Bulgaria is Becoming Wealthier – Although It Started from Scratch in 1997
Mr. Shоumarov, 2023 brought Postbank almost a 50% increase in profit and a 12% increase in assets. What are your expectations for 2024?
Last year, banks’ results were supported by the economic environment in the country, which was surprising given everything happening in the world. The interest rate environment, i.e., the ECB’s monetary policy, also gives them an edge. For Postbank in particular, last year was a record year, as was each of the previous ten years. 2024 will probably also be a successful one – the 12th in a row – unless some cataclysm occurs by the end of the year. Of course, profit cannot increase by 50% every year. But it will certainly be impressive.
The year started and continues very well. The market is favorable for both individual lending and the reviving corporate segment. And regarding households’s savings, we have yet another record year for Bulgaria.
Bulgaria has obviously become wealthier in recent years, despite being labeled as “the poorest country in the EU”…
Obviously. “The poorest” because we compare ourselves only to countries in the European Union. We all forget that there are countries in Europe that are not in the EU. If we compare ourselves with them, including Turkey, we have a better economy and a wealthier population. People in major Bulgarian cities now have a living standard at a mid-European level. Yes, there are many poor people in Bulgaria, but that is the case everywhere. Even in Western Europe and the United States, about 20-30 percent of people are poor or at risk of poverty.
The fact is that Bulgaria as a country is becoming wealthier, and the population is living better. But it is also true that we remain at the bottom in the EU. In the West, economic opportunities are better, and past accumulations allow people to live better. But let’s not forget that In 1997 we started from scratch, with few exceptions. But now we have forgotten that and take an average salary of over 3000 leva in Sofia for granted. This is not bad, as it means people are ambitious to work and earn more. We have shed the mentality of “well, that’s just how it is in Bulgaria, and it can’t change.”
Returning to bank profits, what factors are behind them? In the past decade, to compensate for low interest rates, banks massively increased their fees. What can we expect in terms of fees in the future?
Fees certainly cannot grow further. And it is debatable how high they are. Yes, banks restructured service fees and shifted the burden to mostly used services at the expense of more niche ones. Otherwise, common fees are not as high as some people perceive them to be. We always focus on things like the ATM withdrawal fee or branch withdrawal fee. The ATM fee is 1.30 – 1.50 leva per transaction…
Still significantly less than in Greece, for example…
In Bulgaria, banks did something different: they created packages for individuals and offer them very successfully. These packages include several transfers, utility payments, withdrawals, and so on. But statistically speaking, banks do not have more than 5 to 8 percent annual increase in fee revenue – and this increase mainly comes from the growing number of transactions performed, not from the price factor. And let’s not forget that banks provide also free payment methods. With a debit card, you can now pay almost everywhere in Bulgaria without cash – and there is no fee for the customer. If the ATM fee seems high, pay by card. People, by the way, do not realize the costs associated with an ATM: rent, security, cash-in-transit service for loading, separate software maintenance and licenses, physical maintenance, and whatnot. Naturally, these costs are passed on to users. For example, in countries like Sweden, ATMs are already disappearing, and it has come to the paradox where banks are forced to maintain a certain number of ATMs regardless of their preferences.
The ECB lowered the key interest rate in June but clearly hinted that it will be very cautious with subsequent similar steps. Some analysts claim that the era of low interest rates is irreversibly over and that key rates will remain high due to governments’ growing needs to invest in things like the green transition, defense, and pensions. What do you think? Can this decade of almost zero interest rates be repeated, or will it remain a historical curiosity?
As a student, I never studied about such thing – negative interest rates. Nowhere in the theory of monetary policy did the possibility of stimulating the economy with negative interest rates exist. Obviously, this will not be repeated. And the experiment was not entirely successful. The question is, what do we call “high interest rates”? Everything is relative. Currently, the ECB rates are around 4%…
Roughly the same as they were at the beginning of the Eurozone…
They were at that level around 2008-2009 as well. We know what happened after that: as a countermeasure, we went to the other extreme, and then the pendulum swung back. Yes, interest rates may drop to 2.5 or 2%, or they may remain at 4% for a long time. But this is precisely the balancing role of the monetary policy, conducted in a way that stimulates or at least does not restrict economic growth, while keeping inflation within the healthy limits of 2%. Why everyone has accepted that 2% is a healthy inflation rate is another topic. Monetary policy itself is no longer what it was in Keynes’ time. It changes as the world, society, and the economic entities change. So, it’s hard to predict how long the current situation will last. It will probably remain because it seems balanced.
Bulgaria managed to maintain some of the lowest interest rates on mortgage loans. Does this, however, carry risks for the banking system? Are there signs of a real estate bubble in our country?
There is certainly no bubble in the Bulgarian real estate market. By the way, when we talk about such a market, it primarily affects five to eight major cities in the country, where the majority of the population is concentrated. In almost all these cities, we have a mechanical increase in the working-age population. In other words, we have increasing demand. It is a huge achievement that we have kept mortgage interest rates low. Today, our clients enjoy some of the lowest rates in Europe. That’s why the volume of loans granted is growing. The number of real estate transactions decreased slightly at the end of last year, but now it is increasing again. There can be no talk of a bubble. Even in the 2008 crisis, there was no bubble in the mortgage market. Things were developing in a normal, natural way back then. The subsequent problems were the result of a sharp increase in interest rates.
There was no sharp decline in prices…
No, because the need for housing continues to exist. We have moved away from that patriarchal lifestyle imposed during socialism, where two or three generations lived in one home. Now each successive generation seeks to move out of their parents’ home. This is possible thanks to the banks. Just 20 years ago, there was no mortgage lending in Bulgaria. Around 2002, the first mortgage loans began. And in a situation like today, when, thanks to low interest rates, mortgage payments can be lower than paying rent, the incentive to buy your own home is huge. Here, and in the Balkans and Southern Europe in general, we love owning our homes. Yes, of course, it limits the mobility of the labor force. But on the other hand, we get additional protection. If something saved Bulgarians during the big crisis 30 years ago, it was the fact that they owned their homes. Otherwise, the collapse would have been total. So, for me, there is no bubble. I expect prices to rise for some time.
The big topic in the financial sector in recent years has been the potential introduction of the euro. Are we ready for it? It is already clear that Bulgaria will not meet the Maastricht criteria and enter the Eurozone at the beginning of 2025. Now there are some absurd talks about joining in the middle of the year, which I don’t know if it’s technically possible…
Technically, anything is possible, although it will be extremely difficult. Setting the middle of the year as a deadline increases the challenges for technical readiness. Otherwise, banks continue to work so that we will be fully prepared by the end of this year. Now we will have to maintain this readiness until the next possible date – most likely January 1, 2026. By the end of the year, if there are no cataclysms, we should meet the inflation criterion. But even the ECB warns that new price shocks could emerge. The second challenge is the budget deficit. We are meeting the requirements at the moment, and I don’t see why we wouldn’t meet them in 2025. Interest rate convergence is already a fact; we take it for granted. There are a few legislative initiatives and changes left to reflect recommendations outside the Maastricht criteria. Are we ready for the euro? If countries like Slovakia and Croatia are in the Eurozone, then we are ready.
The question was more about whether we are ready in terms of public approval.
Public approval depends on clearly explaining to people and making them understand the purpose of this move. The discussion has been ongoing for at least a year now, and we expect it to be supported by a strong campaign from the government. People still do not understand why we will adopt the euro. No one remembers that we signed a membership agreement with the EU, which states that we must adopt it.
But there is no fixed deadline for this. We could adopt it in 2126…
That’s right, there is no deadline. Why now? In fact, we should have joined not now, but 15 years ago. And we tried, but someone obviously decided that the moment was not right.
For most people, the main downside of the euro is related to additional inflation due to the inevitable “rounding” of prices. What are the main risks and benefits in your opinion?
Rounding prices will lead to differences of a few cents. This exists even now: very rarely when paying cash in a store does the seller ask for the small change. Very rarely does the customer asks for it, too. The nominal price may be 2.17, but you actually pay 2.20. This will be the whole effect of the euro. In other countries, someone might take advantage of the fact that people are still unable to navigate the exchange rates. But not here. We are used to the euro, and the proof is that real estate prices are in euros, and in border towns with Greece, stores and gas stations have long accepted and returned change in both levs and euros. Regarding the benefits of joining the Eurozone, I’ll highlight some of them. This is a long-awaited process that will positively affect our economy and is a driver for accelerating reforms, increasing prosperity, and reaching European living standards. It is an important prerequisite for increasing incomes and creating a more favorable business environment, reducing transaction costs, and boosting local and foreign investments with expected effects on employment. Currently, Bulgaria has no say in the ECB, but joining the Eurozone will allow participation in the management and decision-making regarding monetary policy, instead of just bearing the effects of others’ decisions. All banks in Europe follow the same laws and regulations, but being outside the Eurozone, we bear the burdens without the benefits.
The current currency board also has another function – it limits the government’s ability to spend recklessly…
That’s why it was introduced.
Is it possible that the removal of the currency board and entry into the Eurozone will further untie the hands of Bulgarian governments for irresponsible spending – a trend we seem to be noticing lately?
In principle, such a risk always exists. Just as it does for everyone who is not in the eurozone and does not have a currency board. Every government is tempted to increase spending to stay in power, to buy support. But the possibilities for this are limited by the ECB’s policy and EU rules. They allowed a temporary exception after Covid-19 when they permitted exceeding the maximum allowed 3% budget deficit. But now they are tightening control again and starting procedures against all countries over 3 percent. The most affected will be Romania, Slovakia, but also countries like Italy and France. Many people insist that in good years Bulgaria should not adhere to a 3% deficit, but aim for zero or even a surplus, to reduce debt. This is very reasonable. Yes, there is the other side: we deprive ourselves of opportunities and limit economic growth. But on the other hand, we ensure potential for future development. Because over-indebtedness creates great constraints on that. Fortunately, we managed to stay in good shape – precisely because of the Currency Board.
In the last decade, Postbank has made three major acquisitions in the Bulgarian market. Are you interested in new similar deals? How far can the consolidation in the Bulgarian banking sector go?
Consolidation is already in its final phase. Naturally, there will always be room for niche, specialized players. But in a few more years, the consolidation process will be exhausted. Fortunately, this happened because it was a major factor for keeping interest rates low in Bulgaria. The latter is due to the competitive environment and, at the same time, the high liquidity in the banking system.
2023 brought significant developments in the field of large language models and Artificial Intelligence in general. Many analysts predict that AI will have the same transformational effect on the economy as the widespread introduction of electricity over a century ago. What does this look like in the banking sector?
Artificial Intelligence is still more noise than actual effect, but it indeed has the potential to bring epochal changes. The difference with electricity is that if it took 30-40 years to build the infrastructure and for everyone to benefit from it, now the infrastructure already exists. AI can enter everyone’s life extremely quickly. Otherwise, its effect can be completely comparable to electricity. We probably won’t be able to imagine life without it soon. AI practically changes the communication between humans and machines. This will transform the world. As for banks, they have been using elements of AI since 2013-2014. The goal is for the customer not to feel that they are dealing with just a machine but to maintain confidence in reasonable and mutually beneficial communication.
Postbank has always been among the pioneers in digitalization in the Bulgarian banking sector. What is next in this direction? Do you think that digitalization and new technologies will send bank branches into history? They are already decreasing in Bulgaria…
Yes, and not only in Bulgaria. Such predictions about the disappearance of bank branches were heard 20 years ago. But Postbank’s strategy, although we are leaders in innovation, is not to seek the other extreme. We are currently one of the banks with the largest number of branches. We use the word “phygital” – a combination of physical and digital presence. This will be the strategy going forward. The branches themselves are changing in terms of organization, type of services, and combination of machines and people. More and more people prefer to use electronic or mobile banking instead of going to a branch. But there are also things for which the branch is preferable – to get to know new products that you are not familiar with, to hear competent opinions. This also builds trust – because banks are the masters of trust. Even fully digital banks that emerged years ago have realized that they need a physical presence and a human face.
The popularity of digital banking is directly related to the levels of financial literacy in Bulgaria – an issue you have been actively working on for years. How do you assess the financial knowledge of Bulgarians today?
We need to educate our customers as we educate our employees. We put enormous efforts into training our staff; we have many initiatives, our employees are knowledgeable and competent, which directly reflects on the quality of service. But we also need to educate our customers. Unfortunately, at the moment, all initiatives in this area focus on the younger generation. This is very important, of course – they need to be educated. But somehow, no one pays attention to those in later phases of life. If someone were to survey people over 70 – whether they know that there is no fee for card payments at terminals – the majority probably wouldn’t know. There is still fear of using digital channels. That is where banks play a big role – it is up to them to build trust.
Accelerating digitalization increases the risk of cybercrime, but on the other hand, it reduces the risk of physical crimes – robberies, etc. What is the balance? Despite grim forecasts, there have been almost no cases of serious cybercrime in Bulgaria in recent years, except for the breach in the National Revenue Agency systems.
And it is better that way. In reality, we put in quite a lot of effort. We in Bulgaria are entering these territories a bit later and can use the experience of others to protect ourselves. In this sense, we are largely protected by established practices and means in other countries. Of course, we are still not a highly attractive target. When we enter the Eurozone, we will become more attractive to the vanguard of cybercriminals, whereas now accounts in levs are only interesting to criminals in Bulgaria. AI works for both good and bad. In countries where it is entering the fastest, families already invent code words to ensure that the person on the phone is indeed a family member, not a deceptive simulation. Otherwise, the voice is the same, the intonation, the vocabulary…
About ten years ago, the so-called Environmental, Social, and Corporate Governance (ESG) was touted by many as the biggest future challenge for banks. Has that turned out to be the case?
In Bulgarian conditions, it is still in its infancy. Banks have always been ahead of others in this direction due to the high degree of regulation in the sector. When we talk about ESG, everyone usually focuses on the first letter, on ecology, and forgets about the others. But banks have enough accumulated experience from the past regarding social responsibility – the middle letter – and can now build on it. In any case, the responsibility and privilege fall on the banks in Bulgaria to be leaders and set trends in the field of environmental, social, and corporate governance.
