DSK, UniCredit Bulbank Plan to Distribute Over 1 Billion Levs in Dividends

Half a billion x2

DSK Bank plans to distribute the largest dividend not only in its history but also in the history of the Bulgarian financial sector. The amount is not specified in the invitation for the general meeting scheduled on March 29, but the bank CEO, Tamas Hak-Kovach, told Capital Weekly that the management would propose to pay shareholders 558 million levs, or 50% of the profit reported for 2023. The prposal has not yet received an auditor's confirmation but the amount is not expected to change.

"We will use the opportunity given by the record profit to further strengthen our capital base to simultaneously support credit growth and especially the country's and our clients' transition to decarbonization, and to create buffers for new risks and future shocks. We will also be able to accelerate our investments in our IT modernization project, which will lead to the replacement of all major systems by 2028," explained Hak-Kovach.

UniCredit Bulbank's invitation for its general meeting on April 11 lists the exact distribution amount proposed by the management board - 524.35 million levs. This dividend payout is also a record for the bank, only surpassed by the amount planned by DSK. The planned dividend equals 65% of the profit for 2023, with the remaining 282.3 million levs planned to remain undistributed.

Both banks have many minority shareholders who can receive their proportional share of the dividend. For DSK, this means 4.20 levs per share, and for UniCredit Bulbank - 1.83 levs per share. However, in both cases, the share of minority shareholders is under 1%, with the vast majority of the amount going to the parent banks - Hungary's OTP and Italy's UniCredit, respectively.

DSK and UniCredit held second and third place by assets among banks in Bulgaria as at the end of 2023, but the distances between the top three are quite small. Last year, they reported the largest profits, which collectively accounted for over half of the earnings of the entire banking sector. They are also the two lenders with the most sustainable dividend policy, having paid out a total of over 3.8 billion levs over the last ten years, and with the upcoming decisions, the amount could swell to over 4.9 billion levs.

The opposite pole

The asset leader, United Bulgarian Bank (UBB), appears to be moving in the opposite direction. At the beginning of 2023, its shareholders approved a proposal to increase capital by just over 309 million levs (158 million euro). The rationale was that "with the planning of UBB's activities during 2024-2026, a need to increase capital has been identified to comply with all regulatory requirements amid expected growth in lending and anticipated changes in the regulatory framework." Minority shareholders were given a one-month period to participate by contributing an amount proportionate to their stakes, or else their shares would be automatically subscribed by the majority owner, Belgium's KBC Group.

UBB has not yet convened a general meeting to distribute the profit reported for 2023, which according to BNB statistics amounts to 471.8 million levs. According to unofficial information from a Capital Weekly source, however, the plan is for the profit to be fully capitalized to ensure business growth. This can also be interpreted as a sign of ambitions for more aggressive expansion.

Among the smaller banks with a tradition of distributing dividends, only Allianz Bank has convened a general meeting, proposing to capitalize its entire profit. Last year, other lenders that distributed dividend were ProCredit Bank, Commerce Bank D, and BACB.

Under tightening conditions

For each bank, the need for capital (and accordingly, the retention of profits) depends on multiple factors. There are regulatory requirements, a large part of which are unified but some are individually calibrated for each bank according to its business model and risk management. Overall, the trend towards tightening and increasing these requirements has continued in recent years, and banks are required to maintain higher levels of capital adequacy.

The second important component is the quality of assets and inherited problems. Banks that need to provision and clean up their balances find it more difficult to afford to distribute dividends and usually, even if they want to, the BNB imposes restrictions on them. This, along with the lack of support from the headquarters when needed, is why, since the global crisis locally-owned banks do not distribute their profits as a rule, with few exceptions from the last two years.

In addition, the state of the economy and expectations for its development also have an impact. The logic is that a potential slowdown or recession carries risks of defaults and a rise in non-performing loans which could lead to future losses. Therefore, banks are expected to set aside provisions for such hypothetical scenarios even for their serviced loans.

Finally, a key consideration is how much aggressive the plans for lending in the coming years are, as most future risk exposures lead to a need for more capital. With interest rates still low and lending booming, especially in housing loans, the sector apparently does not harbor expectations for cooling-off. And with intensive competition ongoing, those who wish to stay in the race must also secure capital.

With this combination of factors, far more than half of the sector's profit for 2023 will be reinvested. At the same time, there is one factor that could significantly ease the sector's capital needs. Currently, banks in Bulgaria allocate capital for their investments in government securities denominated in euro, as they are considered foreign currency investments. Once Bulgaria joins the eurozone, the same instruments will be considered denominated in the national currency and will have a zero risk weight, which should lead to the release of hundreds of millions of capital currently blocked in the banking system.