With the announcement last week of the first acquisition deal since the end of Bulgaria's bank privatisation programme, many are now wondering if this will be a curtain raiser on the much-awaited consolidation process within the country's banking sector. However, sceptics say the takeover of Bulgaria's Hebrosbank by Bank Austria Creditanstalt is a one-off and true consolidation is still a couple of years away.
Analysts agree that Bulgaria is over-banked and market concentration is widely desired. Although the latest deal will eventually result in a merger between Hebrosbank and the Austrian bank's local subsidiary, HVB Bank Biochim, with 34 banks left in the sector there is still plenty of room for further consolidation. The consensus among banking analysts interviewed by the OBG recently is that in a country of around 8m people, the optimal number of banks for Bulgaria should be around 10 - with six or eight of them dominating the market, alongside a couple of local subsidiaries of global banks, such as Citibank and ING.
"The consolidation of the Bulgarian banking sector is inevitable given the large number of banks in a small country," Krassimir Tahchiev, senior analyst at First Financial Brokerage House (FFBH), told the OBG this week. "The start of the consolidation in the sector has been expected for at least two years, but the ongoing privatisation has deterred the process until recently."
According to Tahchiev, there are two groups of banks still up for grabs. While the first consists of small banks owned by local players and is easy to identify, the second could include any medium or large bank which is lagging behind in growth.
For now, however, it is still a time of growth for everyone and too early to say which outfits will be the likely losers in the race for market share. According to central bank data, the banking system's assets expanded by 30.8% in the first half of 2004, reaching 10.12bn euros, accounting for 53% of GDP. Although there has been a gradual decrease in the return-on-assets ratio - due to greater competition - interest rate spreads are quite wide. This allows even smaller banks to remain profitable and staves off the pressure to consolidate.
Small banks are therefore biding their time hoping to raise significantly the value of their equity capital before the interest spreads narrow to a point when size and economies of scale will matter more than they do now.
However, the owners of Hebrosbank, SWC BV (part of the financial group iRegent, based on the Cayman Islands), seem to have decided to buck this trend. They have reportedly sold their stake in the bank for 115m euros, representing a significant increase on the amount iRegent invested back in 2000, when the bank was privatised for around 12m euros.
When merged with HVB Bank Biochim, this will create the fourth largest banking institution in the country, accounting for 10% of Bulgaria's total banking assets. The new company will have around 600,000 clients and will have assets of around 1bn euros. According to recent reports, Bank Austria Creditanstalt has great ambitions for the new entity, as it wants to become the leading banking group in Central and Eastern Europe.
Meanwhile, the concentration of assets held by the five largest banks is expected to exceed 60%, with 80% of total foreign assets held by foreign investors. Currently, all three of the largest banks in Bulgaria belong to international firms and foreign financial groups, such as UniCredito Italiano (Bulbank), the National Bank of Greece (United Bulgarian Bank) and the Hungarian OTP Bank (DSK Bank).
The foreign presence in the market, everyone agrees, helped to increase confidence in the banking sector following a spectacular banking crisis in 1996-97. Since then, the privatisation of DSK Bank, back in 2003, was the most important recent milestone in the evolution of the Bulgarian banking system. Once the privatisation was truly over, all the banks decided it was time to race for market share.
As in other transitional countries such as Romanian and Croatia, this race has resulted in a major credit boom. This in turn has recently sparked concerns among the regulators and the International Monetary Fund (IMF). A recently published survey, conducted by Bank Austria Creditanstalt, showed that the credit growth rate in Bulgaria over the past three years has been the highest among the countries of Central and Eastern Europe.
Meanwhile, some analysts argue that the dominance of foreign banks has also had its drawbacks. Chief amongst these, the argument runs, is that it has to some extent helped to delay the onset of full consolidation. By not having to compete aggressively for deposits, foreign banks can slow down the process of narrowing lending-deposits spreads. While the remaining few locally owned banks have had to increase interest rates on deposits to attract fresh liquidity, foreign-owned banks have enjoyed access to external credit lines, provided by their parent companies, and "cheap money" available abroad.
Nevertheless, analysts think that greater foreign investor participation in Bulgarian businesses and improving country risk ratings will force greater competition among the financial institutions eventually. Banks will ultimately have to face narrowing interest rate spreads and will have to merge to optimise their costs and efficiency.
An additional pressure to consolidate is expected to arise from the new Basel II Standards, which have to be implemented by the end of 2006. The minimum capital requirements of Basel II will oblige banks to put into practice internal credit ratings, which is going to be rather expensive and something only a few can afford.
Meanwhile, there are no obvious acquisition deals in the pipeline, with most banks growing organically, benefiting from a spectacular increase in consumer lending and overall growth in the economy. Fully privatised, well-capitalised and run by experienced foreign parent groups, they are poised to make significant profit gains. Consolidation will have to wait for now.