LENDING to small and medium-sized enterprises (SME) in Bulgaria has turned into the main catalyst of the process of banking consolidation in Bulgaria.

This is according to a report published on October 11 by Raiffeisen Research, the analytical division of Austria’s Raiffeisen Zentralbank (RZB). The document covers the region of Central and Eastern Europe (CEE).

The report said that because of the need to extend loans to a constantly increasing number of SME borrowers, the size of any bank has an increasing importance for its efficiency and profitability. RZB analysts said that in the process of consolidation, managers were ready to pay a price even exceeding that of an acquired bank’s net assets. 

An additional stimulus for mergers and acquisitions in the banking sector comes from the decreasing difference between interest rates on deposits and loans. This downsizing margin is shrinking the profit of each bank and worsening their profitability.

Another factor towards consolidation is the higher capital requirements that will be enforced in Bulgaria in 2007 in line with the country’s accession to the European Union.

Mortgage loans continue to be the most dynamically developing component of banks’ portfolios, RZB said. However, in spite of the significant growth of this type of loans in Bulgaria, the country still seriously lags behind the new EU members in the share of mortgage credits of GDP. At the end of 2004, they made up only 2.6 per cent of GDP. Croatia has the highest share of 10.3 per cent, followed by Hungary (9.4 per cent), and the Czech Republic (six per cent). The average level for the countries in the euro zone is 34 per cent of GDP. 

Retail credits in Bulgaria were 10 per cent of GDP in 2004, and their growth was lower than that registered in 2003. At the same time, retail loans’ share of GDP per capita was less than 10 per cent, while in the euro zone the average level was 50 per cent.

The RZB analysis said that the development of the banking sector in the region had outpaced economic growth. The analysts said that the CEE market was not yet saturated enough with financial products and services, and this is the direction in which it had potential for growth.

Meanwhile, because the sharp increase in credit supply, the banks in South-Eastern Europe have achieved higher growth than those in Central Europe. The same trend has been observed in deposits.

RZB said that this could be because of higher interest rates, as well as in the lack of sufficient alternatives to saving schemes. In Central Europe, for example, deposit growth has been delayed because of the large presence of mutual funds offering higher returns. In Bulgaria, the assets managed by such funds are less than one per cent of GDP.