Petia Dimitrova: We Follow the Market for Potential Consolidations and Are Ready to Broaden Our Presence

An interview with Petia Dimitrova, CEO and Chairperson of the Management Board of Postbank for 24 Hours

 

 

 

The latest forecasts of the Ministry of Finance and the Bulgarian National Bank show difficult times for the economy – inflation, stagnation in the economy’s growth and withholding from investments. How is a big bank like yours preparing to face these challenges?

 

We expect a significant decline in the economic growth compared to the initial expectations. The Ministry of Finance and Bulgarian National Bank’s forecast is in the range of 2.1 to 2.6% growth in the Bulgarian economy. Inflation is a phenomenon we had forgotten over recent years because, allow me to remind you, we have not experienced double-digit levels of inflation for more than 10 years. Over recent years, average wages grew at double-digit rates and that increased the real disposable income of households. However, now the opposite is occurring – inflation is growing faster than income and limits consumption.

The tight labor market also helps mitigate the shock of the high inflation. Unemployment is at an almost record low level, even lower than the pre-pandemic times, which makes employers strive to keep high-quality employees, including through increasing wages.

Data for the first two months of the year show that there is no worsening in loan portfolios – on the contrary, demand is very high not only for mortgage, but also for corporate and consumer loans. It is very important for us as a bank for the economy to continue growing, even if at slower rates, and I am happy to see this is the case in Bulgaria. We closely monitor our customers’ behavior and are ready to react if we notice them experiencing temporary difficulties with servicing their loans, because we have always been their loyal and trusted partner.

It is possible for companies to postpone their investment plans, but we are counting on the state as the investment budget is significantly higher compared to previous years. Furthermore, we rely on the approved Recovery and Resilience Plan to boost investment in the right direction.

 

Is the era of low interest rates finally over? Analysts believe that ECB and central banks will make the long-expected decisions as part of the battle against inflation. When do you expect a gradual increase and what will the steps be?

 

Central banks in several countries are beginning to realize that it is time to go back to their main goal, notably cooling inflation and keeping prices stable. The main tool against inflation is increasing the base rate – the interest rate at which central banks provide money to commercial banks. The speed and degree of the specific measures, however, depend on the political environment and the expectations whether the inflation will be a short-term or a chronic phenomenon.

The Federal Reserve has always reacted in a more dynamic matter. After raising the base rate by 0.25% in the beginning of the year, the Fed announced a second increase in the beginning of May of 0.5%, the most aggressive increase since 2000, expecting a few more increases by the end of the year reaching a level of about 2.5%.

Although the ECB does not like sharp changes, it will also be obliged to undertake measures in increasing the base rate by at least 0.25% for a start, with some analysts expecting this to happen as soon as July. So, yes, the era of low interest rates is over.

 

Is the danger of a rise in non-performing loans due to the expectations of bankruptcies and difficulties both for companies and for households real? Will the rules for providing loans change in order to preserve stability?

 

We have been closely monitoring the behavior of our portfolio for some time now, including due to the moratorium on loans. It was lifted 4 months ago, but the quality of our loan portfolio remains good. I can even happily announce that the percentage of bad loans has even been decreasing over recent months and has now reached record low levels.

That is not by chance of course – we have very strict criteria for lending, we carefully assess the creditworthiness of each customer, as per the European regulations and the best practices of our international Eurobank group.

Loans are granted to physical persons with a good and stable income, good collateral (for mortgage loans) and assessment of the worthiness of each customer. For companies, we do an analysis of their financial condition, the environment, market perspectives and realism of their investment and business plans.

We see that banks have started implementing a more conservative policy regarding lending. Depending on the market situation and the expected decline in economic growth, the criteria for lending will become more stringent. This does not only mean higher interest rates, but also requirements for higher down payment, as well as for a lower debt to income ratio.

The BNB started requiring banks strengthen their capital buffers. The countercyclical capital buffer will be increased twice by 0.5% each in October 2022 and January 2023, which is a clear sign that banks should prepare for a potential new crisis.

 

If you were to try to look at this situation through the eyes of your customers, what advice would you give to those who already have mortgages? And to those who are planning to take out such loans?

 

To those who have already taken out loans, I recommend they continue servicing them and, should they notice they are experiencing difficulties, turn to the financing bank as early as possible. This is their way  to find the best solution together. For the rest, I will repeat that we are not expecting an increase in interest rates this year and customers will continue paying the same mortgage installments they are currently paying.

Regarding those customers who would like to yet take out a mortgage loan, we must divide the market into two – those looking to buy a new home for themselves and those looking to invest.  For the first buyers, it would be best to make a clear assessment of the price they are buying at, the share of their own down payment, their income and their ability to repay a long-term loan. If they have any doubts or uncertainty, I would invite them to visit a branch of ours where our experts can advise them and help them make the best decision.

Regarding the second group, I would recommend they carefully think it through, especially if they are planning on investing only a small share of their own funds and hoping to make big profits from an increase in prices in the future.

After all, you’ve heard the joke that the answer to the question: “When is the best time to buy property?” is “Yesterday.”

 

Why did higher fees have to be implemented for larger sums in deposits? Will this trend be reversed?

 

The fees for larger sums in deposits are a result of the monetary policy of the ECB so far. ECB and BNB have negative interest rates for banks’ excess reserves with them.

The reverse of the trend depends on the monetary policy of central banks, notably the ECB. When the interest cycle turns and the interest rates go up, then we would expect for central banks to stop charging us and, respectively, for us to reflect that regarding our customers.

 

Fees for classical banking are also increasing. Is this effort at teaching your customers to use online banking successful? And does this mean that there is a secret trend to online services becoming cheaper?

 

Our customers have already changed their long-term behavior and banking habits, expectedly preferring the convenience and advantages of digital forms of banking, with the lower fees just part of their advantages. At our bank, we see a significant growth in digital financial transactions compared to those in a physical branch over the past year. The increase of some fees in the conditions of record low interest rates also affects the expenses we have to make in order to cover the increasing legislative regulations and norms. This is why we provide our customers the opportunity to pay lower banking fees by using our services online. This type of payments is not only cheaper than cash payments, but is also much faster – another advantage our customers highly appreciate.

 

Money is flowing out of banks for purchasing property with an investment goal – thus lowering their excess liquidity, but also inflating a real estate bubble. If it bursts, that will affect banks too. How do you mitigate this risk?

 

“Flowing out” is a very harsh way to put it, as money is simply changing the owner – going from one account to another, yet still remaining in the banking system. Let us not forget that we have a cash payment act and practically all real estate purchases are carried out via banks.

A real estate bubble could occur if people are buying property above their abilities and/or with a strongly speculative aim. I personally believe this is not the case here. Over the past 15 years, the average wage in the country has tripled. Compare that to the growth in real estate and you will see that it is difficult to talk of a bubble. Add to this equation the drop in loan interest rates over this period and we will clearly see this has actually made real estate loans more accessible to more people.

Regarding the second part of your question, I would once again like to point out that we carefully assess the capabilities of each borrower and always insist on a reasonable down payment.

 

Are the alternative opportunities banks offer instead of traditional deposits enjoying any interest on behalf of customers? Could you briefly describe the advantages?

 

The interest towards new investment solutions on the market is increasingly growing. This is a precondition and impulse for innovative companies like our bank to offer more new and attractive opportunities to our customers. Consumer demand for diverse savings products is increasing and customers more frequently turn to alternative solutions for safekeeping their personal funds.

For over 13 years, we have been offering mutual funds of the Luxemburg-based Eurobank Fund Management Company, part of our international group.

These funds have many advantages not only in terms of profitability opportunity, but also transparency, flexibility, professional management, as well as the option to invest very small sums on global markets. Our customers increasingly consider mutual funds as an interesting product to diversify savings and achieve long-term returns. In the future we expect serios interest towards life-cycle funds. These mutual funds are very popular in the States and are gaining popularity in Europe. They are related to long-term planning and saving funds for specific future life needs and are an appropriate choice for all investors.

In Postbank’s rich portfolio, there is a broad spectrum of personalized innovative savings’ solutions, best catering to the financial needs of customers, providing them an even better customer experience. In the past year, we offered five types of structured deposit, linked to the performance of different indices. Let me give you an example of why these products are so attractive: in the end of last year the four-year emission of the structured INDEX TECH deposit wrapped up, bringing the investors a bonus interest of 14%.

The benefits of investing in a structured deposit lie in it, uniting the security of a bank deposit with the opportunity to receive profitability, linked to the performance of a given market indicator. The structured deposit is a tool with the potential to receive a better interest on the maturation date compared to standard term deposits, without risking the amount invested.

Let me give an example: recently, Postbank ended the cumulative period of the innovative Index Health Care structured deposit. This was a long-term deposit in euro for 5 years, offering an option for interest, linked to the performance of the investment STOXX Europe 600 Health Care component. This is a price index, linked to the performance of key European healthcare companies’ shares. The customer does not want to directly invest in the companies forming it, but for the potential profitability to be based on the performance of the index over the period between the start and end date for determining its value. Should the reference index perform well over the period of the deposit, the profitability that can be made is up to 120% of the positive percentage flux of the index. Should the index perform in a negative direction, the customer receives no interest, but keeps 100% of their deposit principle.

The product provided for an opportunity for pre-term termination with no additional expenses during the initial cumulative period and a forfeit of 6% of the deposited amount within the five-year main period of the deposit.

 

What innovations are you planning in digital services? Will they be accessible to most customers?

 

Digital is the new normal and not only for our younger customers, which is visible, for example, from the more than 150% growth in servicing through our innovative digital zones.

In just the past year, we at Postbank implemented several innovations for an even better customer experience – with new functionalities of our digital ONE Wallet, we first launched Smart POS by Postbank that turns the smartphone of the seller in the local shop into a POS terminal.

We issue an electronic receipt when carrying out a banking operation or transaction in our digital zones, not only making it more convenient for customers, but also avoiding using paper, thus helping the nature. In a few months we will offer something unique on the market – video consultations through the digital service zones, so that our customers can receive even faster servicing through video chatting with an expert.

You can also expect the new version of our digital assistant EVA, who now has AI and through machine learning will answer customers even faster and more accurately 24/7.

 

Instant payments are already an option, a fact even for your bank. Are there any new European regulations making payments easier soon to be introduced?

 

Postbank was the first certified bank in Bulgaria, offering its customers the modern service of instant payments last year and our customers received the opportunity to make transactions from one account to another in 10 seconds. I personally, as CEO, am overjoyed and would like to thank our entire wonderful team for yet another innovation we introduced on the market, one that helped payments in Bulgaria be easier, faster and more intuitive and save the most valuable asset of customers – their time.

 

The security of bank services is an expensive task for banks. How do you protect your customers money?

 

We invest a lot in systems for physical and, above all, IT security. In an online environment, we also actively teach our customers how to protect themselves from phishing attacks that lure them into providing sensitive personal information to malicious individuals.

Our customers confirm payment transaction in a secure and convenient manner through the m-Token Postbank mobile app that carries out two-factor user identification, so there is virtually no way for a customer to become a victim of fraud, unless they share their own data with malicious persons. Therefore, I would like to once again say not only to our customers, but to all who use bank services: never provide data such as PIN, password or username via mail – the bank will never ask for them!

 

Do you expect a more intense competition between banks on a relatively small market as ours? How do you win such a battle?

 

Competition has always been very high on our market. Let us not forget that there was a period with more than thirty banks on the small Bulgarian market. Some of them didn’t stand the competition. Over the past five years only, Postbank successfully took over two other banks in a record-breaking period and as a result we have very valuable experience in mergers and acquisitions. Because they must not be led only by the will to fight or dominate, as you ask – consolidation on the market should be led above all for the benefit of our current and future customers who will receive even faster, more advantageous, convenient and innovative services from their own bigger bank.

 

Are you planning on increasing your market share through acquisitions? How do you make these decisions and, if they are already made, could you share some details about them?

 

Yes, we are planning to increase our market share through new acquisition. The strategy of Postbank shareholders – Canadian and American funds – is to broaden the presence on key markets like ours – a fact they have emphasized in several statements this year. We are closely monitoring what is happening on the market and participate in any opportunity that arises.

Consolidation is a process that will continue in the coming years too. Regulators are constantly increasing capital requirements to banks through increasing capital buffers, as well as through introducing additional requirements for eligible liabilities – generally speaking, these are loans positioned between deposits and capital. It will be very difficult for many institutions to find this additional capital, especially those that do not manage to generate high enough profits. They will be obliged to either sharply limit their activity or will have to be sold to more efficient banks like Postbank, for example.