The leadership position is important for us but we will not compromise on risk

You took over the management of the bank after Mr. Hampartzoumian who was its CEO for many years. What would you like to keep from his managerial style and what would you change?

This indisputably was a challenge, which I accepted by embarking on this role. At the same time, it was a relief to a certain extent because thanks to the management of Mr. Levon Hampartzoumian the bank has established very good practices and operates smoothly as an organization.

I am glad to be able to share with you three managerial lessons, which I have learned from my direct work with Mr. Levon Hampartzoumian and which certainly remain valid in the area of management. 

The first one is that within the bank every colleague should be treated with trust and respect. The results do not come from the managerial work of the CEO, but rather from team work. 

The second managerial lesson is that in this role you must be able to make decisions. Having spent 17 years in the area of risk management, this is one thing I have learned to do well, to make decisions and be responsible for them.

There are certain decisions where it will be difficult to achieve consensus among all of us, but I have learned that in such cases I should listen to all opinions. However, the responsibility for making the decision will be all mine. The ability to make a decision and timely decision-making go hand in hand. 

The third important lesson is that we are working in an environment, which is extremely competitive and at the same time, we are working in a bank with established strong leading positions. It is important that we learn to celebrate the successful achievements within the organization without being complacent and to always set ambitious targets to ensure that our success still lies ahead of us. 

The CEO change in UniCredit Bulbank in Bulgaria happens at the same time as the CEO changes in other banks within the Group.  This means that we are not an exception but rather a confirmation of the rule that the Group is focused on nominating people from within the organization who have gained experience on different levels and know quite well how the bank operates. Therefore, in Bulgaria as well as in the Czech Republic and Hungary the fact of choosing a person who has grown and has made a career within the organization indicates that no substantial changes are anticipated. Our responsibility rather is to ensure the continuity of the established managerial practices. 

There will be certain changes, of course, as Mr. Hampartzoumian and I are different people, from different generations. With my operational experience within the organization, I will consider the processes from a critical perspective. There will be changes resulting from the shifting banking system and the way we do business as well. This suggests greater empowerment for many people and the organization will not be so hierarchical. This is in line with my personal style, which is centered on trusting people and delegation of responsibility.


You mentioned market leadership. Now that there is consolidation in the sector, banks of the calibre of UniCredit Bulbank are emerging. You have announced that you are not growing by means of new acquisitions. So, what is your strategy to keep the leading position? 

Consolidation is a fact, and it is on a quite large scale. This definitely results in a shift in market shares and market distribution. Yet, it brings no concerns for us as we expected it, because it is only logical that in times of challenges banks look for ways of non-organic growth, on the one hand, and seek efficiency, synergy and cost optimisation, on the other. 

Our strategy, both on Group level and in Bulgaria, is to continue to grow organically. We believe that we have the potential to keep our leading positions by remaining the closest partner for the corporate business – Bulgarian and international one. We are still the bank of choice for individual customers, while trying to adapt our products in such a way so that they meet customers’ new needs.

We focus on innovations and digitalisation. You know that customers expect their bank to be in their phone. Our bank is already there – 50% of payment transactions are made through smartphones. We try to maintain our leading position also through engaging in projects with social significance. This means focusing both on micro-lending and on large corporate projects with effect on the investor’s returns as well as on the community. We also invest efforts in raising the financial awareness of Bulgarians, in this way helping them to make the right choice of products and services.


Is there sufficiently good large business that makes your organic growth in Bulgaria possible?

Every small business has the potential to grow bigger. At the moment, we support companies that form nearly 40% of the country’s GDP. We are not planning any significant changes to our risk profile. However, we believe that we have the potential for expanding our partnership with international clients in Bulgaria, although 85% of them are already our clients, and with the mid-cap business.


As the bank is now managed by the person who was engaged in risk management, could we say that this is some kind of signal? The BNB have already alarmed that there is a burnout in some sectors, mortgage lending especially. Do you see such sectors and have we reached the point where we need to worry?  

With regard to the concerns about the economy burning out and a mortgage lending bubble, as you know the regulatory authority decided to impose an anti-cyclic buffer from September and next year we expect an increase up to 1% in April, which is perfectly logical. I have personal respect to the regulatory authority for its courage to request changes in the legislation and to add to its powers the possibility to impose quantitative restrictions in order to be able to intervene at certain times by setting maximum limits for indebtedness as well as market price-to-funding ratio caps. 

Looking at the current property prices, I must inevitably make a comparison with the situation in 2008, which was the peak time of property construction and prices were at their height. Banks then funded 100-125% of the purchase price of the properties. Fortunately, there are no such offers now, although some customers wish to receive 100% property funding. The difference is that the current property prices have not reached yet the levels we saw in 2008, while the average wage officially now is over 1200 Bulgarian lev and it was 600 Bulgarian lev back then. So, at the present moment the ratio is looking much better. Nevertheless, in some of the bigger cities and rather in certain locations in big cities the dynamics of the prices goes beyond the standard levels and we must all be careful for such signals.


Do you see any other risk sectors – office space construction, agriculture or other? 

Agriculture – not, office space construction – I would also say not. Until recently, tourism alone was under our special focus, but at this moment we do not believe that any concerning trends are observed.


This summer, one of the big topics in the banking sector are the checks by the ECB, which are near their end. Do you expect the outcome of those checks to present a different picture from what we saw in the last review three years ago? 

The current methodology for asset quality review applied by the ECB is quite new. It was adopted in June 2018 and rests upon new accounting standards, which were introduced in banks, such as IFRS 9, which still must stand the test of time. This is why, quite logically, the methodology is conservative.

Still, the review comes after 2018, which was a good year for banks. Therefore, upon equal other terms, the results would have to be better than the previous ones. 

Of course, we must also take into account the comment, which is part of the report of the European Commission, with regard to the recommendation for an adequate valuation of the assets, including the collaterals.


Could you explain that a bit more?

In Bulgaria, for determining the value of the collaterals banks work with surveyors who determine the fair market value based on comparable market transactions.  However, there is no register so we could track the actual values of the concluded transactions. Now is probably the time to try as an institution and through the industry organizations of the sector to have a discussion on creating a register or to establish regulations on the valuation requirements to surveyors. 


Bank assessments are probably the last step before Bulgaria’s entry into ERM II and the Banking Union.  What will be the direct effects and when do you expect this to happen? Will there be a delay compared with the targets set by the government?

We have recently received a confirmation that we meet the requirements. Therefore, it does not seem logical to have a delay, even more so because when this happens there will be many positive effects. The direct effect on us as banks is that the system will become twice more controlled. This in any case does not exclude cooperation between the local regulatory authority and the European one.

Moreover, the BNB currently has limited powers as a creditor of last instance, whereas the ECB has much greater powers to act.

Currency risk, although only on paper, would also be eliminated following our accession, because sometimes foreign markets associate the different currencies with risk. Transactional costs, particularly those associated with export, would decrease. Hence, it is only logical that the accession involves greater wealth and potential for investment of funds. 


Banking sector profits hit record high in 2018 despite shrinking margins. What are your expectations for 2019?  

Currently the system is operating under conditions of shrinking margins. On the one hand, lending growth which is a result of the economic environment as well as consumption growth have a positive impact on banks’ results. On the other hand, banks have achieved positive results due to the considerable cost reduction related to the cost of risk. After a six-year period of growth, provisioning costs are on the decrease. A large part of bad loans inherited from the last crisis was cleared out. Banks succeeded in accumulating buffers, which ensure substantial coverage of the residual non-performing portfolios. As a result, the cost of risk now is quite low, which allows for good final results. The favourable situation of capital markets also contributed to this profit.

At the same time, banks have considerable investment costs, which is in line with the Bank’s regulatory compliance. For example, PSD II is particularly welcomed by everybody because we expect that open banking will offer great advantages. However, we are thus burdened with large investments, which will not produce a direct positive effect on banks’ results. This is why I am a moderate optimist. It would not be sustainable for the industry if this unprecedented and long period of low interest rates continues still longer.


When do you expect it to happen? 

I would refrain from making any forecasts because it largely depends on the ECB’s policy and the economic trend in Europe. If the euro area keeps moving at an unfavourable pace, the ECB will surely keep low interest rates for some time still.  

In a situation of low and negative interest rates, isn’t the greatest fear that the intermediaries themselves, banks, are inclined to take risks which at one moment, at a dramatic turn, may turn out to be not carefully weighted? 

We are in an unprecedented situation with such low interest rates for more than a decade. Actually, nobody has expected that the decrease of interest rates could continue for more than 12 years after the Lehman Brothers’ bankruptcy. However, I think that banks offer good advice to their customers and I believe that customers also try to make informed decisions. 

We have discussed many times whether we should change our risk policy to meet the intensified loan demand with regard to risk profiles, which are different from those we normally lend to. We have firmly refrained from doing this and decided that it is better to pay 60 basis points surcharge on the liquidity, instead of going into that direction.  Due to the market shares, lending has its price and that price must be paid. If you let me go back to the question about the market positions, we said to ourselves that if keeping the leading position would mean changing our risk appetite, starting to underestimate credit or liquidity risk, then this is not the way for us to keep it. 


How do you imagine UniCredit Bulbank in five years?  

I am strongly optimistic about the future of the bank. UniCredit Bulbank is undergoing a complete transformation of its processes and operations in order to meet the needs of its customers. For a long time now, customers have expected us to be their 24/7 bank, so the bank already is in their phones. A great number of our customers visit the branches only when they need consultation services or want to discuss an important financial decision with their relationship manager, and not for their daily transactions. As of today’s date, our branches are only 6% of the total number of bank branches in Bulgaria. A large part of our operations are performed digitally. In the bank and in our consumer financing company, many of the activities are automated and are performed by robots. One of our robots has received a thankful email from a customer, which is a sign that they are doing a great job.


In how many years algorithms and robots, not bankers evaluating the risk, will decide whether a company will receive a loan?

The current trend is most of the scoring to be done through algorithms, models and machines. It applies mostly to individuals and micro companies where the process of standardisation is clearer. I do hope that the customised approach to mid-cap and key corporate clients will not be replaced in the foreseeable future – the next 10 or even 20 years. However, I believe that it will always be possible to have a face-to-face interaction in order to find a specific solution for the specific customer. The function of the robots is only to reduce the operative workload, so that our employees would have time to do what they can do best and be there for our customers.

Who is Teodora Petkova

Teodora Petkova is the new Chairperson of the Management Board and Chief Executive Officer of the largest bank in Bulgaria in terms of assets – UniCredit Bulbank. On 1 May 2019, she took over the post from Levon Hampartzoumian who led the institution after its privatisation in 2001.

The career of Mrs. Petkova in the bank started in 2002 as a credit analyst. In 2007, she became a Senior Manager of the Corporate Lending Team. From 2009 until 2015, she was Head of Credit Risk Department and in 2015 she became a Director of the International Center in Corporate, Investment and Private Banking Division.

Before taking office as a Chief Executive Officer, Teodora Petkova was a member of the Management Board and Chief Risk Officer of UniCredit Bulbank.

Teodora Petkova holds a Master’s degree in Finance from the University of National and World Economy and a Global Executive MBA from Vienna University of Economics and Business and Carlson Business School, University of Minnesota.

She is a member of the Management Board of the Association of Banks in Bulgaria and a member of the Board of Directors of Borica.