Siana Mishkova in Sofia -

Even if a last-minute deal between Greece and its creditors is found before June 30, few would wager this will be the last episode in this long drawn-out crisis. So if the prospect of Greece’s banks collapsing remains a distinct possibility, countries like Bulgaria that have strong exposure to Greek banks, coupled with fragile confidence and credibility in the financial system, are still at risk. But how much of a risk is there?

The World Bank warned earlier this month that Bulgaria’s banking system, which is still recovering from its own banking crisis in mid-2014, remains vulnerable to contagion through sizeable local subsidiaries of Greek banks. This presents risks of spillovers from potential banking system stress in Greece, the institution warned in its latest Global Economic Prospects report.

Greece’s top three lenders – National Bank of Greece (NBG), Piraeus Bank, and Eurobank Ergasias – have subsidiaries in Bulgaria, while the fourth biggest bank, Alpha Bank, operates in Bulgaria through a locally-registered branch. The four banks are in Bulgaria’s top 10 list by assets and together account for 21.7% of the banking system’s total assets as at end-March, according to data from the Bulgarian National Bank (BNB).

Crisis coming

As the Greek drama unfolds and Bulgarians watch their southern neighbours drawing billions of euros from their bank deposits obviously doubting their leftist government’s ability to squeeze any more money from creditors without angering voters, many see some kind of crisis as inevitable. Capital controls have now been imposed and Greek banks will likely stay closed at least until the outcome of the referendum, according to "Demetrios Efstathiou of Standard Bank.

"The problem... has been and will continue to be the complete lack of trust towards Tsipras' government and the rest of the EU," says Efstathiou. "PM Tsipras, in a speech [June 28], repeated his protest against the continuing looting of Greece by its creditors. I must say I am astounded when I hear these comments, as my calculations indicate that Greece has cost its European and other foreign creditors close to €500bn since 1981– no doubt a reason why Europe is completely fed up with Tsipras' antics."

Concerns are mounting in Bulgaria. That is not surprising – just a year ago Bulgarians saw panicked depositors at the third and fourth largest domestic banks queueing for hours in an effort to take out their money after having heard rumours or received anonymous text messages to do so. And trust in the Greek government is low too; earlier this year Athens decided to hit Bulgarian exporters with an extra tax by drawing up regulations that envisioned the introduction of a 26% tax on all transactions carried out by Greek companies with firms in countries with a lower corporate tax rate than Greece. The list includes three fellow EU states – Bulgaria, Cyprus and Ireland.

Yet Bulgarian officials are claiming that there is little risk of contagion on the country's banking system from a Grexit. The country’s President Rosen Plevneliev has said that while he is “seriously worried” about the effect that a potential Greek default would have on Bulgaria, the Greek-owned banks operating in the country are separate entities, well capitalised and credible.

The outgoing Bulgarian National Bank (BNB) governor Ivan Iskrov wrote in his resignation letterfrom June 23 that the central bank has taken “all possible measures” to restrict the effects from potential negative developments in Greece over the domestic banking system. “Bulgarian banks, including those with Greek owners, have no exposures to Greece and are absolutely independent operationally,” Iskrov stated. “This will protect them from any negative scenarios related to future decisions about Greece.”

However, Iskrov and the BNB as a whole do not enjoy high credibility after last year's collapse of Corporate Commercial Bank, which many attribute to supervisory lapses. On June 23 Iskrov quit three months before his officially term ended after pressure from the government over his handling of Corpbank's failure last year.

The central bank still lacks a person responsible for the supervision of lenders and their loan books after the deputy governor in charge of banking supervision, Tsvetan Gunev, was suspended last June amid a probe for failing to perform his banking supervision duties, just before the bank runs.

State of the banks

Despite the official assurances, Standard & Poor’s lowered on June 24 its rating on United Bulgarian Bank (UBB) to 'B-' from 'B' with a negative outlook, citing reputational contagion risk through its 99%-owner NBG and possible reduced prospects to attract customers due to its ownership by the Greek bank, in addition to a deterioration of its competitive position in recent years. S&P underlined that UBB's retail and corporate deposits shrank by 1.6% and 11.5%, respectively, in the first quarter and warned that the deposit base, as well as the bank's access to wholesale funding could weaken further in view of a potential worsening of the difficult economic situation in Greece.

While the other three Greek-owned lenders in Bulgaria are not rated by global agencies, a bne IntelliNews survey, based on BNB data, found that they fared much worse than UBB during the quarter. While UBB’s total deposit base narrowed by 4% from January to March, deposits at Alfa Bank shrank 6.9%, those at Postbank (Eurobank’s local unit) dropped 8.3% and those at Piraeus dwindled 12%. For comparison, the banking system’s total deposits narrowed by 1.8% during the period.

Regarding the theoretically problematic household deposits, Alfa Bank saw the biggest withdrawal in the first quarter – its retail deposit base narrowed by some €70mn, or 19.1%. As it operates through a locally registered branch, in case of insolvency Bulgarian depositors should get their insured deposits from the Greek deposit insurance fund. UBB saw an outflow of €32mn during the quarter, and Postbank registered an outflow of €51mn, while Piraeus enjoyed a €16mn inflow. As the banking system’s total household deposit stock widened by €660mn, or 3.1%, during the period, the Greek-owned banks saw their market shares sliding – to 8.8% from 9.2% for UBB, to 9.0% from 9.5% for Postbank, to 3.4% from 3.5% for Piraeus and to 1.4% from 1.7% for Alfa Bank.

A potential further deposit withdrawal would be the most disastrous for Alfa Bank’s local subsidiary. Its funding profile shows that the ratio of household and corporate loans to household and corporate deposits stands at 176.3%, significantly above the average of 88.3% for the banking system. Alfa Bank’s loan book is funded mainly through €5.5bn worth of ‘deposits from credit institutions’, which typically comprise mainly parent bank funding.

The ratio of household and corporate loans to household and corporate deposits at Postbank seems to be the healthiest, at 94.8%, followed by UBB’s 102.2% and Piraeus’ 118.4%. The data indicates that in addition to UBB, Piraeus Bank Bulgaria could also suffer from potentially harder conditions for wholesale funding.

On a brighter note, Bulgaria’s banking system remains well capitalised and liquid, with an average capital adequacy ratio of 22.3%, an average tier-one capital adequacy ratio of 20.4%, and an average liquid assets ratio of 33.17% as at end-March, according to BNB data. The election of a new governor, who is likely to assume the post as of July 10, should improve the central bank’s reputation and restore its supervisory credibility, as well as strengthen the banking system. Moreover, a systematic overhaul of the financial supervision and regulation framework bas been launched that should mitigate the risk of bank failures going forward.