In 2017 the banking system showed solid resilience, sound capital adequacy, high profitability and stable growth in the context of the rising credit portfolio and attracted deposit resources. This was supported by the favorable condition of the Bulgarian economy, characterized by faster growth than the average for the European and the world economy, low unemployment and rising incomes, despite the effects of the low interest rates and the regulatory environment in the banking system.
As of 31st of December 2017, there were 27 banks operating in Bulgaria, five of which were foreign banks’ branches. Their total assets increased by 6,2% to the amount of BGN 97,8 billion (EUR 50 billion) compared to the 31st of December 2015.
The share of loans and advances from the sum of the total assets increased to 61% compared to 60,7% at the end of December 2016. The share of cash rose to 19,9% from 19,7% and the share of securities decreased from 14,7% to 14,3%.
The loan portfolio of the banking system grew at a moderate pace due to the low interest rates on loans and the higher loan demand. The reported growth in lending has not been influenced yet by the loans written off or sold and it has become more evident and rapid since the asset quality review and stress tests in the banking system accomplished in August 2016.
Deposits, accumulated by banks, continued to grow. As of the end of December 2017 they reached BGN 72,383 billion (EUR 37 billion), or 73,8% of GDP, despite the low interest rate levels. This was an evidence for the confidence in the system which was due to the still high propensity to save by the households. Approximately two thirds of the deposits were held by the household sector (66,1%).
At the end of December 2017 the common equity tier 1 ratio (CET 1) for the whole banking system remained unchanged at 20,41%, compared to the level recorded as of the end of December 2016, and the total capital adequacy ratio increased to 22,08% from 20,88%. CET 1 and the total capital adequacy are considerably above the minimum regulatory requirements on a system level, and also above the average levels for the European banks, which were 14,32% and 17,98%, respectively, according to the ECB data as of the end of September 2017. At the end of 2017 the liquid asset ratio, calculated in accordance with the BNB Ordinance № 11, increased slightly to 38,97% from 38,24% as of 31st of December 2016. The indicator is substantially higher than the recommended 20% by the BNB.
The concentration in the sector remained very high. The top five banks falling in the so called first group of banks according to the classification of the BNB’s Banking Supervision Department hold 55,9% of the assets in the banking system. As of the end of 2016 their share was 57,3%. As of 31st of December 2016, the market share of the banks falling in the second group rose from 40,3% to 41,7%. The share of the banks in the third group, including foreign branches, remained unchanged at 2,4%.
In 2017 the credit risk continued to determine the trends and the behavior of the banks, operating on the Bulgarian market. The challenges which the banking sector in the European Union is facing are related mainly with the financing of the economy and the weak economic sector. The banks in Europe have different business models, the level of competitiveness between them is high and they are striving to develop and offer innovative products and services. Banks are oriented towards creating long-term customer relationships based on trust, which is perceived as an asset for banks in comparison to the capital market. The current challenges are related to the improvement of profitability by reducing costs, against the low interest margins, prudent credit risk management, and the efforts for higher efficiency, including through consolidation.
Considering this, in 2017 the deal between the Belgian KBC, the sole shareholder in CIBANK, which is in the second group, and the National Bank of Greece for acquiring its Bulgarian subsidiary United Bulgarian Bank (UBB), which is in the first group of banks, was finalized. The merger between CIBANK and UBB is a fact in February 2018, after which the new bank becomes the third largest in terms of assets. At the beginning of 2018 Sofia Municipality sold its majority stake of 67,65% in Municipal Bank, which is in the second group of banks, to Novito Opportunities Fund AGmvK. The sale of 100% of the capital of Commercial Bank Victoria, which is also in second group of banks, is expected in 2018. From the beginning of 2018 the activity of Isbank AG – Sofia branch, which is in the third group of banks, ceased.
The active efforts of the banks for optimizing their portfolios led to a gradual decline in the share and the amount of the non-performing loans. As of December 31, 2017, the amount of non-performing loans (excluding Central Banks and Credit Institutions) declined to BGN 5,65 billion (EUR 2,89 billion) in absolute terms, or to 10,07%, as the tendency for decline continues.
The credit growth, the better quality of the lending portfolio, the lower impairments and declining interest rates influenced the financial result of the sector. The net interest income dropped by 4,6% on an annual basis to BGN 2,67 billion (EUR 1,37 billion) from BGN 2,81 billion (EUR 1,42 billion) as of the end of December 2016. The net fee and commissions income grew by 8,1% to BGN 995,7 million (EUR 509 million). As a result, at the end of December 2017 the net profit of the banking system was BGN 1,17 billion (EUR 598,2 million) compared to BGN 1,262 billion (EUR 645,3 million) in 2016. The financial result of the system for 2016 was influenced by one-off effects, one of which was the extraordinary revenue for the banks from the deal between Visa Europe and Visa Inc. The one-off effect, estimated by the BNB at the amount of BGN 186 million (EUR 95,1 million), occurred in June 2016. Without it, in 2017 the net profit of the sector rose by 9,1% on an annual basis.
As of December 31st, 2017, the value of Return on Assets (ROA) decreased to 1,2% from 1,42%, recorded as of December 31st, 2016, and the Return on Equity (ROE) – to 9,32% from 10,57%.
The previous year was characterized with low levels of the average interest rates on new deposits in all sectors and currencies. The average interest rate on deposits with agreed maturity for households on new business in Bulgarian levs (BGN) declined by 31 basis points to 0,24% from 0,55%, as they were at the end of 2016. The decline in euro was by 25 basis points to 0,21% from 0,46%. The average interest rate on new business on deposits with agreed maturity for non-financial corporations fell to 0,09% from 0,14% for deposits in BGN and to 0,05% from 0,26% for deposits in EUR.
The interest rates on loans continue their decline in 2017. At the end of December 2017 the annual percentage rate, which includes the interest rate component and the component of all other fees and commissions, related to the loan, dropped to 4,01% for housing loans in BGN and to 4,44% for those in EUR. The average interest rates on new business loans for non-financial corporations fell to 3,71% for loans in BGN and to 3,38% for loans in EUR. The decrease was respectively from 3,90% and 4,16%. It could be concluded that the lower interest rates would increase the lending activity. In combination with the favorable development of the Bulgarian economy, the lower interest rates provide an additional grounds for accelerating the lending activity.
Overall, 2017 was characterized by growth in lending, an increase of the new business and a decline in the non-performing loans for the banking sector as at the same time the low interest rates and the challenges, posed by the regulatory environment were kept.
In 2018 a new Law on Payment Services and Payment Systems (LPSPS) is expected to transpose the Second Payment Services Directive (PSD 2) in the national legislation. Markets in Financial Instruments Directive (MiFID II) is implemented by the new Law on Markets in Financial Instruments (LMFI). The implementation of the International Financial Reporting Standard 9 (IFRS 9) and the transposition of the General Data Protection Regulation (GDPR) are one of the significant legislative initiatives, which take the attention of the management of the banks.
In October 2017 the BNB Governing Council confirmed the level of the buffer for systemic risk at 3% of the banks’ risk-weighted assets. In 2017 the level of the countercyclical capital buffer remained 0%. The BNB Governing Council determined eleven banks as banks with systemic importance on domestic level. On the basis of Ordinance № 8 of the BNB for capital buffers of banks and taking into account the European practice by using the overall scores according to the EBA Guidelines, the BNB set a level of additional capital buffer for those banks. The eleven banks apply an additional buffer for O-SIBs, which varies from 0,5% to 0,125% in 2018.
The BNB’s Register of Bank Accounts and Safe Deposit Boxes started functioning as of the beginning of 2017. Its creation and functioning is based on Article 56a from the Law on Credit Institutions and Ordinance № 12 of the BNB. The register is an electronic information system organized and maintained by the BNB. It provides centralized information for bank account numbers, their holders and persons authorized to manage those accounts, as well as information for the holders of safe deposit boxes in banks and their assignees as well.
As of July 1st, 2017, LEONIA Plus (LEv OverNight Index Average Plus) reference rate replaced the LEONIA (LEONIA: LEv OverNight Index Average) reference rate as an effective overnight rate computed as a weighted average of all overnight unsecured lending transactions in the interbank market in Bulgaria and it is a basis for calculating the Base Interest Rate. The new reference rate LEONIA Plus differs from LEONIA in terms of its wider coverage of data providers, including all BNB-licensed banks and branches of foreign banks in the country and not just part of them, as was the approach for the calculation of LEONIA reference rate. LEONIA Plus reference rate is computed and published by the BNB every business day as of July 1st, 2017. When no overnight unsecured deposit transactions in BGN have been effected in a given business day on the interbank market, the BNB notes that there is no publishing the indication “n/a” (Not Available).