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Boom in bank earnings: is it genuine or just on paper?

БНР Новини
Photo: capital.bg

Latest National Bank of Bulgaria data about the financial state of commercial banks in this country indicate that in February this year, banks in Bulgaria had a profit almost 60 percent higher than during the same month of the previous year. It amounts to EUR 40 million which may not seem all that much by international standards but is not to be underestimated against the backdrop of the smouldering financial and economic crisis across Europe. And crisis means a drop in profits.

With Bulgarian banks it seems to be just the other way round – profits are up - 35 percent higher on an annual basis for the first two months of the year, than in 2013. Until recently this was not so. And in truth, over the whole of last year banks pocketed a profit of almost EUR 300 million, a mere 9 million more than the previous year. If the current tendency continues, in 2014 the positive results of the credit and financial institutions in the country will reach around EUR 500 million, i.e. double the sum of a year earlier. That banks in Bulgaria are in good shape and more stable than the renowned and much bigger financial institutions in Europe and the world, is something that is known, yet these results seem far too impressive to be true. What are they actually due to? First, banks have been making colossal efforts to reduce their expenditures, including spendings on the interest paid to depositors and creditors. Of course, this is unprofitable for depositors, but there isn’t much of a choice and the alternatives are out of most people’s league. Second, many banks have been opting for more venturesome accounting operations and do not shy away from writing off noncollectable or bad credits. Other problematic takings are transferred to debt collection companies who take charge of the sums due. All this is having a positive effect on the balance sheets of the financial institutions. Cutting down on expenses is one side of the medal, the other side should be the growing revenues from charges, fees and credit interest. However, no such rise in revenues is there to be seen or at least it is meager and could not have any tangible effect, let alone be the motor of such a veritable boom in bank earnings. Experts and observers say that what we are currently witnessing is a restructuring of sorts of the banking sector’s finances and accounting – evidently a temporary state of affairs. And that, unfortunately, the sector’s impressive galloping profits are not a reflection of any process of structural re-prioritization or of streamlining assets and liabilities. The coming months will show whether these profits are temporary and mostly on paper, or whether the financial institutions are entering a new stage of expansion that will inevitably affect the national economy. For now, the expectations are guarded.

English version: Milena Daynova




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