Influence of the Scale Effect Upon the Financial Results of the Banks in Bulgaria масштаба на финансовые

. 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.


INTRODUCTION
One of the main criteria for classification of the banks in a country is according to their size. Review ing 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][6][7]. As an advantage for the largesize credit institu tions was pointed out the fact that the consider able scale of the activity contributes to offering of a wider range and more diverse products, helps in diversification of the bank portfolios and in avoid ance 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 adapt able to the respective regulatory requirements. It is traditionally assumed that in any critical situa tion, 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 custom ers, danger of taking greater risks, related to the largescale transactions. On the other hand, the smaller banks also have their advantages -greater flexibility, easier adaptability to abrupt changes of environment, more simplified management, striv ing towards more moderate and balanced policy, etc. Concerning their disadvantages, they are usu ally 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 ad vantages and disadvantages of the large and smaller banks have more general nature. It is another ques tion to what extent these can be substantiated by empirical data and what is their exact manifesta tion on the background of the specifics of the bank industry in the respective country.
The object of attention of this article is the finan cial 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 objec tive 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 ef ficiency of the credit institutions so, from this pointofview "size does not matter"; • Second hypothesis -there is a certain de pendency between the size of the banks in Bul garia and the status of a series of their key indi cators, 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 A N D DATA
In the beginning, a reasoning of the criterion, which will be the basis to determine the bank size, should be provided. Different pointsofview can also be used to quantify their size. Nevertheless, the con ventional criterion to judge the magnitude of the credit institutions is the asset size [6,7]. We as sume 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 cat egories. 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 classifica tion. 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 sec ond group (the rest of the small and mediumsized 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 Ж. в. вытев outlined guideline of the study. To be more precise, the focus was placed on the following: • Costincome 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 costincome "scissors" is often used to evaluate the efficiency of the credit institutions.
• Operating efficiency. Key importance for es tablishing 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 cur rency transactions, from securities transactions, etc. The ratio of the considered expenses and in come, renders its significant effect upon the so called operating efficiency [6]: Operating expenses Operating efficiency . Operating income = Lower values of the indicator (related to reduc tion 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 • Eff iciency ratio. This popular financial in dicator for evaluation of the commercial viabil ity and efficiency of the credit institutions is based on the fact that the banking profits ob tained from the sum of the net interest income and the other noninterest income after deduc tion of the respective noninterest expenses. In this particular case, we are based on the cir cumstance that usually, for the banks the non interest expenses are larger than the noninterest income, i. e. for them the net noninterest 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 noninterest expenses, which have not be covered by the noninterest income, and on the other hand -to be sufficient so as to form certain profit. These deductions find their quantity expression in the following dependen cy [4]: For example, if the efficiency ratio is 0,70, this means that 70% of the net interest income and the other (noninterest) income will cover the non interest expenses, and the remaining 30% will be used to form up the profit. Lower levels of this indi cator correspond to higher values of the indicators for commercial viability.
• Nonoperating expenses per unit of net operat ing income. The management of the nonoperating expenses and the control of their dynamics and structure are of considerable importance for the bank management. These include: administrative and management expenses, amortisations, provi sions, rental payments, fines, etc. [3]. Due to its nonproduction 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 nonoperating expenses per unit of net op erating income decrease with the decreasing the nonoperating expenses and/or with the increasing of the net operating income. This situation will be favourable, if the values of the coefficient are com paratively 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 nonoperating ex penses. 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 de pendency between the banking profit and the staff expenses (wages, social security payments, etc.) bears valuable information from the human factor utilization pointofview, i. e. [4] Net profit per unit of staff expenses  Net profit Return on Assets . Sum of assets = Using this indicator is appropriate for the pur poses 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 mediumsized banks). The idea is to establish the dependency between the size of the credit in stitutions 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 considera tions played an importance role for the selection of the time interval. First, studying data about a longer period contributes to the better outlining the typi cal patterns in the manifestation of the scale effect upon the banks' financial results. Furthermore, this way the influence of some factors, which have a shortlived, temporary or accidental nature will be ignored. Second, from the pointofview of the effect of the financial crisis upon the banking activity, the analysed period included three relatively differenti ated stages: precrisis period (from 2007 to 2009), crisis period (from 2009 to 2014) and postcrisis 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 costincome ratio. The data show that in the years before the occur rence 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). Never theless, the expenses were completely offset by the Ж. в. вытев income, which during this stage had a frontrunning 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 pos sible, to restrict their expenses. The costincome "scissors" of the banking sector was gradually clos ing. The dynamics of costincome 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 differ ences, 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 toexpense 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 sec tor, as a whole, respectively. On the average, for the tenyear period, it was 0,81 for the largesize institutions, while for the smallersize 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 competi tion 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  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 indica tions 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 sta bility 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 com missions, 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 commis sions. This data allowed us to draw the conclusion that as a whole, the largesize 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 largesize banks enjoy greater Ж. в. вытев popularity; b) they are in a position to generate greater confidence in themselves, and become cen tre of attraction for more customers; c) they own a welldeveloped 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 coef ficient 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 cir cumstance that the increase of the noninterest expenses happens at a quicker pace than the net interest income and the noninterest income. The growth of the noninterest expenses originated mainly from the deterioration of the quality of the bank credit portfolios, causing significant increase of the expenses for provisions against their devalua tion. 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 pointofview of the considered indicator, the large banks from the first group are in a more favourable position in comparison with the small and mediumsized 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.

Sum of income (in thousands of BGN) Cost-income ratio
The analysis shows that the nonoperating expens es 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 nonoperating expenses exceed even the size of interest expenses. These facts contribute to the particular importance of the control upon the nonoperating type of ex penses. The nonoperating expenses represented as ratio against the quantity of the net operating income, show multidirectional development trends (   source: author's own calculations based on data from URL: http://www.bnb.bg (accessed: 12.06.2017).

МИРОВАЯ ЭКОНОМИКА
system level, and to the individual groups of banks. In this period the nonoperating 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 nonoperating expenses per unit of net operating income gradually outlined the favourable tendency towards reduc tion. 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 nonoperating 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 nonoperating 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 nonoperating 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 mediumsized 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 largesize 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 Ж. в. вытев table 6 compared to the ones from the second group. Con cerning the staff expenses on the banking system level, it can be noted that during the analysed period, these showed a tendency of slight increase ( The influence of the scale effect is more tangibleagainst 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 melt ing of their profit. Only for the period from 2008 to 2012 the latter one decreased more than twice 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 continu ously 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 noninterest income. For most of the years though, its effect was not very notable. As to the noninterest 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 stabiliza tion 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 reduc ing the expenses, which has its objective limitations, without the respective expansion of the income Return on Assets (ROA) of the banks in Bulgaria depending on their size 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 As sets (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 respec tive inferences concerning the work hypotheses formulated at the beginning. The first hypothesis, according to which the size of the credit institu tions 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 institu tions 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 continu ation of the process of consolidation of the bank system in Bulgaria that has already started. This ne cessity 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.