Petia Dimitrova: The speed of joining the eurozone and the path towards it are equally important

22 July 2019

Petia Dimitrova is Chief Executive Officer and Chairperson of the Management Board of Postbank. Since June 2019, she has served as CEO and Chairperson of the Board of Directors of Piraeus Bank Bulgaria, which will operate as a subsidiary until the finalization of the merger with Postbank.
 
What results do you expect from the asset quality review (AQR) and the stress tests? Do you think they will necessitate further efforts to increase banks‘ capital and will they suppress the appetites for credit risks? Will this exercise, launched in Bulgaria by the European Central Bank (ECB) this time, cause noticeable changes in the Bulgarian banking sector and what do you expect them to be?
 
The Bulgarian banking sector is strictly regulated – it complies with the common European regulations in the area of financial services. The AQR and the stress tests in some banks in Bulgaria, launched by the ECB, is just one of the planned steps in the process of Bulgaria’s accession to the Single Supervisory Mechanism and the ERMII. We could say this is a standard procedure for a high number of banks in the country because they are part of big international groups, currently supervised by the ECB. The same applies to Postbank, which is part of Eurobank Group – a regional bank group whose majority stakeholders are Canadian and US funds.
 
If the AQR results only in an invitation to Bulgaria to join the EU Banking Union, but not the ERMII, should the government accept it?
 
What is important for Bulgaria is both the speed and the path of accession. The latter involves positive changes, uniform rules and better transparency. I expect this path to fast-track the real convergence of the national economy with the eurozone, higher confidence of foreign investors and increased economic activity as a whole. The entire community will benefit from that. When Bulgaria officially announced its intention to join the EU Banking Union and the ERMII a year ago, the two processes were interconnected. Whether there will be changes in the approach is a political matter within the competence of the government and its partners – they have the entire picture and an expert’s viewpoint on the various options.
 
What are the concrete benefits for the Bulgarian financial sector and economy from joining the Banking Union and the close cooperation mechanism?
 
The good reputation of Bulgaria, confidence and predictability are important for the financial sector. These are, indeed, the biggest benefits for the country from the closer cooperation with European institutions and the compliance with the common rules. The accession is also an incentive for implementing some structural reforms, which will make the Bulgarian economy more competitive. This is an important prerequisite for increasing [people’s] income and more optimism in the business sector and consumers.
 
Last but not least, upon the eurozone entry, the banks in Bulgaria will receive financing from the ECB as a lender of last resort and an easier access to financial markets, which will be yet another benefit for everyone.
 
New loans and credit portfolios as a whole have been on the rise in the last year and a half. At the same time, the increase in revenues from interest rates, fees and commissions are seriously lagging behind. What are the reasons for that and is the comparatively low profitability of credit portfolios a considerable challenge for banks’ capital sustainability?
 
Statistics indicate there is a higher credit activity, which is determined by the high liquidity in the bank system and the record-low interest rates in Bulgaria.
 
In addition, the cost of loans is a function of the competition between banks. High liquidity levels and the strong competition between financial institutions leads to positive effects for customers. Generally, the Bulgarian banking sector is really competitive and dynamic but it is also very strict in one of its main functions – protecting its deposit-holders’ interest. This is why banks constantly seek the balance between active lending and their strife to avoid unnecessary risks in the actual market conditions. The positive results of the sector show they are tackling this challenge and maintain high capital sustainability.
 
What are you expectations of interest rate levels in the next year and a half? What risks will arise from their movement and what are the preventive measures banks can and are planning to take to counter them?
 
The movement of interest rates is an issue everyone is watching and this is absolutely understandable. It is directly determined mostly by the ECB’s decisions because the Bulgarian lev is pegged to the euro and the Bulgarian economy is closely integrated in the European one. The economic growth rate of the eurozone countries is showing signs of a slowdown. Besides, Mario Draghi’s term is ending this year, so we do not expect interest rate hikes in the short run, in the next year or year and half.
 
It is hard to make long-term forecasts because there are key, open questions regarding the global economy, such as “When will Brexit start and will under what conditions?”, “What will be the growth rate of the European and global economies?”, “How will the relations of major economic players such as the US and China change?”, etc.
 
The processes, which determine interest rates, are complex and this is, indeed, why we advise our clients against taking out loans only because of favourable conditions and urge them to assess their resources in the long run and in various scenarios. We also offer our clients not only financial products they can receive in every bank, but also complex professional consultations in our specialized centres. All this helps us be their trusted partner.
 
LIBOR and EURIBOR international interest indices are expected to be discontinued as of 2020. Are the banks in Bulgaria preparing for the new challenge or they will rather rely on solutions from abroad? Do you expect such a change to affect interest rates or prompt other risks for banks and their clients?
 
Our experience has shown, such a change could pass swiftly and without shocks and tensions. The banks in Bulgaria used the SOFIBOR index to form the interest rates for loans in BGN. The index was abandoned in mid-2018 but thanks to timely measures, banks and their clients were not affected. I expect the same to happen next year.
 
Banks are a predictable partner and strive to build long-term relations with their clients. This is why they seek mechanisms for clear and transparent planning of the obligations of both sides by using market-determined indices.
 
The EU regulation for equalizing cross-border payments enters into force as of end-2019. Do you think it will cause a unilateral and sharp drop in the fees for transactions to foreign countries or will lead to an increase in domestic fees and a decrease in foreign fees until both are equalized?
 
The main change the regulation introduces is equalization of the fees for EUR transactions to other eurozone banks with the fees for transactions in national currencies. This is a fee for a service and as such, it is related to the expenses banks make to provide it. Paying such fees, clients receive a guarantee for quality regardless if it is a matter of transactions in BGN or EUR. All banks should prepare an analysis on the costs of such a service and thus calculate the fee it will charge for it. At the same time, we encourage clients to use e-banking channels, which are much more convenient and less costly than traditional banking in bank offices.
 
New, stricter requirements for banks are expected this year such as evaluation of loan applicants’ creditworthiness. Can you describe these requirements and how will they affect loan costs?
 
We prepare a really strict evaluation of our clients’ creditworthiness because this is how we protect the bank and help our loan-holders avoid excessive risks. This is what all responsible financial institutions should do, so I do not expect drastic changes in the criteria for clients’ creditworthiness evaluation and loan costs.
 
There is currently another attempt to reduce creditors’ legal rights for fast debt collection as laid out in Article 417 and other provisions of the Civil Procedure Code. How such a restriction of rights will affect banks’ risk profile and loan costs? Can such amendments lead to restructuring loan profiles in terms of clients, conditions and products?
 
This is a high-profile topic but, unfortunately, this not always involves sufficient awareness although the issue is important for people.
 
It is vital for banks to protect the interest of their deposit-holders – the people who have entrusted them with keeping their money. This is why the law provides for mechanism for their protection, which is absolutely normal because they are key for the economic activity and financial system of every country.
 
Banks are not interested in forced debt collection – this is step of last resort, which is applied when all possible ways to avoid it have been exhausted. All activities are subject to judicial control so the rights of all participants are protected. This process has been applied successfully for years and I do not think it should change because such as step might cause instability in the [banking] system and trigger more restrictive lending measures, which would be to the detriment of good loan payers.
 
The Bulgarian government bonds in EUR and other foreign currencies, which will be issued from now on, have carried risk weight since 2018 and it will gradually increase. How will this affect the policies of the banks in Bulgaria for investment in such government bonds? Will the risk weight lead to stricter requirements for their profitability and to restructuring of bank liquid assets portfolios?
 
Banks in Bulgaria are well-capitalized and this change will not have a considerable effect on their capital adequacy. We should not forget the effect is temporary and will disappear when Bulgaria joins the eurozone. The problem is that the government does not issue new bonds, which prompts banks to redirect their free liquidity to low-risk foreign assets. Government bonds attract huge interest when the Finance Ministry enters the market, as evidenced by the latest bond issue.
 
Do you expect new acquisition and merger deals in the bank sector in the next 12 months? Do you think there will be regulatory and institutional pressure in this regard?
 
I expect the already open deals in the sector to be finalized. There is a global trend of bank consolidation and there are logical prerequisites for this – big institutions are more competitive, more secure, more efficient and have more resources to invest in innovations, which constantly improve customer experience and service. The market and the regulations require better efficiency from banks and consolidation makes this feasible, which enables lenders to make economies of scale. Thus, they can provide customers with more favourable conditions, innovative products and state-of-the-art solutions at optimal price.