Banks will be working for improvement of the efficiency in a difficult operating environment

The Bulgarian banking sector is about to face a number of changes in 2015. Some of them come as a reaction to the crisis of June 2014 and aim at ensuring that the CCB situation will not repeat. Others form part of the corrective measures envisaged in the plan of reforms to the global financial system agreed upon by G20 and the Financial Stability Board and serve the goal of rendering the financial system more secure, simpler, more transparent and fairer.

In this sense an important event for the sector will undoubtedly be the detailed audit of banks’ balances with the help of an external advisory company. We expect that it will be carried out according to a methodology and criteria which comply with the best standards and after coordination with the ECB. The analysis will be probably made on the basis of banks’ results as at the end of 2015.

In 2015 the Bulgarian legislation is going to integrate the European directive on recovery and orderly exit of failing banks from the market. This should not only make banks more secure and stable, but also guarantee that if it becomes necessary to enforce the exit of failing banks from the market, the risk of this bringing additional burden on the budget will be reduced.

We are going to learn what structural measures will be needed in order for Bulgaria to join the eurozone. What seems clear from today’s perspective, is that the achieving of any progress regarding the introduction of the euro is related to the progress in combatting corruption and organized crime, the reaching of the European standards of functioning of the judiciary and the supremacy of the law, and finally, with the successful exit of Bulgaria from the existing mechanism of cooperation and audit in this area.

This year we should see whether and in what time terms it will be possible for Bulgaria to join the banking union, as a first step in the more general process of closer integration of the country with the institutional structures of the European Monetary Union. We continue to look at the accelerated accession of Bulgaria to the banking union as a step in the right direction. The entering in the banking union will contribute to making Bulgaria a known and normally accepted player and after all will provide additional arguments for Bulgaria’s sooner admission to the eurozone.

In the conditions of a slow recovery of the economic activity and employment combined with the continuing deflation processes and the too sluggish and costly debt collection, the operating environment for banks will continue to be tough in 2015 as well. Demand for new loans will remain feeble. It will be further limited by the slow and uncertain recovery of the real estate market. Against this backdrop interests will continue to follow the downward trend, although probably at a speed which is much more modest than the one observed in the second half of the past 2014, and the loans/deposits ratio is decreasing, turning the Bulgarian banking sector more and more into a net creditor compared to the rest of the world.

There is a potential for the introduction of measures for improvement of the efficiency of the banking sector, especially considering the deteriorating ratio of costs/revenues in the recent years.

The analysis is prepared by Kristofor Pavlov, chief economist of UniCredit Bulbank.

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