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Foreign banks’ domination of Bulgaria set to continue

With more than 83% of Bulgaria’s banking assets under the control of foreign banks or financial institutions, who has gained from the country’s banking privatisation in the past decade?
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Foreign banks have entered because they see a business opportunity in developing the largely undeveloped retail banking market. The Top 100 Central European banks commentary in our October issue mentioned the large difference in retail lending as a percentage of GDP between five new accession countries from central Europe and the established EU countries.

From Bulgaria’s perspective, it now has a banking sector relatively free of the large non-performing loans and poor corporate governance that prompted the opening of the banking sector to foreign investment in the first place. There is still a need for further consolidation – at the end of 2004 there were 29 banks and six foreign bank branches operating in Bulgaria.

HVB Bank Biochim is scheduled to merge with HypoVereinsbank’s (HVB) other Bulgarian acquisition, Hebros Bank, in January 2006. The recent merger between UniCredit and HVB suggests that further consolidation between Bulbank, UniCredit’s subsidiary, and HVB Bank Biochim/Hebros may be on the cards. Through this merger of the parents 24.8% of the Bulgarian banking sector’s 2004 assets are now owned by UniCredit. These sector assets amounted to 24,917m lev ($16,998m) with UniCredit controlling assets of 6180m lev. Yet there are currently no signs of further consolidation.

One bank, International Bank for Trade and Development, a commercial bank despite the name, has had its licence withdrawn this year.

The presence of foreign banks operating in Bulgaria is not a new phenomenon, as Koford and Tschoegl pointed out in their 2002 paper Foreign Banks in Bulgaria 1875-2002. They see four distinct eras in the history of foreign bank involvement in Bulgaria, starting in 1875 with the arrival of the Imperial Ottoman Bank.

Only in the current era, which began in 1990, have foreign banks achieved such dominance, though.

What will happen to the banking sector following Bulgaria’s entry into the EU and even into monetary union? Koford and Tschoegl believe that, as domestically owned banks learn from their foreign counterparts and become increasingly competitive, margins will be eroded until the foreign-owned banks sell to domestic purchasers and continue their business through branches or even on a cross-border basis.

But their timescale for this is decades after accession and it is likely that the current state of play, where the top banks (as in our table) are foreign-owned, will continue for some while to come.

Reference: K. Koford & A.E. Tschoegl, 2002, Foreign Banks in Bulgaria 1875-2002, Working Paper 2002-06, Department of Economics, University of Delaware

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