This article in large part appeared in The Banker magazine, May 2019. The Banker is part of the FT Group. It was subsequently removed from the magazine’s website, on account of a complaint by the Bulgarian National Bank concerning a quote attributed to the governor of the bank, Mr Dimitar Radev. In the interests of transparency and accuracy, this quote has been deleted from this article. Responses to this article from Bulgarian bankers have been positive.
Consolidation in Bulgarian banks has gathered pace as foreign acquirers have sought to gain a position in a strongly growing economy. Bulgarian GDP grew 3.3% over the last year. The recent completion of DSK’s acquisition of Expressbank, bought from Societe Generale, has secured its position as the leading retail bank. DSK, a subsidiary of the Hungarian OTP bank, is Bulgaria’s second largest bank by assets. KBC’s acquisition of UBB in 2017 – a bank with no more than 10.5% of the market– for a price put by one observer as high as €1 billion, indicates the growing value of the Bulgarian banking franchise.
Greek-owned Postbank, part of the Eurobank/EFG Group, acquired Piraeus Bank in the most recent deal for €75m announced in March 2019. This transaction has attracted some controversy as a rival bidder, Highgate Capital, a hedge fund, claimed it had bid €5 million more than Postbank but had its bid rejected. Andrey Kruglykhin, Highgate CEO, said he had reported the issue to the European competition authorities.
Raiffeisen, meantime, has announced it is looking for an acquisition in Bulgaria although it is says targets in leasing and other financial areas may be preferred to a bank. It says it has Bulgaria’s third largest leasing company and is interested in building on the business.
The exception to the acquisitive trend is Unicredit Bulbank, the country’s largest bank by assets. This was the former foreign trade bank built up from the merger of three foreign banks and has stated that it has no acquisition plans and plans to pursue organic growth.
The market has shrunk from 35 banks five years ago, to 25 banks, said Peter Andronov, CEO of UBB and chairman of the Bulgarian Association of Banks. He expects consolidation to continue. ‘We intend to improve our efficiency as we control our costs and income more aggressively. This will lead to consolidation. Different players have different strategies, but they all clearly understand that size matters, and it allows you to have advantages.’
KBC’s takeover of UBB (through its local subsidiary C-Bank) has raised UBB from ninth in the country’s league table to the third biggest bank in terms of assets. Its market share is estimated at 10.5%. The merger has enabled UBB to double its profits between 2017 and 2018. A 10% rise in profits is expected for 2019.
A stream of fee income from the sale of KBC insurance products to UBB banking customers is powering profits, said Andronov. ‘We can cross sell insurance in the banking branches to the benefit of both the insurance company and the bank, and the whole group. This would not have been possible if we had been single companies standing alone.’ The bank has a platform for ‘big data management’, said Andronov. ‘This is a centrally driven process with outside establishments which helps us to improve the service by crunching the data of our clients, to provide services and knowledge about our clients which we already possess in our registries and systems.’
Bulgaria’s largest bank by assets, Unicredit Bulbank, receives a stream of insurance income through cross-selling products from Allianz.
DSK’s integration of Expressbank is well underway, said Violine Marinova, the CEO of DSK. ‘The integration of the Societe Generale subsidiary, which would be completed by the end of 2020 will allow us to build an efficient, consolidated network of banking operations. It will enable us to increase our scale and approach a lead position in in terms of assets. We will have the biggest branch network in the country, and our deposits and credit portfolio will be the largest in Bulgaria.’
Société Générale Expressbank was Bulgariaʼs seventh largest bank before the DSK takeover with assets of €3.6 billion in 2017 and corporate loans worth €1.15 billion. Its branches, ATMs and online presence will be rebranded with the DSK logo and colours, said Marinova. The fate of Soleilife, the insurance company Expressbank used to cross-sell insurance products is in the balance, said Marinova.
DSK, the former savings bank in the communist era, has a primary retail franchise, with 25% of the market and a large branch network. Its corporate business has been developed over the last five years and issues remain about its strength. This may explain why some former Societe Generale Expressbank clients have told bankers they are bailing out and considering moving to Unicredit Bulbank or Raiffeisen following the merger. One banker commented, ‘Multi-national companies want the standards of a mainstream European bank. They are not sure the merged entity will provide that.’
As DSK cements its retail presence, Unicredit Bulbank aims to boost its position among corporates. A bank spokesman said that the corporate banking area would offer new innovative products and services to the market in 2019. These would include ‘EU-funds related expertise along with specially designed solutions to companies and projects with significant potential.’
Reduction in numbers of branches in remote parts of Bulgaria has been a priority for Raifeissen, a second tier Bulgarian bank, said CEO Oliver Roegl. ‘A decade ago we had 200 branches, many in scattered parts of the country. We have closed many of these and our branch network has now come back to 133. We see scope for opening new branches in Sofia, Bulgaria’s capital city, although often it is a case of moving a branch to a more effective location.’ Raiffeisen has 7% of the banking market, making it fifth in the fast-changing ranking order of Bulgarian banks.
Optimism among Bulgaria’s bankers is curbed by two factors largely outside their control. The first is low interest rates, the second shortage of manpower. Petia Dimitrova, Chief Executive Officer and Chairperson of the Management Board of Postbank, said that ‘One of the key challenges for Bulgarian banks is defending margins in the continuing environment of low interest rates. In addition, the rising regulatory and capital requirements and also pose a challenge to banks – limiting profitability and making investing in banking less attractive. All business in Bulgaria has a problem finding talent.’
The assets of Bulgaria’s top three banks are currently being scrutinized by the European Central Bank as part of the country’s progress towards membership of the European ‘banking union.’ Results of this ‘asset quality review’ (AQR) will be announced this coming July and it is hoped these will enable the country to enter the ‘banking union’ and Exchange Rate Mechanism simultaneously. The country is required to spend at least two years in the ERM before it can adopt the Euro. The length of Bulgaria’s stay in this waiting room is unclear. The mood in Sofia is upbeat that the country will jump the necessary hurdles and join the Eurozone in 2023. Peter Andronov is resolutely upbeat. ‘If Bulgaria successfully enters the ERM2 and the ‘banking union’, we would enjoy the same environment as other countries who have joined the Eurozone’, This is what we have all been working towards.’
Marinova is also keen to jump on the Euro bandwagon. Membership of the Eurozone would bring ‘the necessary scale not only for the development of the Bulgarian economy, but for the way other European Union states see us,’ said Marinova.
‘The country will look a more attractive banking destination where the processes are clear and where regulation and the rule of law are observed.’ Bulgaria remains subject to the European Union’s Co-operation Verification Mechanism (CVM), a process that entails an annual review of the country’s judicial and investigation processes.
Bulgaria’s high levels of non-performing loans, which stand at some 8% across the country’s banking system will not support its claim for Eurozone membership. ‘We are aiming for non-performing loans to fall to a Eurozone average of 3% over the next three years,’ said Andronov. Insisting the matter is under control. ‘The gap is closing quickly. If we have two or three good years like this year, we will come close to the EU average levels. The number of NPLs will fall quite rapidly. We have quite a nice environment in which we can clean out old legacies.’
Unicredit Bulbank, Bulgaria’s largest bank by assets – it has 18% of the total asset base– has already reached the 3% NPL target for the sector, said a spokesman.
CEIC consultants reported that the NPL levels of Bulgarian banks stood at 7.2 % in September 2018, compared with 7.7 % in the previous quarter. This reflected a continuing fall from a peak of 15% in 2015.
The risk that the country could be building up new NPLs is greater than ever, as loan books burgeon in today’s positive economic climate. Andronov says that the amount of retail credit has grown by 10% over the last year, while corporate lending has grown by 5%. This represents a 50% increase in lending from the year before. ‘There has been an build-up of deposits and now banks feel able to increase lending although caution remains a priority. We should be mindful and careful about the credit growth.’
Today’s high level of borrowing is part of a catch-up process reassures Raiffeisen’s Roegl. ‘Loan penetration in Bulgaria, in both corporate and retail, lags far behind western standards. So even if the growth is sizeable, they are still far from western levels. We are engaged on a catching- up process.’
The scale of the burgeoning economy is demonstrate by a near 10% growth in money supply in the year to September 2018, while foreign exchange reserves stood at $25.1 billion in Oct 2018, 8.6% worth of imports in August 2018. Domestic credit reached $33.4 bn in Sep 2018, a year on year increase of 7.2 %.
Moving into the breach to control an imminent credit bubble is the Bulgarian National Bank which has announced an increase in a counter-cyclical buffer. The BNB had already announced the introduction of a 0.5% buffer from October 2019, but now this will be increased to 1% from April 2020. Andronov said. ‘We take seriously the concern raised by the central bank. It warns banks to be careful. We may still be some way from a significant imbalance, but if we keep going with this pace, we could be building up a greater more NPLs, which would only appear in a crisis period. During this race for higher lending we must not underestimate the risks and afford losing standards.’
A ratings upgrade — BBB to BBB+ — from Scope Ratings has reflected the new economic strength. Scope pointed to three factors. First, ‘The sovereign’s low and declining general government debt ratio, and favourable debt profile’. Second, ‘A commitment to reform, including the addressing of banking system vulnerabilities, further facilitated by Bulgaria’s application to enter the Exchange Rate Mechanism II (ERM II) and the EU’s Banking Union.’ Third, ‘improving external resilience reflected in: the significant boost to reserve coverage ratios in recent years, supporting the nation’s currency board exchange rate regime; and declines in the external debt ratio and improvements in the net international investment position.’
While aspects of the country’s judicial and regulatory processes have attracted criticism in European quarters, as demonstrated by the CVM’s annual reports, the Bulgarian National Bank is regarding as keeping a careful hand on the tiller. Its decision to issue a circular to all banks to avoid issuing mortgage and loan products in Swiss francs is appreciated, said Reiffeisen’s Roegl. A currency peg, tying the Lev to the euro for some twenty years has ensured one of the lowest public debt burdens in the EU as well as fiscal surpluses and low inflation.
The banking system remains relatively straightforward and manageable, said Margarita Petrova-Karidi, an executive director for risk at DSK Bank. Bulgaria’s banks had yet to develop sophisticated derivative products at the time of the 2008 banking crisis and came through relatively well, ‘The Bulgarian banking system consists predominantly of loan books. We do not have a fancy instruments like derivatives or many bonds. The market is not so sophisticated and developed. This helped when the crisis came in 2008’.
The crash of Corporate Commercial Bank, one of the country’s largest at the time, 2014, under the weight of €2.5 billion of loans paid largely to related parties serves as a warning to braver Bulgarians. This left the regulatory system reeling said Kamen Zahariev, an official with the EBRD at the time. The state’s guarantee fund was left to pay depositors billions when its owner Tzvetan Vasiliev fled the country. ‘This was a watershed for the country’s banks.’ He said. ‘The progress in regulation and risk management since then has been considerable.’