Despite their name, banking stress tests are not meant to be too stressful. It's as simple as that - the regulator will never risk banking stability just to make a point or solve a problem or two in the sector. That's why analysts expected the approach of the Bulgarian National Bank (BNB) to be largely in the same careful vein when it prepared to unveil the results of the stress test of the country's banks in August.
The check-up showed an overall robust banking sector, with capital adequacy ratios well above the EU average and above domestic regulatory thresholds. The examination revealed a small need for additional provisions - 665 mln levs (340 mln euro) compared to 88 bln levs (45 bln euro) assets, concentrated mainly in two domestically-owned lenders - First Investment Bank and Investbank. Both of them were found to stay just above the absolute minimum of Common Equity Tier 1 ratio of 4.5% (a key measure of bank's soundness expressed as its top quality capital divided by its risky assets). In the worst-case scenario of the stress tests, the capital shortfall was downplayed as purely hypothetical and due to highly unlikely assumptions. So, the BNB recommended relatively mild regulatory measures to stem deficiencies at the two banks.
Did the examiner fail?
The whole exercise left the impression that the BNB was treading a thin line. The regulator was loaded with high expectations for change after it vowed to restore its reputation tarnished by the 2014 collapse of the fourth largest lender, Corporate Commercial Bank (CCB), made possible by inadequate supervision. Widespread suspicions among the general public that related lending was rampant in other domestically owned banks and the arrival of a new BNB governor (former deputy finance minister Dimitar Radev came back to Bulgaria after more than a decade at the IMF) raised expectations that the asset quality review (AQR) and stress test will be an efficient tool to expose the system's long accumulated problems.
The BNB was in a good position to raise its supervisory profile which had been strongly criticized as inadequate both by the Bulgarian parliament and foreign observers such as the European Commission and the IMF in the wake of the CCB collapse. Still, the declared outcome of the stress test exceeded even the most optimistic expectations, leaving the impression that the inspection had failed to reveal the whole truth.
With such optimistic results it is hard for the central bank to instill confidence that it has done its job thoroughly and fairly and nothing was left hidden in the closet once again. What makes it even harder is the level of transparency of the stress test results, which in the end was considerably lower than the European Central Bank standards and didn't live up to the announcements at the start. The BNB disclosed the bare minimum of numbers which was hardly enough to compare performance among banks and discover where potential future problems lie.
In the end, the big losers are the bank clients and generally the taxpayers, who might be exposed again to still unidentified risks stemming from the banking sector.
Sailing at two speeds
Having discovered some big shortcomings, the AQR generally painted a fair picture of the banks and confirmed the two-speed structure of the sector. On the one hand, are the local subsidiaries of big EU banking groups which generally have a sound management as they import some good practices from their headquarters. Overall, they have a higher share of non-performing loans but that is due to their more prudent accounting and disclosure standards. As a result, BNB expectedly found next to no need for them to set aside more provisions.
On the other hand are the domestically owned banks controlled by business people who also have interests in various other sectors and are tempted to extend credits to fund their endeavors. This related lending requires circumventing banking regulations and creates huge conflicts of interest, particularly in the absence of good oversight by the regulator. And predictably this is where the problems were found.
The general feeling among analysts is that the check-up revealed the direction if not the full scope of the problems in the banking sector. The CET1 ratio at the system level stood at 18.9% post AQR - only mildly below the 20% level declared in the first half of 2016 but way above the minimum of 10% required by the BNB. And also way above EU levels. Bulgarian banks are traditionally urged by the regulator to maintain higher capital and liquidity levels partly because of the currency board system functioning in the country which limits the ability of the central bank to act as lender of last resort.
Even if the doubts that the stress test results were somewhat deliberately toned down prove true, it does not mean straight away that the BNB is again turning a blind eye to persisting bad practices. Bulgaria's banking sector is not particularly sophisticated and in a relatively small market it is easy to trace most of what is going on. Leaked reports from supervisory inspections in the failed CCB and in the worst AQR performer FIBank showed that deficiencies did not go unnoticed by the experts in the regulator. So probably what the BNB is trying to achieve is to clean up the problems quietly rather than bring them to media and public attention. Whether this is true or not will be seen in the follow-up actions of the regulator which is in the process of beefing up its supervision department and trying to shake off the public mistrust it got with the CCB failure. The problem with this strategy is that even if applied rigorously, it will take time to implement which means that BNB has missed an opportunity to act tough and restore its image of a vigilant guardian by taking a more hard-line approach.
The BNB and Bulgaria's financial sector also face some more scrutiny from the outside. Currently the IMF and the World Bank are conducting a complete Financial Sector Assessment Program (FSAP) in the country which, when finished, will undoubtedly provide an additional look at the state of the banking sector after the AQR.
The first part of the FSAP conducted last year looked only at banking supervision. It was highly critical and was the basis for reform at the BNB launched by the new team of governors led by Mr Radev. Other institutions that may want to look deeper into the whole AQR/stress test process include the European Commission and the ECB if Bulgaria indeed steps up its plans to join the European banking union and take action to enter ERM II and the Eurozone.
Fourth largest bank in Bulgaria is up for saleNBG could receive up to 500 mln euro for UBB
The fourth largest lender in Bulgaria, United Bulgarian Bank (UBB), is in a sale procedure. The bank has about 7 bln levs (3.5 bln euro) assets, or 8% market share. It is 99.9% owned by the National Bank of Greece, which is under pressure to sell its non-strategic units as it relies on ECB liquidity support.
The sale is in its initial phase as it is yet to attract indicative offers. According to unofficial information, at least 7 candidates have expressed interest. Among them are Belgian KBC (which already owns the smaller CIBank in Bulgaria) and Hungarian OTP (which is the owner of Bulgaria's second biggest lender DSK). Interest was expressed also by the French Credit Mutuel. The other candidates are financial investors or funds with shorter term interest such as Apollo, Warburg Pincus, JC Flowers.
The Bulgarian National Bank is likely to give its regulatory nod to groups that already control banks in the country as it has spoken frequently about the need to consolidate the sector. UBB passed the stress test well and with 1.2 bln leva
capital it is among the best capitalized banks in the country. Analysts expect a deal at 60-75 percent of its capital, or
400-500 mln euro for NBG's shares in bank. But NBG may choose to distribute profits and reserves as dividend before
the sale which would lower the price.
Victoria Commerci al Bank may finally find new ownerEight bidders expressed interest in the purchase of the bank
Eight bidders expressed interest in the purchase of Victoria Commercial Bank (VCB) until the deadline in the middle of
September. The lender is a wholly owned subsidiary of Corporate Commercial Bank which went bankrupt in 2014. The
willing buyers are Investbank, Bulgarian American Credit Bank, D Commerce Bank, Transact Europe Holding, the Bulgarian Telecommunications Company, Egyptian engineering group Zaghloul Holding, and two consortia comprising insurance company Lev Ins and Kerbler Holding GmbH, and Hanson Holdings Lux s.a.r.l. and Eurofinance, respectively.
The sale of VCB was launched in 2015 but the expessed interest was low. In March 2016, the procedure was relaunched with the help of Afa consultancy which advised the seller to increase the capital of VCB. As of the end of June, the bank's capital was 62.5 mln euro and total assets stood at 70.3 mln euro. The buyer should repay an outstanding debt of 44.9 mln euro to the parent bank. The current phase of the process is submission of non-binding
offers, to be followed by the final stage with binding offers.
Nikolay Stoyanov, editor with Capital