivalent to EUR20,000 or about BGN40,000), the client will be repaying CHF145 per month (EUR93 or BGN186) during the first year, and CHF214/month (EUR138 or BGN276) during the remaining term till the credit is entirely paid off.
The borrower, however, could exchange the francs in BG levs or in euro and put the money on a long-term deposit in some of the big banks which offer annual interest rates of 7% to 8.8 per cent. The client will be getting annual incomes of EUR1,400-1,750, or EUR112-146 per month. When the borrower gets the income from the deposit he may exchange it into Swiss francs and repay the due instalment to the bank.
Some people may ask
why EUR20,000 exactly?
That is the highest amount of a deposit which according to EU standards should be entirely guaranteed by the Deposit Insurance Fund. The guaranteed amount is presently BGN25,000 but Bulgaria should bring the guarantee on deposits in compliance with EU standards by the year 2007. So, banks' clients can be absolutely sure they won't lose their money if the bank where they have deposited it goes bankrupt.
The question is
how long will the high interests on deposits last
Currently, most banks offer 6%-7.81% interest on deposits in BG levs for a term longer than one year. The yield from deposits in euro and US dollars should be lower, but many banks offer very high interest rates on forex savings as well. Post Bank's 3-year Europlan deposits yield an annual interest of 6.25% which can be drawn every month.
First Investment Bank (FIB) offers the Record deposit in BG levs, euro and US dollars. If the client leaves his money in such a deposit for three years, he will be getting a 6.27% interest for deposits in US dollars and euro, and 7.81% for deposits in BG levs. That is, if he leaves BGN40,000 on a deposit, he will be getting BGN3,124 annually from it. And the interest can be drawn each month, or the monthly yield will be BGN260.
DZI Bank pays 7.2% interest on 3-year deposits in BG levs, euro and US dollars. EIBANK offers a 3-year deposit, called Record, calculating an annual 7.5% interest on deposits in BG levs, 8.55% on savings in US dollars, and 8.8% on deposits in euro.
And while interests on credits are doing steeply downwards, the interests on long-term deposits will stay high for a long time. The reason is that despite all their efforts the banks fail to make citizens and firms open long-term deposits. BNB's statistics shows that deposits for a period longer than one year in end-June, 2005 (more recent data are not available) totalled BGN692.9MN, or just BGN270MN up from end-June, 2004.This amount does not seem a small one, but compared to the aggregate amount of citizens' and firms' deposits in the bank sector - about BGN18BN in all - it is invisibly small. And it will hardly increase by more than BGN300-350MN annually in the years to come, because neither citizens, nor companies have free money resources to invest in long-term deposits. Therefore, in order to gather money for launching long-term credits the banks resort to the issuance of bond loans or borrow credits from abroad. Therefore, their external liabilities are raising significantly. It's true that a moment will come when that tendency will make a turn. That may happen in three, five or ten years. Then the interest rates on long-term credits will go down and the scheme of borrowing a loan in order to deposit it won't be working any more. But that does not mean such operations in a somewhat different form won't be possible. Not without grounds big local banks have begun to set up companies which are managing mutual funds.
The shares of UBB's fund, for instance, appreciated by more than 20% within a year. In other words, the people who have invested in them when the fund was established, may sell their papers now at a 20% profit. Citizens will be able to invest in these funds the money from drawn credits if a moment comes when the interest rates on long-term deposits go down drastically. Such investments, however, will be risky, because the shares of a fund may quickly go up, but they could quickly depreciate as well. Besides, not a single state guarantees investments in stocks or bonds. But that is the future of financial markets. The products they offer will become more and more complex, and only those who have taken pains to become financially literate will stand any chances of getting profits from them. However, it's a fact that at present the Bulgarian financial market gives an unique chance to any citizen who owns a real estate and has a monthly income of BGN500-600 to accumulate savings through not so sophisticated operations, such as the above-described. But it's doubtful that many would take advantage of it as in order to evaluate an opportunity one should be somewhat informed about the market situation.