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Influence of the Scale Effect Upon the Financial Results of the Banks in Bulgaria
Zhelyo Vatev Vatev,
"D. A. Tsenov" Academy of Economics, Svishtov, Bulgaria http://orcid.org/0000-0001-8731-4675
Abstract. The object of attention in the article is the profitability and efficiency of the banks in Republic of Bulgaria. The subject of the development focuses onto the influence of the credit institutions size upon their financial results. The objective of this study is to either to reveal that there are sufficient grounds to believe that the effect of the scale renders its influence upon the profitability and efficiency indicators or such a dependency can hardly be found. This study comprises observations about the processes in the banking sector of the country for the period 2007-2016. A coefficient analysis was employed, using a system of indicators suitably selected to this end. Certain dependency between the size of the banks in Bulgaria and the values of these financial indicators was established on the basis of the analysis of the real empirical data. It was concluded that utilizing the scale effect influence the large credit institutions manage to derive certain advantages in comparison to the smaller in size banks. The idea that by means of further consolidation of the banking sector of the country its efficiency can be increased, was substantiated. Keywords: banks; banking system; size of banks; economies of scale; banking sector consolidation
For citation: Vatev Z.V. Influence of the Scale Effect Upon the Financial Results of the Banks in Bulgaria. Finance: Theory and Practice, 2017, vol. 21, issue 4, pp. 88-99. УДК 336.7 JEL G21
DOI 10.26794/2587-5671-2017-21-4-88-99
Влияние эффекта масштаба на финансовые результаты банков в Болгарии
Ж. В. Вытев,
Хозяйственная академия им. Д. А. Ценова, г. Свищов, Республика Болгария
http://orcid.org/0000-0001-8731-4675
Аннотация. Объектом внимания в данной статье являются доходность и эффективность банков в Республике Болгария. Предмет разработки фокусируется на влиянии размера кредитных организаций на их финансовые результаты. Цель исследования - выявить, существуют ли основания полагать, что эффект масштаба оказывает влияние на показатели прибыльности и эффективности, или такую зависимость может быть трудно установить. Исследование охватывает наблюдения процессов в банковском секторе страны на период 2007-2016 гг. При этом применяется коэффициентный анализ, причем используется система показателей, подобранных подходящим образом специально для этой цели. На основе анализа реальных эмпирических данных была установлена определенная зависимость между размерами банков в Болгарии и значениями их финансовых показателей. По результатам исследования можно сделать вывод, что крупные кредитные организации, используя действие эффекта масштаба, имеют возможность извлечь определенные преимущества в сравнении с меньшими по размеру банками. Таким образом, обосновывается идея, что путем дальнейшего укрупнения банковского сектора страны может быть достигнуто повышение его эффективности.
Ключевые слова: банки; банковская система; размер банков; эффект масштаба; консолидация банковского сектора
Для цитирования: Вытев Ж. В. Влияние эффекта масштаба на финансовые результаты банков в Болгарии // Финансы: теория и практика. 2017. Т. 21. Вып. 4. С. 88-99. УДК 336.7 JEL G21
DOI 10.26794/2587-5671-2017-21-4-88-99
INTRODUCTION
One of the main criteria for classification of the banks in a country is according to their size. Reviewing the reference literature shows that the question of the relative advantages and disadvantages of the large and the smaller in size banks is debatable [5-7]. As an advantage for the large-size credit institutions was pointed out the fact that the considerable scale of the activity contributes to offering of a wider range and more diverse products, helps in diversification of the bank portfolios and in avoidance of excessive concentrations. Large banks are considered more competitive and more sensitive to innovations in the financial industry. Their policy is usually oriented towards more risky, but highly profitable investments, and they are better adaptable to the respective regulatory requirements. It is traditionally assumed that in any critical situation, the probability for the state to support a large-size bank is greater than if it was about saving of a smaller bank ("too big to fail"). The following disadvantages of the large banks are pointed out: greater inertness of the banking activity, harder adaptability to changes of the external conditions, more complex and more expensive management, more limited interest in servicing small customers, danger of taking greater risks, related to the large-scale transactions. On the other hand, the smaller banks also have their advantages — greater flexibility, easier adaptability to abrupt changes of environment, more simplified management, striving towards more moderate and balanced policy, etc. Concerning their disadvantages, they are usually related to the limitations in provision of large credits and servicing big customers, difficulties in diversification of the operations, harder access to the financial markets, etc.
To a certain extent, the outlined comparative advantages and disadvantages of the large and smaller banks have more general nature. It is another question to what extent these can be substantiated by empirical data and what is their exact manifestation on the background of the specifics of the bank industry in the respective country.
The object of attention of this article is the financial results of the banks in Republic of Bulgaria. The subject of the development is directed towards the intensity and the direction of influence of the factor of bank size upon these financial results. The objective of the study is to establish whether the effect of the scale renders its influence upon the profitability and the efficiency of the banks in Bulgaria or such dependency can hardly be found.
Two work hypotheses will be formulated for the needs of this study:
• First hypothesis — the size of the banks in Bulgaria virtually renders no influence upon their financial results. The core of it consists in the fact that the effect of the scale renders no significant effect upon the commercial viability and the efficiency of the credit institutions so, from this point-of-view "size does not matter";
• Second hypothesis — there is a certain dependency between the size of the banks in Bulgaria and the status of a series of their key indicators, reflecting the final financial results from the banking activity. According to this hypothesis, the effect of the scale renders significant effect the last, meaning that for the banks in the country "size does matter".
METHODOLOGY AND DATA
In the beginning, a reasoning of the criterion, which will be the basis to determine the bank size, should be provided. Different points-of-view can also be used to quantify their size. Nevertheless, the conventional criterion to judge the magnitude of the credit institutions is the asset size [6, 7]. We assume that the sum of assets is the most precise expression of the scale and scope of the banking activity.
To outline the tendencies in the financial sector, Bulgarian National Bank (BNB) divides the banks in Bulgaria according to their size into three categories. The first group comprises the five biggest banks in terms of the sum of their assets, whichever they may be as at any given moment. The second group includes the remaining small and medium-sized banks. A separate, third group comprises the branches of foreign banks in Bulgaria. The present study is based on this officially accepted classification. Further down, our attention focuses upon the financial results of the banks from the first group (the five largest banks) and the banks from the second group (the rest of the small and medium-sized banks). Due to certain specifics of the activity of foreign bank branches in the country (the ones from the third group), these have been intentionally not included in this study.
The dependency between the size of the banks, grouped into the two mentioned categories and some of their key financial indicators of profitability and efficiency, is to be analysed on the above grounds. Coefficient analysis is employed by using a system of indicators, selected in accordance with the above
outlined guideline of the study. To be more precise, the focus was placed on the following:
• Cost-income ratio. It expresses what part of the bank income covers the respective expenses and what part of the income remains to set up the net financial result [2], i.e.
„ . . Sum of expenses
Cost - income ratio =-.
Sum of income
Its values decrease with the increasing of the income and/or decreasing of the expenses, which is a favourable situation. Due to its complex nature the cost-income "scissors" is often used to evaluate the efficiency of the credit institutions.
• Operating efficiency. Key importance for establishing the income and expenses will have the operating ones, which are related to the main (typical) for the banks activities. Therefore, the operating expenses and income have sustainable nature and are constantly occurring. These are: interest expenses/income, received/paid fees and commissions, expenses/income from foreign currency transactions, from securities transactions, etc. The ratio of the considered expenses and income, renders its significant effect upon the so-called operating efficiency [6]:
^ . . Operating expenses
Operating efficiency =-.
Operating income
Lower values of the indicator (related to reduction of the operating expenses and/or increase of the operating income) are an indication of an increasing efficiency. The difference between the operating income and expenses expresses the net operating income.
• Net interest margin. The difference between the income and expenses for interests gives us the concentrated expression of the efficiency of the bank's intermediary operation. For comparison, the net interest income is used by its relative value against the assets [1]:
Net interest margin = _ Interest income - Interest expenses _ Assets Net interest income Assets
This gives an idea of the efficiency of the active banking operations (their interest income), though not in themselves, but depending on the price of the resources attracted.
• Efficiency ratio. This popular financial indicator for evaluation of the commercial viability and efficiency of the credit institutions is based on the fact that the banking profits obtained from the sum of the net interest income and the other non-interest income after deduction of the respective non-interest expenses. In this particular case, we are based on the circumstance that usually, for the banks the non-interest expenses are larger than the non-interest income, i.e. for them the net non-interest income has negative value [6]. This necessitates that the interest income should have such an amount that the interest expenses will be recovered so that on the one hand, the remainder of them will be covered by those non-interest expenses, which have not be covered by the non-interest income, and on the other hand — to be sufficient so as to form certain profit. These deductions find their quantity expression in the following dependency [4]:
Efficiency ratio = Noninterest expenses Net interest income + Noninterest income
For example, if the efficiency ratio is 0,70, this means that 70% of the net interest income and the other (non-interest) income will cover the non-interest expenses, and the remaining 30% will be used to form up the profit. Lower levels of this indicator correspond to higher values of the indicators for commercial viability.
• Non-operating expenses per unit of net operating income. The management of the non-operating expenses and the control of their dynamics and structure are of considerable importance for the bank management. These include: administrative and management expenses, amortisations, provisions, rental payments, fines, etc. [3]. Due to its non-production nature, the increase of the latter ones represents an additional weight on the final financial result. For the needs of the comparative analysis, these are interpreted as relative quantity. The present study uses as a basis the size of the net operating income of the banks, i.e.
Non -
- operating expenses per unit of net operating income = Non - operating expenses Net operating income
The non-operating expenses per unit of net operating income decrease with the decreasing the non-operating expenses and/or with the increasing of the net operating income. This situation will be favourable, if the values of the coefficient are comparatively lower when compared to the other banks or a decrease tendency is observed. Otherwise, this may suggest excessive staff employment, inefficient management policy, deterioration of the quality of assets, etc.
• Administrative expenses per unit of assets. Administrative expenses have their significant weight in forming up of the non-operating expenses. These are unavoidable, but their keeping the unreasonably large will render negative effect on the profit and efficiency of the banking activity. As a relative quantity, these are often expressed as a percentage against the assets:
Administrative expenses per unit of assets = _ Administrative expenses Sum of the bank assets
Generally, the reduction of the values of this coefficient means higher efficiency. The situation is not favourable, if for a certain period the increase of the administrative expenses exceeds the one of the assets or if against the increasing of the former ones, a reduction of the latter ones is observed.
• Net profit per unit of staff expenses. The dependency between the banking profit and the staff expenses (wages, social security payments, etc.) bears valuable information from the human factor utilization point-of-view, i.e. [4]
Net profit per unit of staff expenses = Net profit Staff expenses
The indicator expresses the contribution of the staff to the final financial result.
• Return on Assets (ROA). Gives an idea of the amount of the bank profit, distributed per unit of assets [6]:
Return on Assets =
Net profit Sum of assets
Using this indicator is appropriate for the purposes of the present study, because the profit is a result from the overall banking activity, and assets best reflect its scope and scale.
On the basis of the financial indicators presented, we performed comparative analysis between the two groups of banks in Bulgaria, classified according to their size: the banks from the first group (the large banks) and the banks from the second group (small and medium-sized banks). The idea is to establish the dependency between the size of the credit institutions and their financial results.
This study comprises observations about the development of the banking sector in Bulgaria for a period of ten years (2007-2016). Several considerations played an importance role for the selection of the time interval. First, studying data about a longer period contributes to the better outlining the typical patterns in the manifestation of the scale effect upon the banks' financial results. Furthermore, this way the influence of some factors, which have a short-lived, temporary or accidental nature will be ignored. Second, from the point-of-view of the effect of the financial crisis upon the banking activity, the analysed period included three relatively differentiated stages: pre-crisis period (from 2007 to 2009), crisis period (from 2009 to 2014) and post-crisis period (after 2014). This allows for a more precise outlining of certain specifics of the dynamics of the processes in the banking sphere, during each individual stage.
The conclusions from this study are based on the officially published information by the Bulgarian National Bank on the status of the banking sector in the country.
EMPIRICAL RESULTS
Our further development specifies the testing of the formulated work hypotheses by means of an analysis of the real empirical data on the condition of the banking sector in Bulgaria.
Let us first begin by presenting the most popular of the indicators considered — the cost-income ratio. The data show that in the years before the occurrence of the economic crisis, the expenses on the banking system level were continuously on the rise. This is logical taking into account the increasing activity of the credit institutions (table 1). Nevertheless, the expenses were completely offset by the
Table 1
Ratio between the expenses and income of the banks in Bulgaria depending on their size*
Year Sum of expenses (in thousands of BGN) Sum of income (in thousands of BGN) Cost-income ratio
Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system
2007 1844720 1 338374 3312864 2614900 1680626 4456422 0,71 0,80 0,74
2008 2592266 1 810848 4598547 3585209 2180919 5985296 0,73 0,83 0,77
2009 3139947 2076809 5458969 3675847 2348995 6239161 0,85 0,88 0,87
2010 3133509 2185932 5582100 3575635 2406498 6198763 0,88 0,91 0,90
2011 2945852 2427016 5610977 3379541 2600419 6197118 0,87 0,93 0,91
2012 2950492 2434556 5590060 3343397 2601741 6157538 0,88 0,94 0,91
2013 2727362 2531798 5372100 3236701 2599140 5956967 0,84 0,97 0,90
2014 2743283 1791796 4706419 3333558 1940220 5452732 0,82 0,92 0,86
2015 2505794 1738225 4376276 3243282 1913770 5274706 0,77 0,91 0,83
2016 2220067 1 458 849 3747544 3115118 1824864 5009878 0,71 0,80 0,75
Source: author's own calculations based on data from URL: http://www.bnb.bg (accessed: 12.06.2017).
* Note: The values in the present and all following tables, referring to the banking system as a whole, include data not only for the banks of the first group (large banks) but also of the second group (smaller banks), along with ones concerning the activities of the banks of the third group (i.e. branches of foreign banks in the country).
income, which during this stage had a front-running growth rate. The consequences from the crisis after 2008 rendered negative effect upon the profitability of the banks. The thinning growth of the income in the crisis conditions forced them, as much as possible, to restrict their expenses. The cost-income "scissors" of the banking sector was gradually closing. The dynamics of cost-income ratio outlined a negative tendency — the total value for the sector marked a palpable increase from 0,74 in 2007 to 0,90 in 2013. It was only in the last years that there were some symptoms of overcoming of this negative dynamics. At the end of 2016, it almost restored its 2007 levels. The outlined tendency refers not only to the banking system as a whole, but also to most banks, regardless of their size. In the same time, the comparative analysis reveals structural differences, observed in the banks with difference scale of activity. The large vaults of first group are in a more favourable position — despite the worsened economic conditions, they maintained the income-to-expense ratio to a higher level in comparison with
the smaller in size banks from the second group, or against the respective values for the banking sector, as a whole, respectively. On the average, for the ten-year period, it was 0,81 for the large-size institutions, while for the smaller-size ones it was 0,89. The outlined advantage of the larger banks in this aspect appears as a permanent tendency — it has been observed for the entire period analysed.
As to the operating efficiency coefficient (Operating expenses / Operating income), it is important to note that until 2013 it reported a constant deterioration both, for the banking system, and for the individual bank groups (table 2). Operating expenses increase at a quicker pace than the operating income. Interest expenses rendered the most significant effect upon this negative tendency. The fierce deposit competition and the popular "deposit tourism" between the banks, typical for the years of the crisis, found their expression in the aggressive interest policy carried out by them in the collection of deposits and in the maintenance of high deposit interest rates. This inertia was overcome after 2013. For the period
Table 2
Dynamics of the operating expenses and the operating income of the banks in Bulgaria according
to their size
Year Operating expenses (in thousands of BGN) Operating income (in thousands of BGN) Operating efficiency
Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system
2007 698083 605810 1369158 2613900 1 680624 4453407 0,27 0,36 0,31
2008 1 250997 908028 2257460 3567788 2179817 5967807 0,35 0,42 0,38
2009 1 367492 991370 2420886 3643353 2 348 995 6213036 0,38 0,42 0,39
2010 1 149 262 1035454 2259163 3568382 2406481 6191493 0,32 0,43 0,36
2011 1085 644 1115445 2268522 3365370 2600419 6182947 0,32 0,43 0,37
2012 1114725 1171702 2325376 3326929 2601741 6 141 070 0,34 0,45 0,38
2013 1230573 1 022500 2238834 3236701 2590205 5948282 0,38 0,39 0,38
2014 838519 647709 1 528341 3333558 1 920497 5432939 0,25 0,34 0,28
2015 563615 507991 1 070751 3237289 1 913770 5268713 0,17 0,27 0,20
2016 509 844 403987 923702 3114392 1818918 5003206 0,16 0,22 0,18
Source: author's own calculations based on data from URL: http://www.bnb.bg Accessed: 12.06.2017).
from 2013 to 2016 inclusive, the operating expenses were reduced by impressive rates — more than twice. They reached levels far lower than in comparison with the ones in 2007. This was basically due to the drastic lowering of the interest expenses. The interest rates for the bank deposits in these years dropped substantially. Indeed, there were indications of certain decrease of the operating income in this period, but it was considerably smaller than the one of the operating expenses. Most of the stability of the operating income was substantiated by two circumstances. Firstly, the interest rates on the credits remained at a comparatively high level. The banking competition was redirected from deposit collection towards credit provision activity. Secondly, the significance of the income from fees and commissions, as an element of the operating income, increased. In these two aspects, the large banks demonstrated certain advantages in comparison with the rest. On the one hand, they managed to maintain higher interest rates on the credits, and on the other hand — offering wider range of services,
they increased their income from fees and commissions. This data allowed us to draw the conclusion that as a whole, the large-size credit institutions have better operating efficiency when compared to the smaller size ones.
The general tendency is that under the conditions of crisis the banks in the country should operate with decreasing net interest income. The latter one gradually stabilizes only in the years after coming out of the crisis (table 3). At the same time, during the analysis of the data on the dynamics of the net interest margin, considerable differences between the large and the smaller banks were found. The advantage is mainly to the benefit of the former ones — they operate at considerably higher interest margin than the rest. The main reasons for it being the circumstance that for the analysed period the large banks in Bulgaria managed to maintain higher interest rates on the credits and lower ones on the deposits, and attract more customers, at the same time. This finding may appear illogical, but it has its reasoning: a) the large-size banks enjoy greater
Table 3
Net interest margin of the banks in Bulgaria in accordance with their size
Year Net interest income (in thousands of BGN) Assets (in thousands of BGN) Net interest margin
Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system
2007 1 369946 740614 2171581 33400697 22 786572 59089503 4,10% 3,25% 3,68%
2008 1 767371 925 044 2787632 39 748 006 26000037 69560455 4,45% 3,56% 4,01%
2009 1 766764 976380 2847031 41076648 26 208 651 70 184 446 4,30% 3,73% 4,06%
2010 1 868641 963901 2917234 40171228 29995864 73 724 696 4,65% 3,21% 3,96%
2011 1 709854 1056757 2868973 39 730 860 33602309 76811182 4,30% 3,14% 3,74%
2012 1521921 978969 2625479 40812865 36 024 702 82415660 3,73% 2,72% 3,19%
2013 1354834 1 095206 2540914 42 511 878 37811402 85746670 3,19% 2,90% 2,96%
2014 1675831 875389 2572446 46 183 296 32945623 85 134 799 3,63% 2,66% 3,02%
2015 1 745858 954943 2771123 50157997 33 995 963 87524257 3,48% 2,81% 3,17%
2016 1 792987 990097 2805106 52771169 37 110 171 92094979 3,40% 2,67% 3,05%
Source: author's own calculations based on data from URL: http://www.bnb.bg (accessed: 12.06.2017).
popularity; b) they are in a position to generate greater confidence in themselves, and become centre of attraction for more customers; c) they own a well-developed branch network; d) they are in a position to provide users with both traditional credit and deposit products, along with a wider range of other services, meeting their individual needs.
The consequences from the economic crisis in the country rendered negative effect on the coefficient of efficiency (table 4). The negative tendency is well expressed after 2008 and continues until 2013. The reason for this takes its root in the circumstance that the increase of the non-interest expenses happens at a quicker pace than the net interest income and the noninterest income. The growth of the non-interest expenses originated mainly from the deterioration of the quality of the bank credit portfolios, causing significant increase of the expenses for provisions against their devaluation. It was only in the last three years (2014-2016) that the efficiency ratio altered its negative trend, though still far from the levels, which were typical for 2007 and 2008. However, we should note the fact that from the point-of-view of the considered
indicator, the large banks from the first group are in a more favourable position in comparison with the small and medium-sized banks from the second group. This pattern was manifested during the whole analysed period. The average value of the efficiency ratio for the period 2007-2016 for the first group was 0,74, while for the second group it was 0,84. In this sense, the large banks of the sector demonstrated greater efficiency in comparison with the rest.
The analysis shows that the non-operating expenses take up a large relative share from the total sum of expenses of the banks in Bulgaria. If we compare data from table 5 and table 1, we will find out that over the individual years, it varied between 60% and 75%. It is interesting to note that the non-operating expenses exceed even the size of interest expenses. These facts contribute to the particular importance of the control upon the non-operating type of expenses. The non-operating expenses represented as ratio against the quantity of the net operating income, show multidirectional development trends (table 5). Under the unfavourable crisis conditions for the period 2009-2012 the indicator continuously deteriorated. The conclusion refers to the banking
Table 4
Efficiency ratio of the banks in Bulgaria according to their size
Year Noninterest expenses (in thousands of BGN) Net interest income (in thousands of BGN) Noninterest income (in thousands of BGN) Efficiency ratio
Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system
2007 1213778 781311 2064957 1 369946 740614 2171581 614 012 382 949 1036934 0,61 0,70 0,64
2008 1431559 949362 2468178 1767371 925044 2787632 657131 394 389 1067295 0,59 0,72 0,64
2009 1846731 1129327 3144510 1 766764 976 380 2 847 031 615867 425 133 1077671 0,78 0,81 0,80
2010 2038960 1 197266 3428338 1 868 641 963 901 2917234 612 445 453931 1 127 767 0,82 0,84 0,85
2011 1911687 1 367875 3450695 1709854 1 056757 2868973 635522 484521 1167863 0,82 0,89 0,85
2012 1897971 1 337565 3399138 1521921 978969 2625479 768955 525781 1 341137 0,83 0,89 0,86
2013 1560904 1 660189 3292759 1 354 834 1 095206 2540914 715 409 632325 1 336712 0,75 0,96 0,85
2014 2020210 1 225078 3374267 1675831 875389 2 572 446 934 654 498113 1548134 0,77 0,89 0,82
2015 2074250 1 310106 3496519 1 745 858 954 943 2771123 1 065 880 530 708 1623826 0,74 0,88 0,80
2016 1948894 1 224973 3236765 1792987 990097 2 805106 1 050958 600 891 1 693993 0,69 0,77 0,72
Source: author's own calculations based on data from. URL: http://www.bnb.bg Accessed: 12.06.2017).
system level, and to the individual groups of banks. In this period the non-operating expenses increased faster when compared to the net operating income. The significant increase of expenses for provisions against credit devaluation rendered strong negative pressure in the analysed aspect, originating from the deterioration of their quality (of the credits). It was only in the last years that the non-operating expenses per unit of net operating income gradually outlined the favourable tendency towards reduction. In the same time, if the attention is drawn to the values of the analysed indicator, which are characteristic about banks of different size, certain differences become evident. The large banks from the first group are in more favourable position. For them, the non-operating expenses per unit of net operating income for the entire period analysed are lower in comparison with the ones of the smaller banks from the second group (the average values of the indicator for the period for the first ones is 0,73, and for the others — 0,83). It is noteworthy that only for the period from 2007 to 2013 the non-operating expenses of the banks from the first group marked a growth of about 30%, while for the ones from the
second group this increase reached more than 100%. Therefore, this data confirm that the influence of the scale effect is more tangible even concerning the non-operating expenses.
The effect from the achieving of economies of scale is particularly well pronounced against the administrative expenses. The data in table 6 show that in this aspect, the large banks in Bulgaria enjoy a marked supremacy. In 2016 when compared to the basis 2007, the expenses of administrative nature of the large banks increased by 13% (while assets' growth was 58% for this interval of time). As to the small and medium-sized banks, this growth rate for the same period is significantly higher — 36% (while assets' growth was 63%). In other words, it is typical for the large-size banks that the assets' growth is accompanied by relatively smaller increase of the administrative expenses in comparison with the smaller banks. This reflects on the rate of the administrative expenses per unit of assets for both groups of credit institutions. The pattern, which is clearly distinguished, is that the banks from the first group will continuously report lower percentage of administrative expenses related to the assets when
Table 5
Non-operating expenses per unit of net operating income of the banks in Bulgaria depending on their size
Year Non-operating expenses (in thousands of BGN) Net operating income (in thousands of BGN) Non-operating expenses to net operating income
Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system
2007 1146637 732564 1943706 1915817 1 074 814 3084249 0,60 0,68 0,63
2008 1 341269 902820 2 341 087 2316791 1271789 3710347 0,58 0,71 0,63
2009 1772455 1085439 3038083 2275861 1357625 3792 150 0,78 0,80 0,80
2010 1984247 1150478 3322937 2419120 1 371027 3932330 0,82 0,84 0,85
2011 1 860208 1311571 3 342 455 2279726 1484974 3914425 0,82 0,88 0,85
2012 1835767 1 262854 3264684 2212204 1430039 3815694 0,83 0,88 0,86
2013 1496789 1509298 3133266 2006128 1 567705 3709448 0,75 0,96 0,84
2014 1904764 1144087 3178078 2 495 039 1 272788 3904598 0,76 0,90 0,81
2015 1 942179 1 230234 3305525 2673674 1405779 4197962 0,73 0,88 0,79
2016 1 710223 1054862 2823842 2604548 1414931 4079504 0,66 0,75 0,69
Source: author's own calculations based on data from URL: http://www.bnb.bg (accessed: 12.06.2017).
Table 6
Administrative expenses against the sum of assets of the banks in Bulgaria according to their size
Year Administrative expenses (in thousands of BGN) Assets (in thousands of BGN) Percentage of administrative expenses against assets
Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system
2007 722778 528130 1304375 33400697 22 786572 59 089 503 2,16% 2,32% 2,21%
2008 884718 692011 1 657904 39 748 006 26 000 037 69 560455 2,23% 2,66% 2,38%
2009 864528 712136 1683282 41076648 26 208651 70 184 446 2,10% 2,72% 2,40%
2010 860363 723869 1691376 40171228 29995864 73 724 696 2,14% 2,41% 2,29%
2011 863815 765071 1 731662 39 730 860 33602309 76811182 2,17% 2,28% 2,25%
2012 870 541 779643 1 755073 40812865 36 024 702 82415660 2,13% 2,16% 2,13%
2013 789212 895863 1 783370 42 511878 37811402 85746670 1,86% 2,37% 2,08%
2014 906132 731717 1737773 46 183296 32 945 623 85 134 799 1,96% 2,22% 2,04%
2015 990284 757062 1850151 50 157 997 33 995 963 87524257 1,97% 2,23% 2,11%
2016 816877 716097 1587481 52 771 169 37110171 92094979 1,55% 1,93% 1,72%
Source: author's own calculations based on data from URL: http://www.bnb.bg (accessed: 12.06.2017).
Table 7
Profit per unit of staff expenses of the banks in Bulgaria depending on their size
Year Net profit (in thousands of BGN) Staff expenses (in thousands of BGN) Net profit per unit of staff expenses
Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system
2007 770180 342252 1143558 299899 218976 540 052 2,57 1,56 2,12
2008 992943 370071 1386749 384113 287906 706056 2,59 1,29 1,96
2009 535900 272186 780192 368261 292925 698980 1,46 0,93 1,12
2010 442126 220566 616663 368132 293024 700955 1,20 0,75 0,88
2011 435235 172763 586141 357047 326387 722811 1,22 0,53 0,81
2012 395982 166556 566842 358528 331680 728601 1,10 0,50 0,78
2013 509 339 67 342 584 867 313967 384922 735300 1,62 0,17 0,80
2014 590275 148424 746313 369 745 313788 720916 1,60 0,47 1,04
2015 737488 175545 898430 392511 308253 737218 1,88 0,57 1,22
2016 895051 366015 1 262334 397771 341 010 755238 2,25 1,07 1,67
Source: author's own calculations based on data from URL: http://www.bnb.bg (accessed: 12.06.2017).
compared to the ones from the second group. Concerning the staff expenses on the banking system level, it can be noted that during the analysed period, these showed a tendency of slight increase (table 7). The analysis showed the presence of variable internal structural changes, brought about by the multidirectional influence of the two categories of banks, grouped according to their size. This finding was particularly well outlined for the period from 2008 to 2013. During this period, the banks from the first group (the large banks) reported reduction of staff expenses by 18% (from 384113 thousands of BGN to 313967 thousands of BGN). For the ones from the second group (the smaller banks), the reverse trend was found — they increased by 34% (from 287 906 thousands of BGN to 384 922 thousands of BGN). Considering this, it is no wonder that from the point-of-view of the efficiency, expressed through the quantity of the net profit, distributed per unit of staff expenses, the large banks in the country enjoy an impressive supremacy. On the average, for the
period 2007-2016, the net profit per unit of staff expenses for them (1,75) is two times greater when compared to the one of the smaller banks (0,78). The influence of the scale effect is more tangible — against the staff expenses incurred by the banks from the first group, the latter ones generate two times greater profit in comparison with the one from the second group.
Achieving of sufficient and increasing profit is a priority task for each credit institution. The data presented about the dynamics of the net profit of the bank system in Bulgaria for the period 2007-2016 (table 8) show that during this interval of time three stages can be outlined. Until 2009 the profits of the sector increases by substantial amounts. The reason is the fast economic growth and the credit boom in the country during that period. The crisis after 2008 rendered its negative effect on the activity of the banks, the sign for which was the constant melting of their profit. Only for the period from 2008 to 2012 the latter one decreased more than twice
Table 8
Return on Assets (ROA) of the banks in Bulgaria depending on their size
Year Net profit (in thousands of BGN) Assets (in thousands of BGN) Return on Assets (ROA) - %
Large banks Small banks Banking system Large banks Small banks Banking system Large banks Small banks Banking system
2007 770180 342 252 1143558 33400697 22 786572 59 089 503 2,31% 1,50% 1,94%
2008 992943 370071 1 386 749 39748006 26000037 69 560 455 2,50% 1,42% 1,99%
2009 535900 272186 780192 41076648 26 208 651 70 184 446 1,30% 1,04% 1,11%
2010 442126 220566 616663 40171228 29995864 73724696 1,10% 0,74% 0,84%
2011 435235 172763 586141 39 730860 33602309 76 811 182 1,10% 0,51% 0,76%
2012 395982 166556 566842 40 812865 36 024 702 82 415 660 0,97% 0,46% 0,69%
2013 509339 67 342 584867 42511878 37 811 402 85 746 670 1,20% 0,18% 0,68%
2014 590275 148424 746 313 46183296 32945623 85134799 1,28% 0,45% 0,88%
2015 737488 175545 898430 50157997 33995963 87524257 1,47% 0,52% 1,03%
2016 895051 366015 1 262334 52 771169 37110171 92094979 1,70% 0,99% 1,37%
Source: author's own calculations based on data from URL: http://www.bnb.bg (accessed: 12.06.2017).
(from 1 386 749 thousands of BGN for 2008 to 566 842 thousands of BGN for 2012). It was only after 2012, when a positive tendency towards increase of the final financial result of the credit institutions was noted, and in 2016 it reached the levels from the pre-crisis period (1 262 334 thousands of BGN). The particular factors affecting the profit during the individual years had multi-directional effect. The most contradictory is the effect of the interest income. Until 2009, the bank profits were mainly supported by the considerable interest income. Under the conditions of the crisis, due to the reduction of the volumes and the decrease of the interest rates on credit provisions, the interest income continuously dropped, which rendered its negative effect on the financial results. The interest expenses had strong impact in negative direction over the first two years of the analysed period. At the same time, this influence was not so tangible, as it was completely offset by the increasing interest income. For the next years its negative impact is insignificant, and
after 2013 — even positive (the interest rates on the deposits were perceptibly reduced, and respectively, the interest expenses were reduced). The only factor of permanent positive effect for almost the whole analysed period was the non-interest income. For most of the years though, its effect was not very notable. As to the non-interest expenses, they are constantly rendering negative impact on the profits, mostly, due to the deterioration of the quality of the bank credit portfolios and the increasing of the expenses for provisions against their devaluation. This factor had its strongest negative impact during the first years of the analysed period. The stabilization of the profits at the end of the period (2016) was conditioned by: a) low interest expenses; b) the gradual reduction of the expenses for provisions; c) certain decrease of the administrative expenses. The problem was that to achieve permanent increase of the financial results cannot be done only by reducing the expenses, which has its objective limitations, without the respective expansion of the income
base. The above considerations explain the reasons why the return on assets (ROA) of the banking sector varied broadly over the last ten years in the country.
If we draw the attention to the situation in the large and in the smaller in size banks, the values of ROA will present to a great extent the complex patterns, outlined within the study of the previously mentioned financial indicators. The analysis shows that there is a certain dependency between the size of the banks and the commercial viability of their assets. The data confirm the influence of the scale effect to the benefit of the large banks from the first group. The latter ones report higher Return on Assets (ROA) in comparison with the banks of smaller size — both, in each and every of the analysed years, and as the average value for the period.
CONCLUSIONS
The exposition above allows us to do the respective inferences concerning the work hypotheses formulated at the beginning. The first hypothesis,
according to which the size of the credit institutions had no significant effect on their financial results, cannot be confirmed. The results from this study proved the second hypothesis — utilizing the influence of the scale effect, the large credit institutions in the country managed to derive considerable advantages when compared to the smaller in size banks, which eventually, is reflected by their better financial results.
This finding corresponds to the need of continuation of the process of consolidation of the bank system in Bulgaria that has already started. This necessity is further intensified against the background of: a) comparatively limited economic activity in the country; b) existence of significant number of too small in size credit institutions with limited scope of activity; c) the overall increase of the regulatory requirements to the banks, in accordance with the requirements of Basel III. Proceeding from this we believe that consolidation of the banking sector is one of the routes to increase its efficiency.
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ИНФОРМАЦИЯ ОБ АВТОРЕ
Жельо Вытев Вытев — доктор экономики, доцент кафедры финансов и кредита Хозяйственной
академии им. Д. А. Ценова, г. Свищов, Республика Болгария
ABOUT THE AUTHOR
Zhelyo Vatev Vatev — PhD in Economics, Associate Professor, Department of Finance and Credit, "D. A. Tsenov" Academy of Economics, Svishtov, Republic of Bulgaria [email protected]
