Mr. Vatev, the decline in the banks’ net interest income continues. When is this trend expected to reverse?  

- The net interest income of banks has been declining for two reasons. On one hand, there is an absolute decrease in the income from interest on non-performing loans, and, on the other hand, there is an observable trend of shrinkage of interest rate margins. The second trend is a purely natural process basically due to the contracting loan market, the competition and still limited access to cheaper external financing.  

The margins will continue to contract because of the faster rate of reduction of interest rates on loans in contrast to those on deposits. I cannot forecast their parity level as it depends primarily on the market, the competition and, of course, the relative internal efficiency of banks. To a large extent, these trends will depend on and will be determined by the condition of the international money markets, provided that these markets are recently normalized.   

Is there an ongoing trend for a drop in the interest rates on deposits and what interests on 1-year deposits could be expected in a year’s time?

- Yes, the trend persists even though developing at a slower pace than that of interest rates on loans. This is an indisputable fact and I would like to repeatedly ask again - which are the high rates – those on loans or those on deposits?! I have said it already in public - the toughest situation is that of people who cannot repay their loans even upon a zero interest. Otherwise, a long time ago they would have reached a reasonable agreement with the Bank. 

To put it straight, the reproaches against high interest rates come from persons that either don’t have loans, or if they do, have no intention to repay these loans. I think it is high time for the outcry over high interest rates in the Bulgarian banking sector to die out, or, at least, to stop its unfair use for ill-intended publicity and profit-making. And yet, bank loans are not an indispensable commodity and everyone may decide, judging by his/her own needs and capacities, whether to take a loan or not. Surely, you may expect an average reduction of the interest rates on deposits within a year by no less than 50 basis points, or with a half percentage.   

The banking system has seemingly found a profitable niche, namely the growing price of government securities has procured a profit, a chance currently embraced by all banks. What is you estimate of the effect on UBB, produced by the growing prices of government securities over the period from 1 July 2012 onwards and is it time to abandon ship on government securities?   

- By definition, for a classic commercial bank, as most Bulgarian banks are, investments in securities are an instrument for liquidity management, not a profit-generator. The main decision-making criteria for such type of investments are the quality of the securities, i.e. their risk profile, the degree of their liquidity on the market, i.e. how much time it takes to sell these in case of need, and, of course, their current profitability.

Your question contains another criterion - the price volatility - which is not of a primal importance for Treasury department managers in the process of making the above investment decisions. In other words, no universal bank would invest in securities in order to generate profit from the rising prices, or, at least, there are strongly conservative limits for the so-called market risk, integrating also the price risk. The majority of Bulgarian banks manage liquidity through investments in Bulgarian securities primarily due to the fact that presently these comply to the utmost degree with the above investment criteria.

Unfortunately, while there is an increased demand of similar securities, supply is far from being sufficient. This is also the basic factor for the soaring prices of our securities over the last months. The profit, mentioned by you, is already a fact, but it is still an accounting value. To become real, the relevant bank should sell these on the market, which, in its turn, depends on many other factors, quite often contradictory ones that I would not comment on.  

Just to illustrate it, it took only a few days for the current political crisis to entail decline in the price of the Bulgarian securities by 15 to 20 basis points. Nonetheless, we should not forget that the basic activity of banks is to credit the real economy, not to embark on the ship of public finance. The moment banks prefer investing their money in sovereign debt, rather than in loans is called “crowding out” and is typical for economies in times of crisis and high inflation, as was the situation in Bulgaria quite a few years ago. Let’s hope that we will never reach that stage again.

Is there any room for corporate bank Eurobonds after the benchmark, established by the government Eurobonds?  

- There is always room for everything depending on the needs, time and prices. Just like in the past, each bank would be interested in diversifying the structure and maturity of its sources of financing, incl. through issuing of securities. Unfortunately, the moment is extremely inappropriate as the Bulgarian banks are hyper-liquid, in the first place, and secondly it’s a rather costly pleasure nowadays. Many people are deluded that while EURIBOR is 0.2 – 0.3%, the credit resources for the business, respectively for Bulgarian banks, are much cheaper both on the local and the international markets.   

Quite the opposite, the access to a 5-year loan, for example, is rather limited and/or relatively expensive. Besides, in most European countries, and, more specifically those from the Central and Eastern Europe, the gap between the spreads, associated with sovereign risk and that of the banks and corporations, operating in the same countries, has widened too much. For example, regardless of the fact that the interest rate spread of 5-year bonds, issued by the Bulgarian government, is some 1.5%, the spread for a new 5-year bond, issued by a Bulgarian bank with the highest rating in this country, would be not less than 6 to 6.5%, i.e. the price of financing would reach 6.5 - 7 % per annum. Just for comparison, I would like to point out that UBB, hardly known on the international market in Y2006, issued 3-year bonds for EUR 100 million at a price of 2.7% annually and less than 30 basis points over the sovereign risk for Bulgaria. Probably, such times of extremely low-cost money won’t be back soon, so let us hope at least that things will take a similar course. As you see, neither the low EURIBOR nor the spread of our securities represent a logical and reliable benchmark for an issue of Bulgarian corporate securities on the current hardly accessible and non-liquid market.

In the recent months, banks managed to contain the growth of their administrative costs. Is it possible to economize on this item?

- Under the circumstances of a contracted banking market and intense competition, the only way to be competitive is to simply be efficient, or in other words, to generate a unit of profit through lower costs, i.e. a unit of cost to bring you larger income. It is true that the above rule is valid above all in times of crisis when in the majority of cases cost control and cost reduction are the only mechanism not only for overcoming the economic crisis but for survival itself.

UBB, for example, has always given credit to the efficiency ratio as a very important factor – cost to income. It is true that it deteriorated over the recent years of crisis but it was mainly on the account of the income’s reduction outrunning that of expenses. From now on with the same expenses we plan to increase considerably the volume of business and respectively the income and to achieve again the optimum level of internal efficiency.   

Specifically as far as UBB is concerned, is there reduction of the offices, especially considering the larger penetration of e-banking?   

- About twenty years ago when e-banking, based on Internet platforms, was launched on a mass scale in the developed countries, I read a futurological article, which envisaged that in about fifty years there will be no bank branches and all the banking services will be effected from home or the office electronically.   

Rapidly enough afterwards this idea was refuted by distinguished psychologists, who claimed that people in their capacity as human beings needed personal contact, in this very case with the people whom they had entrusted their funds with, or from whom they would request a loan, consultation, etc. Hence, even though e-banking is an extremely important and effective channel for access to banking services, it is by no means a substitute for the demand of bank offices for direct and human interaction between clients and bank officials.   

Naturally, what keeps increasing is the number of people whose time is expensive and prefer e-banking, the self-service offices, the ATM network, the automated bank payments, etc. which has considerably improved banking efficiency and expenses, including staff costs. To this end, UBB devotes much attention and investments in the variety of channels for access to banking services and this is a pretty good and quite profitable strategy. As far as the branch network is concerned, we do our best so that the number of the branches, their staff and location conform best to our clients’ needs and we react really fast upon ascertaining significant negative aberrations or trends.   

UBB is among the few owners of a personal ATM network and respectively services which vary from those of Borica. What is the level of popularity of the “depositing of cash at an ATM” service among your clients and do you intend to expand the network of such ATMs?  

- Card business has always been a strategic priority for investments and development ever since Y1995, when UBB launched the first ATM and issued the first bank card in the system of the newly created Borica company. In Y2004 we established our own card payments system outside that of Borica and the reason behind it was really simple – a capacity to develop quickly and of high quality as many independent card products and services as possible, which in the Borica system at that point in time was close to impossible. Depositing cash at an ATM is one of the latest services introduced by us, which lamentably, just as you state, is not yet that popular. Over Y2012 through the 30 devices the average number of deposits per month is 14 000, or about 16 transactions per device on a daily basis. We are investigating carefully the reasons as perhaps one of them is the insufficient advertising and promotion effort. Irrespective of this, we are continuing our investment in such devices (this year we will introduce further 20), as the expansion of their popularity and use is beyond doubt.   

How is the process of selling loan collaterals, mainly real estates, going? Do you sell loans and what are your impressions from the whole process of enforcement on the problem loans?   

- To be honest, it is still hard and slow, especially when it comes to real estates. The market is saturated with supply and the demand remains pretty timid. To break the status quo, we are planning to establish soon a specialized company within the NBG Group, in which we will transfer all the properties acquired in this sector, as well as the future ones.   

The underlying purpose is to concentrate expertise and managerial experience for such type of properties in this company, and in case of market recovery, they will be sold. This will enable the bank to relieve itself from a function untypical for it and to focus on its main business.   

On the other hand we are in no position to complain – as a rule court procedures for enforcement on problem loans are relatively quick. There are, naturally, individual cases of purposeful delay or blocking by specific officials of the law-enforcement system, but we resist with all the lawful means, including public disclosure, to protect our interests and those of society.   

Where do the resources for increasing the profit of banks lie?   

- There is this golden rule: „Selling as many products as possible at the lowest possible prices to the largest possible number of consumers“ (quote of a world-famous marketing guru). This, of course, is impossible when the market is competitive, so the answer to the question may be rephrased as follows: Selling more banking products at competitive prices to more clients at fewer expenses.   

Nouriel Roubini has offered that the country should increase its foreign debt with the purpose of investments in production projects, do you approve of that idea?   

-The proposal is theoretically correct– economic growth is impossible without investments. Bulgaria’s sovereign debt burden is low and the country can afford its increase, but only and solely by directing the additional expenses into productive investments and not for consumption. If such a strategy is adopted by any government, the society should be absolutely certain that these funds will be invested only in projects that will increase the GDP growth rate in the years to come.   

Every country abides by the principles of a single corporation, that is –long-term investing results in future income, and for the society this means GDP growth.    

To illustrate this all the highly developed Asian economics have driven along this road – the country starts with huge and long-term investments financed with foreign debt, but all of them invested in productive projects, which directly or indirectly generate high employment rate and economic growth. What distinguishes us from Asians is only their patience...   

On the other hand, however, even though the share of sovereign debt to the GDP for Bulgaria is only 14 per cent, which is rather low, the high private foreign debt is an issue and we need to be very careful.   

Granting loans for farm land purchase is a pretty hot niche right now, what is your opinion on the sector’s security?   

- Undeniably the agricultural sector has enormous potential for Bulgaria and will always be of priority for us – first of all because of its natural prospects and competitive advantages, and also for the persistent world trend towards organic foods and rise of their prices.   

On the other hand, however, we have recently been observing intensified interest towards investments in farmland and fast price rise. This will certainly result in concerns about the beginning of the next bubble, similar to what happened on the real estate market. For the time being there are no signs of inflow of considerable external capital of purely speculative nature – high profits over a brief time span and immediate repatriation - but that, too, is possible to happen, hence the trends on this market should be attentively monitored. There is this secure instrument to measure whether we’re close to the bubble in this sector, specifically – when the ratio between the price per decare and the projected levels of the rent for this decare of land starts exceeding the digit 10 fast enough. This signifies that the price of the land you buy today will be paid back by the projected annual rent in 10 and even more years. Take the apartments bubble, for example, when the prices reached EUR 3 000 per sq.m. in no time and the rentals increase was far more humble. In the end, the bubble did burst out……