Banks will have to treat borrowers like “a tender bird because if you squeeze them too hard, you will stifle them and if you let them too loose they will fly away”. This was the highlight of a speech given by Levon Hampartzoumian, the CEO of Bulbank UniCredit Group Bulgaria, at the Second Decade of Growth: Risks and Opportunities conference held on October 3.
In his overview of and forward-looking analysis of the banking market, he voiced his sector’s opinion on the role of banks operating in Bulgaria in sustaining local fiscal stability. The bird metaphor, he said, was an omen for the shift in the banks’ attitude toward lending in the years to come.
Putting Bulgaria’s banking market into the overall economic picture, he explained that banks were not the engine behind GDP growth but rather the ones to scoop dividends from the economy’s success. Therefore, they were integral to fiscal stability but only to the extent of remaining steady over the medium and long term.
And the prospects for the banking market are far from bleak. Hampartzoumian ruled out the prospect of a catastrophic scenario. Though a crunch served a good purpose for markets in need of fundamental reforms, it was fraught with creating problems in Bulgaria. The local banking market has already reached maturity and a fiscal crisis would only signal delay in vital reforms and mass layoffs across a number of sectors.
Being a follower of general economic trends, the banking market was on the threshold of mini-reform as the economy enters into a “transition within transition” stage, Hampartzoumian said.
“The Bulgarian banking players are aware and have become accustomed to operating in years of crisis and fast growth, yet they are yet to learn how to work in times of slowing growth rates,” Hampartzoumian said, alluding to the fact the banking market has reached near-saturation.
With years of slower growth around the corner, it was vital that lenders in the country learned how to keep their lending portfolios in check. Hampartzoumian argued that the fast growth of lending in recent years was still happening, with banks repatriating funds from abroad after the waiver of the bulk of lending restrictions. The country’s lenders also funnelled lavish resources into developing new niches such as the consumer loan, loans to SMEs (small and medium enterprises) and other largely untapped lending areas. There, growth is still in the 25-30 per cent range, he said.
With loan exposure reaching record highs, Hampartzoumian said that the main challenge to the banking market now would be to stave off defaults on the part of lenders and borrowers alike. Bad loans would leave all parties to the process dissatisfied: the population, banks, regulators.
Taking the issue further, he focused attention on lender credibility. In particular, he mentioned the emerging host of non-banking lenders such as locally-owned leasing and consumer lending companies, whose financial trustworthiness called for the need for stricter governmental regulations.
Hampartzoumian proposed that Bulgaria’s Parliament legislate a credit agency, whose primary goal would be to both track the records of all players in the lending market and ensure high levels of transparency. The existence of this institution would not encourage companies of lower credibility but would rather tighten the discipline in lending activities, he said. He went on to say that this practice had served well in a number of countries.
Loans in the billions of leva also raised the issue of clients’ bad loans. In forecasting how far the percentage of bad loans would go, Hampartzoumian used simple maths in analysing changes to the bad loans fraction under various economic development scenarios. If the volume of loans is in the numerator and the volume of bad loans is the denominator, the ratio will be a big figure in good times and a small one in bad times.
“People tend to be diligent payers when the economy is booming and disposable income is on the rise,” Hampartzoumian said. Naturally, the reverse holds true when incomes are on the decline. Then, the ratio would go on a deferred, post-loan increase, and cause an avalanche in decline.
Therefore, to avert a banking crisis banks should be especially careful in tailoring their credit portfolios and should already tighten credit extension procedures now, Hampartzoumian said.
A regulatory measure that could cushion the banking market from crises could be a mini-reform in the insurance of deposits.
Hampartzoumian argued that at present low-volume deposits were subject to overly high insurance and were thus hyper-protected while the ones with larger sums were not sufficiently protected. To fix this situation, the expert offered to reform the risk valuation and management system for instalments in deposits. It is the right time to do this as the financial institutions have reached an advanced stage of development.
Tsvetan Manchev, the deputy governor of the Bulgarian National Bank (BNB), gave an assurance that the central bank would do all it could to safeguard the banking market against a crunch. Manchev said that BNB’s core goal in the years to come would be to ensure a solid foundation, namely a healthy public finance structure over the long run. In its first measure, it would be looking to consolidate and diminish the volume of public finances.
Given that the banking market was well diversified, the levers to maintain its healthy condition over the long term was the retention of the monetary council and continuing to peg of the Bulgarian currency to the euro; to speed-up structural reforms; securitisation of governmental bonds and treasury notes and liberalisation of the economy alongside ensuring a stable regulatory framework.
Furthermore, BNB would be looking to sustain the inflow of foreign direct investment at current levels and looking to reduce soaring consumer spending to keep inflation in check. This would help avert devaluation as soaring inflation would be detrimental both to the banks and the population and lead to a credit crunch.
The statements of Hampartzoumian and Manchev spell good news for the banking segment. Though heading for a change, it will be a managed and expected change, the remainder of panellists at the annual conference, organised by Kapital and Handelsblatt, agreed. While the banking market is prepared to weather impending, and necessary, changes, the central bank stands ready to safeguard them at the top regulatory level.
