Saturday, September 1, 2007

Bulgaria, Unrestrained Rush of Loans?

From Focus News Agency

The unrestrained rush of loans

1 September 2007 | 05:16 | FOCUS News Agency

Sofia. Banks in Bulgaria have demonstrated a huge financial potential (for our country's size) regarding crediting. The lifting of restrictions on credit growth by the Bulgarian National Bank (BNB) was sufficient to literally flood the market by a wave of newly-advertised loans. Statistical data for June 2007 show that the total volume of banks' receivables from citizens and firms was BGN28.13BN, up BGN5.3BN from the end of last year, and up 8.3BN from their size in June 2006 when they totalled BGN19.82BN. What is specific about that one-year period is that the growth this time was mostly due to corporate loans. According to central bank figures, they rose by BGN6.9MN, from BGN12BN in June 2006 to BGN18.9BN twelve months later. It is interesting that three quarters of these newly extended loans -more than BGN5.2BN -exceed BGN500.000 each. In other words
the expansion in crediting has been mainly directed towards big companies, rather than to small- and medium-size enterprises. Moreover, according to experts, most of the loans are short-term, i.e. for turnover capital.
An annoying fact is the lack of information about how much of the above-mentioned financing was spent for the purchase of inputs and raw materials and how much of the money went for wholesale purchase of household items that are afterwards sold by retailers. Due to the lack of such data no analysis can be made if that crediting directly influences the quickly rising current account deficit.
The lifting of restrictions on the increase of loans in the summer of 2006 gave many banks an opportunity to report an over 100% credit growth for the twelve months from June 2006 till June 2007. Within that period, for instance, INVESTBANK registered a 136.4% increase of the size of extended loans - from BGN140.7MN to BGN332.6MN. Tokuda Bank reported a 126.8% growth of crediting, Commercial Bank AD - 113%, and Piraeus Bank - 102.9 per cent. The fact which sticks out a mile is that in most cases such steep increases of receivables from citizens and firms are characteristic of institutions where loans accounted for less than 50% of their balance sheet volumes.
But there are also exceptions of that rule, characterizing bigger credit institutions which have already made everything possible to increase their most lucrative assets to the maximum. Such is the case with Piraeus Bank Bulgaria. As a result of the quick growth of the loans released by it, they account for 76.4% of all its assets, while a year earlier they were 64.5 per cent. The same situation can be noticed in Post Bank, which credits rose by 76.81% within the twelve months from June 2006 to June 2007, while their share in the total size of its assets increased from 53.9% to 66.81 per cent.
But UBB is the champion in that respect, having directed 82% of its assets to crediting. It is big Bulgarian banks that could afford to follow such a policy as their equity exceeds BGN300MN and powerful foreign owners are behind them.
In fact, the size of the shareholders' equity is of decisive importance in case a bank tries to attract as its clients firms with big turnovers and gain from providing complex services to them. Such companies need sizable turnover and investment loans, and their amount according to the Law on Credit Institutions,
may not exceed 25% of the shareholders' equity (that is the turnover between the share capital, the reserves, and the current profit) of the bank which extends the loan.
One way or the other banks ureter to deal with firms rather than citizens for several reasons.
Corporate banking provides opportunities to offer more services - managing cash flows, issuance of guarantees, bails and letters of credit, bearing various fees and commissions, which means additional incomes besides the extended credits, as well as trade in bonds. Moreover, firms that receive loans may be required to present various real securities which could be quickly sold if necessary. They include pledged goods, equipment or even an entire enterprise, as well as mortgages of its real estates.
Consumer loans, however, lack any such extras It's true that the interest rate on them is twice higher than on corporate credits, but the latter provide opportunities for more sources of income and are secured by pledges or mortgages. Therefore, they
are preferred by banks, while consumer loans are laid aside. Within a year they grew by almost BGN1.2BN (26%) and totalled BGN5.6BN in end-June 2007. The total volume of unsecured financing extended even by DSK Bank went down from BGN1.7BN in June 2006 to BGN1.2BN in June 2007. As of the beginning of this year a tendency that banks are trying to transform unsecured loans to citizens into mortgage credits can be observed. There are many reasons for that: the lower risk of financing, guaranteed by a mortgaged real estate and its longer term of repayment, which means more and steady proceeds for the bank. The dynamic market of real estates in this country indisputably contributes to the development
of mortgage loans According to analyses of experts from MKB Unionbank, mortgage credits in Bulgaria are already 99,000 in number, amounting to some BGN4.7BN. The average size of a loan, secured by a mortgaged real estate, is almost BGN45.000, and the average real annual percentage of expenses for it is 8.4%, the financial institution's Executive Director Maria Ilieva claims.
Housing credits are practically the most quickly increasing ones in Bulgaria. They rose by almost 81 % within a year. Their repayment could be put at risk if citizens' incomes go down and they are not able to service their liabilities. However, there are no such indications for the time being. Bulgarians possess real estates in excess.
According to a survey, published in the Real Estates magazine, private housing property per capita is 94% in Bulgaria, 84% in Spain, 76% in Greece, 64% in the Czech Republic, and between 36 and 42% in Switzerland and Germany. The average time necessary for the sale of a real estate in Bulgaria is 90 days, while in Germany and Switzerland it is more than 190 days. The real estates market In our country still offers competitive prices as compared to those in most of our neighbours. In Romania, for instance, prices of flats in big resorts, such as Mamaya, Sinaya, Constanca, Costinesti, etc., are in the range of EUR1,100-1,500/sq. m. A square meter of such real estates in Turkey costs about EUR1.000 to EUR1,760. Prices in Greece, Montenegro and Croatia are still higher. In Dubrovnik, for example, there are even purchase deals for houses, sold at EUR4,500/sq. m.
The prices in Sofia are greatly manipulated, on one hand, and differ a lot, depending on the real estate's location and type of construction, on the other hand. The third, but the most important circumstance is that the construction work of a great part of the so costly housing is not of adequate quality. And that means it has been realized cheaply, using bribing practices, and brings huge profits to the investor and sub-contractors. God forbid - but in case of natural disasters such as drought, fires, floods, and earthquakes, such buildings could be ruined to the ground. What would then the price per square meter matter if the real estate has not been insured against such accidents? It's another question that sellers of immovable property are not interested in that. They are glad to get their profits, which are based on their conclusions that demand in cities and summer resorts is equal to supply or even exceeds it. Bank experts have calculated that even if prices go down by a quarter, that would not endanger credit institutions. The reason is that most mortgage loans do not exceed 75% of the market evaluation of the mortgaged real estate they are secured by.
Since 2000 the BANKER weekly has been preparing a quarterly
rating of the most actively crediting banks, evaluating them according to three criteria: total volume of extended loans, share of credits in the balance sheet value, and annual growth of released loans. The institutions which occupy the first ten positions according to all the three indicators are included in the group of the most actively crediting banks. From all that has been said so far it is clear that some of the biggest
credit institutions in this country quite logically enter the newspaper's ranking in end-June 2007, namely United Bulgarian Bank (UBB), Piraeus Bank Bulgaria, and Post Bank. UniCredit Bulbank has not been included in the rating because it was born as a result of the merger between BULBANK, HVB Bank Biochim, and HEBROSBANK, in 2007, but it would not be fair to add up mechanically the three banks' data and compare the results with those of the other credit institutions.
UBB's success is connected with a policy, established some years ago. In a nutshell, it is connected with the balanced development of loans to citizens and firms. This is the only bank in our country where corporate credits - BGN1.7BN, almost equal the released consumer and mortgage loans BGN1.8BN. Another feature is that UBB has always had a huge shareholders' equity. In end-June 2007 it totalled BGN641MN. That allows it to maintain credit growth steadily high -56.8% from June 2006 till June 2007, and a very high ratio between credits and the aggregate amount of assets.
Piraeus Bank Bulgaria has demonstrated an appetite .to enter the group of the top five banks in this country, both by the size of its balance sheet value and the total amount of extended loans. The very fact that within twelve months it increased the volume of extended credits by 102.9% -from BGN903MN to BGN1.81BN, shows that its managers had been following an aggressive policy of extending its market share.
The bank maintains also quite a high ratio between loans and its balance sheet value - 73.8 per cent. The only hindrance to maintaining the growth so far displayed, is its comparatively small shareholders' equity - just BGN114.9MN.
Its unbalanced credit portfolio, in which corporate loans account for almost 80%, could be regarded as a flaw. However, the bank's managers have demonstrated willingness to change that ratio and have been actively offering credit products to citizens for half a year now.
Post Bank's executives have been steadily abiding by their promise that the processes connected with the acquisition of DZI Bank would not adversely affect its market positions. The institution affirmed itself as the fifth one in terms of extended loans, and reported a 76.8% credit growth within twelve months. Its comparatively high equity of BGN283.1 MN allows it to follow an active policy when releasing credits, although they account for 66.8% of its assets.
All in all, the heat on the credit market will continue till the end of 2007, although the measures for restricting credit growth, to be imposed by the BNB as of September, are expected to cool down temperatures. Loans, however, will continue to be the source of highest proceeds for banks and they will be actively competing to attract clients. A problem would arise if the competition between them leads to an increase of the volume of bad credits. Thus, due to the wild race between them, in a certain moment Bulgarian banks could be infected by the virus which has already infected much larger and more powerful American and European credit institutions.

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