Interview for Trud Daily by Mr. Peter Andronov, CEO, UBB
Forecasts are that there is an upcoming reverse in the trend and an increase in interest rates. When do you expect this to happen in Bulgaria?
Due to the Currency Board Bulgaria is pegged to the interest rate trends within the Eurozone. And given the lack of political or economical shocks in this country, we need to monitor interest rates in the euro currency in order to understand what is going to happen with those. There is no need to guess, it is sufficient to just keep track of the acts, statements and thinking of the best-informed subject and decision-maker with regard to the interest rates in the Eurozone, namely the European Central Bank (ECB). We should add to that the international markets which analyze the environment and assess the most appropriate timing to make decisions on interest rate changes. Up until recently the ECB had relatively clear intentions and gave signals that probably towards the end of this year it might resort to increase in interest rates. This was reasoned on the good economic results of the Eurozone – the growth, the slightly increasing inflation, the salary rise and so on. So to say, until recently and based on its information the ECB was seemingly willing to indicate an increase in interest rates within the Eurozone with a nearly 4-year delay after the process, initiated by the US Federal Reserve at the end of 2015.
However, during the third quarter of 2018 the GDP growth within the Eurozone slowed down to 0.2%, the inflation rates remained low, which, in combination with the significantly evolving political instability gave reasons to ECB to postpone its moves and to rethink its intention. Hence it decided to wait and consider a more comprehensive data sequence. Probably it would also be willing to see the data for the first quarter of 2019 before deciding to proceed in the same direction or reassessing its intention of interest rate increase. To a great extent the ECB has grounds for this. We anticipate some serious shocks in line with the elections within the EU – for the European Commission and for the European Parliament. A change in the ECB management itself is also expected, national elections are upcoming, there is serious storyline in Italy, challenging storyline in France, not to mention Brexit. There are worries about individual countries within our region and the political developments there, there is some slowdown in China, which long-lasting effect is still unclear, there is an ongoing global trade war. That is, we witness intensification of the factors, leading to uncertainty and having negative impact on the economy, which may slow the economy down and it seems exactly what is happening now.
In a situation of uncertainty the ECB prefers to wait and make a well-grounded decision because it is going to have a large-scale impact. On the other hand, there are factors which may give it some grounds for interest rate increase – the growth might have decreased temporarily, the salaries in Germany are rising more than ever, as compared to the near past. There are also other indications that may be the temporary economic unclarity will not result into growth slowdown, but into a short-term phenomenon. This is the reason why the ECB wants to see longer manifestation of the trends, which onset was in the second quarter of the previous year both within the Eurozone and internationally. So the answer to the question as to whether and when there will be an increase in interest rates is no longer so unambiguous. Rather the answer will come later in the year when more facts will become clear, many of them on the political arena.
Meanwhile the international financial markets, while analyzing the environment, have priced their deals with an anticipated interest rate increase at the beginning of 2020.
How much are interest rates expected to increase and how is this going to impact the individual installments on loans?
If there are no unpleasant economic surprises, the Central Banks, including the ECB are apt to gradually increase interest rates over a very long period at rather small steps. No one knows how exactly the ECB would act but we can make inferences by the way another Central Bank acts – the US Federal Reserve over the period from 2015 up till the end of 2018. The increment, used by them to change the base interest rate, was 0.25%, and the end result was 2% over a period of three and a half years. So to say, if the question refers to what people should think, then apparently there is no reason to expect a significant and major change. On the other hand, however, we again contemplate over a rather short period of time – what will happen during the 2019-2020 period.
But loans are being taken for a longer period. People take mortgage loans even for more than 30 years or consumer loans for a decade. For this reason, the advice is never to take a loan at the edge of your repayment capacity. That is, if the current historically low interest rate is your main argument to take a loan, you should better think it over as the interest rate will not remain so low forever. The assessment should be prudent and made while taking into account the long-term nature of the loan. People should plan for rainy days and should be careful. The same holds true for bank employees, who make decisions for granting loans.
Will the interest rate increase also lead to increase in the interest rates on deposits?
It is well-known that interest rate is the price of money. The price of money is being transferred to all its manifestations – loans and deposits included. Naturally, if the interest rates increase that would impact both loans and deposits.
Consumer loans grow at a very quick pace. What is the reason for this and are the measures of the BNB for cooling the lending down – increase in the countercyclical buffer rate – well-founded? Loans for individuals, according to the BNB data, have increased with slightly above 11% per annum.
We should also be accurate here – the individual loans data for the previous year includes statistical data for a branch of a foreign bank, hence there is an added volume, which is purely technical and distorts the statistics slightly upwards. Even if we ignore this effect the growth has been the fastest since the crisis in 2008. For the first time the growth in loans exceeds that of the population’s income and the real estates’price rise. If this significant upward growth proceeds to even higher rates, we should be seriously worried. However, if it remains close to the one-digit range and is accompanied by good employment rate, increase in income and growth in the economy, our worries will be more limited.
We are probably in the highest phase of the economic cycle, during which it is generally known that mistakes are being made, which mistakes will be paid for during a time of crisis. So to say, bad loans are being granted in good times and I absolutely agree with the BNB’s assessment that this high loan portfolio growth should be well-considered and not at the expense of low lending standards. Because later, upon economic growth slowdown or interest rates’ increase, the price will be paid. From this point of view the BNB’s decision to implement the counter-cyclical buffer rate in the late autumn this year seems a logical step.
The share of non-performing loans significantly decreases. What is the reason for this – is it that banks sell portfolios with non-performing loans or people and companies have become more cautious and conscientious?
Banks, indeed, sell provisioned non-performing loans and thus clean their portfolios as many of those loans, especially the company ones, have not been repaid for years. Now banks simply sell those loans or write them off and this is nominally expressed as a significant improvement in the portfolio. The second reason is the credit growth in question, which mathematically includes standard loans in the credit volumes, thus reducing the share of non-performing ones. The third effect is connected to the phase of economic growth – growth in which the income of individuals and companies are in a progressive phase, enabling them to better service their loans.
According to the BNB data the growth in lending is mainly due to companies which have been granted loans of more than BGN 1 million and to individuals.” “Why, in your opinion, small business loans do not grow at the same pace?
From what I see on the market I can say that the growth has been distributed absolutely everywhere. During the first years of recovering from the crisis indeed the strongest, the most stable and the largest economic subjects, i.e. the big corporate clients, were the quickest to adapt to the harsh environment and obtained loans most easily. I mean the period from 2011 through to 2015 when there was, indeed, one and only dominant segment and that were the big corporate clients. Then this segment was supplemented with small and medium enterprises and, of course, with individuals as the next wave of growth in consumption and utilization of loans. I cannot accept that presently there is, so to say, vacuum between big companies and individuals. On the contrary, in this segment competition is as intense and aggressive as in any other market sector. That is, there is no vacuum left after such a long economic growth in which banks have not started intensive and dynamic competition for lending to clients.
On the other hand, let us not forget that the number of enterprises which have moved to the next level throughout these years – small enterprises have become medium ones, the medium ones have become large companies – is significant. We have an 8-year economic growth during which enterprises have become bigger and stronger. Presently many companies can take a loan and invest in not so big properties, needed for their operation and worth BGN 1-2 million and even more. And they all fall into the range of loans exceeding in amount BGN 1 million. So, I would not conclude that there is vacuum in the lending activity for any sector or segment. On the contrary.
Who is Peter Andronov
Peter Andronov is Chairman of the Association of Banks in Bulgaria. He is Management Board Chairman and UBB AD’s Chief Executive Officer after after UBB’s acquisition by the Belgian financial group KBC in June 2017. His carrier in KBC Group started in July 2007 when he was appointed Executive Director of CIBANK. In 2008 hе became CEO, and since March 2011 he has been Country Manager of KBC Group for Bulgaria.
During the period 2002-2007 Peter Andronov was Director General of Banking Supervision Department at the Bulgarian National Bank. He participated in the elaboration of the laws on banking and in the preparation process of the country’s accession to the EU in the domain of banking services. He is fluent in English, German and Russian.
Source: Trud Daily / Translation and permission for re-print: UBB