Banks, insurance, pension funds

Banks
Banks will assume a more cautious approach to lending activity in 2008, especially in regard to retail loans, Deputy Governor of Bulgarian National Bank (BNB) Roumen Simeonov told the sixth Banks, Investments, Money conference.

Overviews of the different financial sectors and the trends in banking, insurance and pension funds were discussed at the international exhibition, which took place on February 27 to 29 in Plovdiv.

According to Simeonov, banks were becoming more conscious of households looking to borrow more than they could afford. The adjustment was more of a forward-looking change to policy than a problem that banks were facing and needed to eliminate now. There was no concern about the share of bad loans both in regard to corporate and retail loans at the moment, Simeonov said. The shift in the market, from consumer to corporate loans, that started last year was set to continue for a number of years, he said.

It was unlikely that the new risk awareness of banks would translate into fewer new loans this year, either in terms of value or number. Therefore, according to Simeonov, credit growth would remain strong but not at the same levels as in 2007.

Last year, the cumulative loan portfolio of banks rose by 63.7 per cent, with the bulk of the growth coming from corporate loans, which grew at 71 per cent. Household loans during the same period grew by 52 per cent. Corporate loans accounted for about 62 per cent of all bank loans at the end of 2007, consumer loans for nearly 25 per cent and mortgages for 13 per cent. The total cumulative loan portfolio was equal to 70 per cent of GDP.

Banks in Bulgaria had seen limited impact from the international financial crisis and were unlikely to find it difficult to procure financing for growth, Simeonov said. However, the cost of financing was expected to grow as a result of the crisis and this would cause price adjustments to banks.

Currently, 50 per cent of the banks’ financing came from deposits and the remainder from their parent companies, he said.

To ensure banks remained on course for stability, BNB will retain its conservative policy regarding the control and oversight of banks. Specifically, the central bank will raise quality requirements, as well as the requirements to maintain additional funds and liquidity in case of unexpected events. Banks will also be urged to notify customers about any risks they plan to undertake.

Insurance
The insurance discussion focused on growth. The share of the four largest insurers in Bulgaria decreased over the year, demonstrating that competition on the Bulgarian insurance market was growing, Zhivka Slavkova, head of Insurance Oversight department at the Financial Supervision Commission (FSC) told the expo.

The market was also seeing double-digit growth. The sector’s gross premiums last year were up 21 per cent in absolute terms to 1.498 billion leva. After adjustments for inflation, growth in revenues was 10.8 per cent.

General insurance was the largest part of the market, with 1.264 billion leva in premiums and a year-on-year increase of 19.1 per cent. The life insurance segment reported an increase of 25.7 per cent on the year to 234.1 million leva.

General insurers paid out 454.4 million leva in indemnities, an increase of 25 per cent from 2006. Indemnities on life insurance rose by 13.6 per cent on the year to 77.3 million leva.

Last year, the share of the top four general insurers in Bulgaria declined to 52.22 per cent, and that of the top life insurers was down to 67 per cent.

Local insurance penetration, the ratio of gross collected premiums to the gross domestic product, was 2.73 per cent in 2007, an increase from 2.54 per cent the year before. Insurance density, which measures the amount of total annual premium payments divided by the population, was down from 162.38 in 2006 to 100.9 in 2007.

Pension funds
Pension funds were also expected to see fast growth, especially if the Government made the relevant legal changes, said Valentina Dinkova, director of the FSC social insurance supervision division. By 2010, the net assets of pension funds are set to increase to six billion leva and proceeds from supplementary insurance instalments to 890 million leva.

This year, supplementary pension contributions are forecast to reach 675 million leva and 780 million leva in 2009.

Dinkova called for a series of legal amendments to allow pension funds to expand and diversify the scope of their activities, including a brand new bill, which could allow pension funds to buy into bonds of large infrastructure projects. The bill, to define the procedures for the issue of bonds, could allow pension funds to buy into the securities either through the stock exchange or through a major financial institution, acting as the project’s main investor.

According to Government estimates, Bulgaria will have spent more than nine billion leva on large infrastructure projects by the end of 2015. The transport sector is expected to need more than 3.5 billion leva, environment 307 million leva and energy 5.2 billion leva.

The idea for the bill can only be developed if there is a broad discussion between the ministries, municipalities, FSC, BNB, the Bulgarian Association for Supplementary Pension Insurance Companies and the Association of Banks in Bulgaria on the subject, Dinkova said. It also has to run alongside legal amendments to the State Property Act, the Concessions Act and the Black Sea Coastal Area Act.

Other changes that might drive the operations of pension funds, are the passage of the bill on the funding of funds and the law on pension funds with a view to raising the requirements of pension licence issue.

Pension funds are also awaiting regulatory changes that could allow them invest in initial public offerings and the liberalisation of some investment limitations such as the increase of the capital in corporate bond investments.


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