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Annual banking analysis, by Kristofor Pavlov, UniCredit Bulbank Chief Economist

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Annual banking analysis, by Kristofor Pavlov, UniCredit Bulbank Chief Economist

By: Kristofor Pavlov, UniCredit Bulbank Chief Economist

The banking sector in 2013:

The vulnerability of the Bulgarian banking sector will continue to decline in 2013. Several factors have contributed to this, with the completion of the process of reduction of external indebtedness and the significant slowdown in the rate of increase of non-performing loans having the most weight. On account of expected new depreciation costs in the amount of around 1.1 billion Bulgarian lev in 2013, an additional part of the losses, resulting from the bursting of the real estate bubble and the recession in 2009, was absorbed. The existing capital buffers are expected to grow by an amount slightly over 500 million Bulgarian lev that also represents the expected consolidated profit of the sector for 2013. These results were accompanied by a further reduction in interest rates on loans at a faster pace ahead of deposits, which made it possible for the net interest spread (the difference between interest rates on deposits and loans) to be reduced for the second consecutive year.

The big picture, however, was not entirely positive. Lending slowed down to its lowest levels since the beginning of the crisis (0.7% annual growth as of October 2013), while the sector continued losing its efficiency. The ratio of revenues over expenditures deteriorated to 53% as of October 2013, compared to the record level of 47%, recorded in 2007.

What does the year 2014 hold for banks?

Similarly to 2013, this year again we expect the price that banks will have to pay in order to continue attracting deposits from residents to continue going down, albeit at a slower pace. To a certain extent, the reasons for this forecast are the same as a year earlier. What is new now is that the process of reduction of the financial indebtedness of the banking sector has already been completed as a whole and the number of banks that will be forced to continue aggressively attracting funds from residents to reduce their dependence on external financing to sustainable levels is small. Another new thing is that inflation has declined significantly compared to a year earlier and now the same real interest rates on deposits of residents are possible at lower nominal interest rates. Lower funding costs will make it possible (ceteris paribus) for the loan cost for households and businesses to continue diminishing in 2014 as well.

Next again year we expect that deposit growth will outperform loan growth, but the banks' behavior will change. They will use some of the sectors’ liquidity, generated by households and enterprises, to proceed with the restructuring of their liabilities, paying up their most expensive funding sources, while the free resources, for the most part, will be channeled towards the fixed income securities market. A certain increase in foreign assets will also be on the agenda during the next year.

While the potential for long-term growth stays in place, in the short and medium term the demand for new loans remains weak. This is due to the combination of still high levels of debt in some sectors of the economy and a rather fragile recovery of GDP, which is further constrained by political instability and economic uncertainty. The financial restructuring of companies experiencing difficulties continues at a slow pace, which makes it difficult to reduce the costs associated with enforcement of claims. The losses in the loan portfolios do not seem to have been fully absorbed and will continue to maintain depreciation costs at high levels for at least a few years. All this indicates that the operating income will remain under pressure, and thus the efficiency of the sector will remain close to the currently observed levels of about 53% for the ratio of revenues over expenditures.

If we need to specify only one trend that best sums up what is happening now, this will be the growing polarization between the results of the leading banks and of the smaller players from the periphery of the market. Considering that most banks have already taken measures to improve their efficiency, further cost reductions will be more difficult to achieve. In this regard, the consolidation of banks is a logical path towards improving the efficiency in the sector.

The way customers work and interact with banks is rapidly changing, which is a global trend, and Bulgaria is no exception to it. Customers now realize much more their power as consumers of services and are interested in different options for contact with banks that allow saving time and money, while making it possible to make informed choices more easily. This prompts banks to change the way they work and banks that better and faster understand how the preferences of their customers evolve have better chances to adapt to this change. Regulations are also changing, including those designed to increase transparency and customer protection, which ultimately leads to still greater competition and thus it is yet another channel through which banks are placed under pressure to keep changing.

More information for clients:

UniCredit Bulbank, Call Centre

Phone: 0700 1 84 84

More information for media:

UniCredit Bulbank, Identity & Communications Department

Viktoria Blajeva, Phone: + 359 2 9264 993, wjlj/ebwjepwbAvojdsfejuhspvq/ch

Ekaterina Ancheva, Phone: + 359 2 9264 963, flbufsjob/bodifwbAvojdsfejuhspvq/ch

Magdalena Ivanova, Phone: + 359 2 9232 528, nbhebmfob/jwbopwbAvojdsfejuhspvq/ch