Mr. Bauer, on July 16th you began the subscription period for the first issuance of mortgage bonds by a Bulgarian bank. How has it gone? Very well, indeed! Yesterday, we ended the subscription period, having sold Euro 3,242,000 to 9 pension funds and 4 other investors. The issue was oversubscribed, exceeding our goal of Euro 3.0 million. The term of the bonds is three years and the rate offered is 7.75%, which is quite respectable for a first offering in a so-called emerging market. In fact, it is a significant improvement in terms of rate, term and size over earlier private bond issues made in Bulgaria and, except for size, looks like what an established firm might get in London. To me it is simply a stunning outcome of the modest project to create mortgage bond legislation that the BACB and Krassen Stanchev at the Institute for Market Economics began more than three years ago. Well, to what do you attribute this ?............ A number of factors are at work and they reinforce each other. The most important is that the pension funds are growing and they need to invest longer-term in order to realize a respectable yield. At the same time, there is a growing acceptance that the Bulgarian National Bank has succeeded in strengthening the banking system with the result that bank issued mortgage bonds are seen as investment grade in a market where little else is available. Finally, regarding our offering, the more sophisticated buyers see that BACB mortgage bonds, which contain a highly diversified portfolio of home mortgages, were put together by experts from a quite strong and profitable bank. You might say that the stars all came into line at the same time. Are you planning to issue other instruments that are new to the Bulgarian capital market? Yes, we have a couple of things up our sleeve and you will be one of the first to know. However, the introduction of new instruments and the development of capital markets in Bulgaria are to some extent waiting upon the rationalization of the BNB reserve policy. The purpose of reserves is to ensure that banks have sufficient funds in hand to cope with short-term outflows. By definition, this is obviously not a concern with longer dated maturities, which is why the practice in the EU and other developed banking markets is not to require reserves on deposits or borrowings with maturity longer than two years. Yet, in Bulgaria, all attracted funds, regardless of term, require an 8% reserve except - can you believe this? - funds attracted from foreign sources with a maturity of three or more years. Very odd! What kind of policy do you expect to see from the new government? Well, in the main, I take them at their word as by virtue of philosophy and experience I believe that they understand what is needed. I also hope that they appreciate that it is important to work in parallel on both the grand strategy and the details of its implementation, as simply announcing a policy leaves open the messy and often contradictory legal and regulatory details. In this regard, dealing with and even reinventing the bureaucracy will be their greatest challenge. How well they swim through this molasses remains to be seen. Still, the momentum is in the right direction and I am hopeful. What is your opinion of the economic climate in Bulgaria? Conditions continue to improve. We see it in the success of our clients and observe it in others. However, this wealth has rained unevenly on the country and there is a sense of unfairness that I certainly understand. Discussions of the economic climate may preoccupy journalists and politicians, but compared to jobs and bread they mean little to the average citizen. My one concern is that the government balance the budget so that it will not roil (DERAIL?) domestic credit markets. A sustained multi-year recovery is underway but, in my opinion, this recovery will be driven much more by domestic investment than is generally acknowledged. The money, which could approach $1 billion in the next 5 or so years, will come from the private pension fund system. The crucial question is whether this money will actually be available for domestic investment or whether it will be sucked-up by the government, in turn starving the private sector. Other than that, I will confess that I spend little time thinking about macroeconomics. Our Fund is in Bulgaria for better or worse and we must live with the environment as we find it. Fortunately, in the past we have done well in changing times, perhaps because we are a little quicker on our feet. Yes, you can always make money if you sharpen your strategy, have a skilled team and work with correct clients. Is the banking business profitable in Bulgaria? It is quite profitable on the whole, though the profitability varies widely from bank to bank. Of course, the owners of some banks may have objectives that are satisfied, shall we say, off the balance sheet of their bank. Also, too much of the system profits, perhaps as much as 40%, depend upon depositors that get paid virtually nothing for their balances. Still, at the end of the day, the profits of the banking system tend to rise with the tide of the overall economy, which since it is in a multi-year surge, augurs well for those banks that are building their franchise for the longer-term. What are the reasons behind the recent personnel changes in the top management of most banks? Even your bank has a new executive banker -- Temenuga Gazdova from CB? Well, I suppose that there could be many reasons and perhaps you should ask each of the banks. Personally, I do not read anything into the tea-leaves of these recent changes. In our own case, we had been looking nearly three years for an experienced banker who would fit into our organization and Mrs. Gazdova was the answer. Oh! One more thing. In banking, as we say, your assets ride the elevator. Clearly, not only is the banking sector growing faster than the availability of seasoned executives, but there is a complexity being introduced as a result of new products and technology. In light of this, I have predicted that the demand for qualified people will cause an explosion in salaries. Remember, one really good person is easily worth fifty stone-heads. Do you think that when the bank privatisation is over, and especially after the privatisation of the State Savings Bank, that it will be necessary to start consolidating the existing banks in the country? I have been hearing about bank consolidation for years and at the same time I keep seeing new banks being formed or at least being talked about. When you say necessary I hope that you do not mean that the heavy hand of the bureaucracy is going to decide who participates in the market. Please, let the market decide! Of course, there will be consolidation but this talk is much overdone. You could eliminate one-half of the banks in the country and only affect about 10% of the system's total assets. But it is important that these smaller banks have a chance to grow rather than be ruled out through government fiat that basically dances to the tune of the oligopolists. More consequential will be a rationalization of the branch systems of the larger banks. Look at the number of new branches that are being established in the major cities. This will create competition for deposits resulting in higher rates for the public, which, in turn, will pressure the business model of collecting cheap deposits and sending them to London or New York. Here, the most vulnerable are the large players and I think that it could lead to a rethinking of their strategies. By the way, I find the public pronouncements and apparent strategies of some of the major banks difficult to fathom, particularly in light of their actual financial results. In closing on this topic, consolidation is only one of many areas that will be topical in ensuing years. The question is whether in dealing with such issues Bulgaria will gravitate towards the more centrally controlled and ossified European model or whether it will turn in the other direction, toward the more open and dynamic American model. As you might suspect, I have my preference. Some of your colleagues from the Bulgarian banks are blaming the foreign banks for not extending credits to Bulgarian companies. Some of them have even established a new bank. Do you find that the businessmen and bankers are unable to find a common language? Actually, I am not certain that I agree with the assertion. Regarding the question, one way to look at this is that if anyone could find a common language it would be the Bulgarian businessman with the Bulgarian bank. Sounds like an opportunity! At the moment Bulgaria holds a record for the highest interest rates on credits. What in your opinion should be the real interest rate on credits and should we expect the levels to drop to approximately 8% , the rate at which some foreign financial institutions (DEG) have started financing? Regarding the real interest rate I can only say that it is an unreal question. But, if forced to answer, I would say that a 6-8% spread over the cost of funds would be close (that spread is about 3 1/2% in the US for whatever that means). In other words, for non-institutional credits short term loans of around 9-12% and longer term loans of 14-16%. However, these are averages in both instances and will obscure wide variations. For example, in the US many people have home mortgages at less than 8% but pay 22% on their credit cards. Yes, rates will drop but not to 8%. |
