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Preserving financial stability BNB supervisory perspective Mr. Tsvetan Gounev

Preserving financial stability BNB supervisory perspective Mr. Tsvetan Gounev Head of Credit institutions supervision department Bulgarian National Bank Athens, 14 May 2010. Contents. Macroeconomic developments in 2009 Bulgarian banking system as of Dec.2009

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Preserving financial stability BNB supervisory perspective Mr. Tsvetan Gounev

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  1. Preserving financial stability BNB supervisory perspective Mr. Tsvetan Gounev Head of Credit institutions supervision department Bulgarian National Bank Athens, 14 May 2010

  2. Contents • Macroeconomic developments in 2009 • Bulgarian banking system as of Dec.2009 • Greek banks performance as of 2009 • The buffers the Bulgarian banking system • Measures to the banking system • Macroeconomic outlook for 2010 • Bulgarian banking system – current anti-crisis measures • Forthcoming regulatory work in 2010

  3. Macroeconomic developments in 2009 • External sector • FDI inflow stood at 8.4% of GDP • The current account deficit narrowed from 25.4% to 8.6% of GDP • Monetary and lending developments • Slower annual credit growth rate of 3.6% in 2009 (down from 24.2% in 2008) • BNB reduced the MRR ratio, eased the claims’ classification and provisioning rules and improved the monitoring of the non-bank financial sector • Real sector • The real GDP is estimated to have contracted by 5% in 2009 • Tightened lending policy have negatively influenced the investment dynamics • The net export of goods and services contributed positively to the GDP dynamics by 12 p.p.

  4. Macroeconomic developments in 2009 • Labour market • The unemployment accelerated throughout the year to reach 6.8% - annual growth rate in 2009 is 2.8% • Fiscal policy • The budget deficit - 0.8% of GDP on cash basis and 1.9% of GDP on accrual basis • The Government debt-to-GDP ratio remains below 15% in 2009. • Inflation • End-of-year inflation was 1.6% and annual average inflation was 2.5% (down from 12% in 2008)

  5. Bulgarian banking system as of Dec.2009 Stable financial fundaments • Pro-active policy of BNB in recent years (a lot of measures were undertaken to cool loan growth), which established a solid ground for bank intermediation • Comfortable level of solvency (17.04%) after revaluation losses, although: Loan portfolio is deteriorating • All classified loans are 13.6% of total loans • Past-due loans over 90 days are 6.4% of total loans • Coverage ratio of past-due loans over 90 days is 80% • Coverage ratio of past-due loans over 180 days is 119% • Unaffected capital buffers, accumulated as a result of anti-cyclical policy of BNB • Smaller profit compared to previous years, but still based on core activities after impairments and taxes • Good level of liquidity (21.90%) • Growth of local deposits • Stable parent funding

  6. Top ten risks in terms of the importance and impact of the risks as of Dec.2009 and outlook for 2010

  7. Bulgarian banking system as of Dec.2009

  8. Bulgarian banking system – as of Dec.2009

  9. Bulgarian banking system – as of Dec.2009

  10. Bulgarian banking system – as of Dec.2009

  11. Greek banks performance as the end of 2009 • Market share in terms of total assets – 28% • Market share in terms of total loans – 30% • CAR av. – 14.68% • Tier 1 ratio av. – 13.39% • Impaired loans/total loans av. – 17.03% • NPL’s ratio av. – 7.04% • Liqiudity ratio av. – over 20% • ROA – varies from 1.26% to (– 5.73%) • ROE av. – varies from 3.25% to 10.59% • The supervision risk assessment is 2 ( among 5 rates of estimations in line with CAMELOS RAS) Acceptable performing.

  12. The buffers of the Bulgarian banking system The conservative application of the capital adequacy regime in Bulgaria and the maintenance of increased capital requirements by banks provided for a “cushion” against unexpected losses during the crisis: • 12% minimum capital adequacy ratio • Non-inclusion of interim profit until 2008, eligibility criteria for inclusion after 2008 • Increased risk weights in the Retail and Mortgages exposure classes • Conservative approach to usage of prudential filters (e.g. no recognition of unrealised gains from financial instruments) • Reduced reliance on hybrids and other non typical capital instruments • Introduction of a specific supervisory provisions, aimed at capturing the amount of potential future losses

  13. Measures to the banking system Some of the most important steps to grant the smooth functioning of the banking systems were: • Reduction of the minimum reserves requirement in 2008; • Increased frequency of on-site examinations with special focus in risk areas; • Increased dialogue with the bank managers and frequent update on the financial situation, including ad-hoc reports; • Advising banks to maintain additional capital above the regulatory minimum; • Advising banks to maintain liquidity ratios well above the regulatory minimum; • Requiring from banks to perform regular stress tests under different assumptions

  14. Measures to the banking system • Increased dialogue with home supervisors, focused on issues of the local subsidiary • Issuing recommendation for non-distribution of dividends by banks; • Raising the minimum guaranteed amount of customer deposits to 50,000 EUR in 2009 • Widening the scope of supervision – introduction of registration requirements for other financial institutions (e.g. leasing, cash credit, etc.) • No state aid or government guarantees were provided to commercial banks during the crisis

  15. Macroeconomic outlook for 2010 • External sector • The downward correction of the current account deficit is expected to continue in 2010, but at a much lower pace. The main factor will be export growth as opposed to domestic demand contraction • Stable FDI inflows to cover the CA deficit • Bank lending • In 2010 lending will gradually accelerate with credit growth rates expected to remain at single digit levels • Real sector • GDP growth in the range of 0% to 1% as the private consumption stabilizes and the net export’s contribution remains positive • The improvement of the export capacity of the companies will be a major factor for the expected positive economic growth

  16. Macroeconomic outlook for 2010 • Labour market • The unemployment rate will continue to increase moderately due to delayed effects of the 2009 economic downturn • The economic recovery is expected to influence positively the labour market, but not before the last quarter of 2010 • Fiscal policy • The government will continue to follow a strict fiscal discipline in 2010 • The general government budget for 2010 is planned to be balanced • Inflation • In 2010 inflation is expected to remain at a low levelin the range of 2-2.5% • The gradual increase in international commodity prices and the rise in excise duties on tobacco are projected to be the main contributors to inflation in 2010 • Domestic demand is not expected to exert inflationary pressures

  17. Changes in Prudential Regulations and Supervisory Practices - September 2008-2009 • Amendments to Ordinance No 9(evaluation and classification of banks’ risk exposures and allocation of provisions to cover credit risk) • Make it easier for credit institutions torenegotiate credit conditions • Introduce a threshold of BGN 100 000 above which a risk exposure or pool of exposures shall be evaluated and classified individually and below whichexposures may be aggregated in portfolios by similar characteristics • Expand range of acceptable collateral • Amendments to Ordinance No 8 (on capital adequacy of credit institutions) • Segregation of exposures past due more than 90 days in a separate class for banks under the standardized approach • Unrated investment firms to get the same risk-weighting (not more than 50%) applied to exposures to credit institutions according to the CRD. These changes also apply to administrative bodies and public sector entities. • Inclusion of interim profit in bank’s capital

  18. Forthcoming regulatory work in 2010 Transposition of EU Directives in the banking sphere and elaboration of legal acts and ordinances • Ordinance No 8 amendments -retail exposures currently risk-weighted at 100% and exposures backed by elligible residential mortgages, risk-weighted at 50%, to be weighted at 75% and 35% resp. • Retained earning no longer need to be voted on by the general assembly to be included in the bank’s capital • Implementationof CRD amendments (Tier I own funds items, changes to large exposures regime, new supervisory arrangements and crisis management provisions, new requirements on securitisation) • Implementation of CRDIII amendments for Q4 2010 (issues of remuneration policy (currently applied througha BNB guideline), resecuritisation and securitisation, market risk models in the trading book)

  19. Bulgarian banking system – current anti-crisis measures • 50000 EUR Deposit guarantee in place • More flexible approach with respect to MRR • From 12% to 10% • State funds and parent funding are excluded in calculation of deposit base • 50% of cash position is eligible for MRR • No dividend payments for 2008, similar measures were taken on a case-by-case basis for the 2009 results • Conservative approach with respect to provisioning, creating capital buffers Additional provisioning as capital deduction is required (above IFRS impairment losses) • 10% Tier 1 ratio is recomended for the whole 2009 and current 2010 (for 2008 is 6%) • 15% coverage of attracted funds from households and companies (local and foreign) with liquid assets is recomended for the previous 2009 and for the current 2010 • Joint measures on banking group level (home-host coordination of efforts) • Strengthened prudential supervision

  20. Thank you for your attention!

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