Download Speech by Mr. Ivan Iskrov, Governor of the BNB, at the spring

Speech by Mr. Ivan Iskrov, Governor of the BNB, at the spring meeting
of the Bankers’ Association in Bulgaria, Sofia, 16 May 2007
Ladies and Gentlemen,
It is a great pleasure for me that today we are once again together and have the chance to discuss
professionally the condition, the prospects and challenges to the domestic banking sector. Some six
months ago I said to this audience that we were on the threshold of a new era in the history of our
country – the accession of the Republic of Bulgaria to united Europe. It is equally true that we have
to tread a path which our country has not walked before. From 1 January 2007 our integration into
the European economy does not finish, but begins. As I have pointed out on quite a few occasions,
there is no more prepared and better integrated part of the Bulgarian economy than the banking
system. At the same time, however, it is exactly this high level of integration that adds to the
challenges to the national banking system.
2006 Results
The favourable external and internal economic environment in 2006 was a good basis for banking
sector growth and for keeping its stability. The banking system’s assets grew by 28.3% on the
previous year up to BGN 42.2 billion. Profit reached BGN 786 million which is a 37.2% increase on
2005. Despite the increasing credit market competition, the retained interest rate levels on loans and
the higher cost of attracted funds, the return on assets ratio (ROA) of the banking system went up to
2.15% against 2.01% in the previous year. The trend from the last five years of growing return on
equity (ROE) continued. In 2006 it reached 23.7% against 21.6% in 2005, and 20% in average for
the last five years. For comparison, in EU-25 the return on assets and equity is respectively around
1.2% return on assets and approximately 16% return on equity. Following the BNB’s decisive
interference, from 2005 second half the rate of growth of credits for the private sector slowed
downed reaching 24.6% in 2006. This trend continued throughout 2006 mainly as a result of the
extended action of the administrative regulation on credit growth, which made the commercial
banks contain their lending, and still many of them to even sell part of their loan portfolios. In 2006
the commercial banks managed to keep the quality of their loan portfolios with the ratio of standard
loans growing from 92.3% at the end of 2005 to 93.9% in late 2006. The prolonged action of the
measures aimed to restrain credit growth for the private sector and the increase of capital in some of
the banks during the year conditioned unchanged capital adequacy level of the system close to that
of the preceding 2005. As at 2006 year end the capital adequacy of the banking system was 14.5%
against 15.3% for 2005 year end.
In 2006 the country reached a relatively high BoP current account deficit – 15.8% of GDP. A
trend of slight increase of the deficit has been observed since the beginning of 2007. As we well
know, this deficit is not destabilizing but is rather a reflection of the high rate of investment growth
in the country as a result of the strong capital inflow and the process of our economy’s convergence
to the EU countries. Further to these factors the switch to a new way of compiling statistical data on
foreign trade based on the so-called Intrastat creates certain difficulties and leads to omissions in the
reporting of foreign trade flows. Amid these uncertainties, it would be good for the country to build
up reserves to allow for greater flexibility against potential adverse developments in the
international markets. Such reserves could be accumulated by realising in 2007 a higher fiscal
surplus than our government’s commitment to the European Commission (2% surplus of GDP).
2007 Challenges
The broadening and deepening of financial co-operation in the country brought about the more
and more frequent use of market indices: LEONIA, SOFIBID and SOFIBOR. As a result, the
Bulgarian Bankers’ Association and the Bulgarian Dealers’ Association are planning to extend the
term of SOFIBID and SOFIBOR from 3 months to 12 months, which will bring Bulgarian indices
closer to EURIBOR.
In the process of Bulgaria’s accession to the pan-European payment infrastructures, the banking
community in the country is facing two major projects – SEPA and TARGET2. For the purposes of
organizing and coordinating the process of the county’s integration to the payment systems area, a
National Payment Systems Council (NPSC) was established in 2005. In January 2007, the NPSC
decided to set up consulting groups, to deal with the main aspects of harmonization with European
practices – payment instruments, infrastructures, card systems and TARGET2. The participation of
the BNB and Bulgarian banking community in TARGET2 provides an opportunity for the revision
and optimization of payment processes with a view to participation in TARGET2.
The SEPA project is a priority project for the countries which had introduced the euro as their
national currency. Nevertheless, from the very beginning, all countries outside the euro area were
allowed to use SEPA when executing payments in euro, and to implement the SEPA standards for
their payment instruments. By mid-2007, the NPSC will have an estimate as to the possibilities
implement a project on a single entry point for Bulgaria, and will set a starting date for the project.
The single entry point project will be executed jointly with the commercial banks.
Over the past two years, we have attempted together with the commercial banks to find an
effective solution, to satisfy both the banking community and the public, on cash circulation
arrangements. From the beginning of 2007, together with Unicredit Bulbank, DSK Bank and United
Bulgarian Bank, the BNB had negotiated and launched the procedure for establishing a joint venture
for coin and banknote processing. Until the end of the current year, the BNB and the founding banks
will work towards achieving as quickly as possible tangible results - launching the new joint venture
- which will be a big step towards the creation of new secure and effective cash circulation
arrangements.
The BNB began the construction of a new cash centre. I would like to remind you again that after
2008, the cash centre will be the only place to provide free-of-charge cash-desk services, as
regulated by the ECB. All other services will be offered at market-based cost.
The combined efforts of the BNB and commercial banks lead to the successful development of
the Central Credit Register system. Starting from mid 2007, the scope of credits in the register will
be expanded to include subsidiary non-banking financial institutions among the participants. The
access to this data will facilitate participants in the decision-making process in lending. At the same
time, the quality of information had improved due to the regulated access of borrowers to the
information concerning them, and the existing means for timely adjustment of such information.
The introduction of the new capital requirements is running smoothly, as expected. Most of the
banks have planned their capital parameters adequately. Very few banks have allowed temporary
deviations from the minimum capital requirements, in most cases due to technical causes, and on
rare occasions – due to insufficient capital planning. Another challenge to the banking industry from
the start of the year was to adapt to the requirements of financial and supervision reporting. All
banks implemented the new reporting standards successfully.
The introduction from the beginning of this year of Basel II will have an impact on the BNB’s
policy with regard to the publication of non-aggregated data about individual commercial banks.
Each quarter since 1999, the BNB has been publishing the balance sheets and income statements of
individual commercial banks. These data enjoy the particular interest of the specialized media, and
the banking community. From the first quarter of 2007, the BNB will also start publishing part of
the additional reference information collected by the banking supervision function. This will assist
both commercial banks in analyzing market trends, and individual banking service users in their
choice of a servicing bank.
With regard to the BNB’s licensing policy, the principle adopted on EU level of freedom of
establishment and provision of financial services by banks licensed for business in another member
state is of paramount importance. On this basis the BNB receives notifications by European credit
institutions expressing serious intentions to enter the Bulgarian banking and financial services
market through the so-called direct banking. As of end-April, 42 such notifications were received.
As regards licensing of new domestic banks, the BNB will continue to pursue its cautious licensing
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policy, which requires from applicants to provide proof that with its presence the new financial
institutions will contribute to the enhancement of banking intermediation and will add value to the
market by offering innovative products and services.
In addition to the intensifying competition among banks, the banking sector should also anticipate
the increasing competition of the non-bank financial intermediaries. This is a global trend, which
has gained in strength in Bulgaria in the recent years. The administrative restrictions enforced by the
BNB on bank credit growth definitely had their positive effect on the development of the nonbanking financial market.
From the beginning of 2007, the BNB revoked the additional minimum reserve requirements in
effect in the country from the second quarter of 2005 г. After the revocation, credit growth has again
shown signs of acceleration, reaching in March 36.1 percent. Of course, these data contain
information about multiple factors having their impact on the banks’ lending policy - some of them
of temporary nature. Firstly, these data reflect the return to some banks’ balance sheets of loans that
were sold in the period of effect of credit restrictions. In addition, the accelerating rate of credit
growth also reflects the replacement by some corporate clients of foreign financing with domestic
financing. Practically, these two trends have not changed the amount of lending within the economy.
They only transfer credit risk into the balance sheet of the Bulgarian banking system.
Although we have no reasons for serious critique as to the way commercial banks manage their
risks, we find that the competition for customers and a market share, which seems to be evidenced
again as a consequence of the optimism in relation to our EU membership, should be based on
prudence and caution. The need of greater caution in accumulating credit risk is determined by two
factors. Firstly, with regard to the level of indebtedness accumulated in the economy. At the end of
2003 and the beginning of 2004, when the BNB took the first measures for restricting the pace of
bank credit growth, the level of indebtedness of the private sector was much lower than in the newly
acceded EU member states. The credit to the private sector was about 27 percent of GDP, while
private external debt was about 23 percent of GDP. This relatively low level of indebtedness,
combined with the historically low interest rate levels worldwide, allowed us to believe that the high
credit growth rates are of limited nature and are determined by the growth in the economy and
deepening of financial intermediation. Today, the level of debt in the Bulgarian economy is above
the average in the newly acceded EU member states, while the level of our per capita GDP is lower
that the average for these economies. Commercial banks should take account of the fact that the
degree of indebtedness reached by companies and households makes them more vulnerable to
changes in the interest rate levels.
Neither should we overlook the interest rate cycle in the euro area, which is transmitted
domestically through the mechanism of the currency board. Since end-2005, the European Central
Bank has started to increase interest rates, reaching presently an increase of 1.75 percent. The good
development of the economies of euro area member states gives us no grounds to believe that the
upward cycle of interest rate growth has peaked. In this period of rising interest rates in the euro
area, the cost of credit decreased domestically, stabilizing relatively in the recent months. The
decrease in the interest rate came as a result of strong competition among commercial banks for a
market share, and the large capital inflow to the country, and the reduction of country risk premium
as a result of Bulgaria’s higher sovereign rating. However, the shrinking of the net interest margin
has its limits, and with the continuing increase in the euro area interest rates banks will have to
increase the cost of credit at a certain point in time. This generates certain risk, as in the recent
several years companies and households have got used to operating in an environment of decreasing
interest rates.
The BNB is of the position that any acceleration in the rate of growth of lending to the private
sector may put to risk the quality of commercial banks’ credit portfolios. The central bank is
monitoring with enhanced attention the increased credit growth rate evidenced from the beginning
of 2007, and if we find that this is a sustainable growth entailing risks to the stability of the banking
system, we will take steps to restrict credit growth.
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Thank you for the attention.
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