In 2020 the banking sector operated in the context of lower economic activity and in an environment of restrictive measures taken in regard with the COVID-19 pandemic. The low and negative interest rates, increased impairment costs, lower fee and commission income, the slowdown in credit growth in the context of COVID-19 and declining profits have also affected the banking system activity during the past year.
As of 31st of December 2020, there were 25 banks operating in Bulgaria, seven of which were foreign banks’ branches. The total assets of the banking system increased by 8,6% to the amount of BGN 124 billion (EUR 63,4 billion) compared to 2019.
The share of loans and advances as a part of the total assets decreased to 58,9% compared to 65,7% at the end of December 2019. The share of cash rose to 21,9% from 15,9% and the share of securities grew to 14,6% from 13% a year ago.
Deposits, accumulated by the banks, continued to grow. As of the end of December 2020 they reached BGN 93,4 billion (EUR 47,75 billion), or 78,4% of GDP, despite the low interest rate levels. This was an evidence for the confidence in the system and pointed the leading role of the banks as financial intermediaries. The increase in deposits was also due to the formation of precautionary savings as well as due to the high propensity to save by the households, which held approximately two thirds of the deposits in the banking system (65,4% as of the end of December 2020).
The capital position of the banking sector continued to be marked by a significant capital surplus above the regulatory requirements for the capital adequacy and leverage ratios at systemic and local level as well as in comparison with the average levels for the European banks.
At the end of 2020 the common equity tier 1 ratio (CET 1) for the whole banking system was 21,69% and the total capital adequacy was 22,74%. The capital adequacy ratios of the banks in Bulgaria are above the average levels calculated for the European banks, which were 15,21% and 19,05%, respectively, according to the ECB data as of the end of Q3 2020.
According to the BNB, the dynamics in the capital ratios was due to the regulatory changes, dynamics in the total amount of the risk exposures and in the total equity and in relation with consolidation processes.
According to Regulation (EU) No 575/2013, in Q1 2020 a risk weight of 100% for the Bulgarian government bonds, denominated in euro, was applied, which led to an increase of the risk weighted assets. Meanwhile, in relation with the COVID-19 pandemic, in Q1 2020 the BNB announced measures for the banking sector, one of which was full capitalization of the banking system’s profit for 2019 amounting to BGN 1,6 billion. The decision of the BNB banks not to distribute dividends compensated the effect from the increased risk weight for the Bulgarian government bonds, denominated in euro, in the second quarter of 2020.
According to the European Commission’s decision from April 2020 for the so-called “Quick fix” of Regulation (EU) No 575/2013, part of the Commission’s coronavirus response, in the field of banking sector, the Bulgarian government bonds, denominated in euro, were again treated as bonds in local currency, which means applying of 0% risk weight until 2023. This would lead to a decline in the risk weights of some risk weighted assets of the banks and respectively, to an increase of the capital adequacy.
The liquidity coverage ratio (LCR) was 279% compared to 269,9% at the end of 2019. According to the ECB data, as of the end of September 2020 the LCR for the banks, participating in the Single Supervision Mechanism, stood at 170,94%.
The top five banks falling in the so called first group of banks according to the classification of the Banking Supervision Department at BNB hold 66,6% of the assets in the banking system. As of the end of 2019 their share was 62,1%. As of 31st of December 2020, the market share of the banks falling in the second group declined from 34,7% to 30,4%. The share of the banks in the third group, including foreign branches, remained unchanged at 3,2%.
Regarding the consolidation processes – in 2020 the merger of Expressbank – from the second group of banks, into DSK Bank, which is in the first group of banks, according to the classification of the BNB, was finalized.
Due to the challenges, posed by the COVID-19 pandemic, the lending growth slowed down, while the share and the amount of the non-performing loans (NPLs) continued to decline. As of December 31, 2020, the amount of non-performing loans (past due 90 days, excluding Central Banks and Credit Institutions) declined to BGN 3,32 billion (EUR 1,7 billion) in absolute terms, or to 4,8% as a share.
Although the level of NPLs is still above the EU average, the higher level of coverage for gross non-performing loans by provisions compared with the average level of the EU countries is typical for the Bulgarian banking system.
At the end of 2020 the impairment coverage ratio of gross non-performing loans in the Bulgarian banking system was 62,6%. In comparison, the coverage ratio for the European banks, according to the ECB data for Q3 2020 was 43,75%.
Despite operating in an unusual environment for all economic sectors in the country, accompanied by many constraints, the banking sector continued to be stable, profitable, with high levels of capital adequacy and liquidity. Despite the difficult economic situation and the restrictive measures, some of the positive aspects for the banking sector were the increased confidence, as well as the acceleration of the processes of digital transformation, which banks are experiencing, under the pressure of the growing need of individuals and companies for distant banking services.
The net interest income declined by 3,5% on an annual basis (after a minimum growth of 0,1% on an annual basis at the end of 2019) to BGN 2,649 billion (EUR 1,35 billion) as of the end of December 2020, which was due to the slower lending activity throughout the year. As of the end of 2020 the net income from fees and commissions dropped by 6,1% on an annual basis (after an increase by 3,8% at the end of 2019) to BGN 1,04 billion (EUR 532 million). As of 31st of December 2020 the net profit of the banking system was BGN 814,7 million (EUR 416,6 million) compared to BGN 1,675 billion (EUR 856,4 million) a year earlier.
The financial performance of the system was influenced by the higher impairment costs and accrued provisions, lending dynamics, lower incomes from fees and commissions, low interest rates, expenditure and credit portfolio management as well as some one-off effects.
As of December 31st, 2020, the value of Return on Assets (ROA) decreased to 0,66% from 1,47%, recorded as of December 31st, 2019. For the same period the Return on Equity (ROE) dropped to 5,3% from 11,6%.
The previous year was characterized by a minimum decline of the average interest rates on new deposits and loans. The average interest rate on deposits with agreed maturity for households on new business in Bulgarian levs (BGN) declined by 3 basis points to 0,14% from 0,17%, as they were at the end of 2019. The decrease in euro was by 6 basis points to 0,14% from 0,20%. The average interest rate on new business on deposits with agreed maturity for non-financial corporations fell to -0,05% from 0,05% for deposits in BGN and increased to 0,02% from -0,04% for deposits in EUR.
At the end of December 2020, 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 3,07% from 3,32% for housing loans in BGN and increased to 3,61% from 3,50% for those in EUR a year earlier. The APR for consumer loans in BGN was 9,53% and 3,96% in EUR compared to 10,96% and 4,02%, respectively, at the end of the previous year. The average interest rates on new business loans for non-financial corporations fell to 2,80% for loans in BGN and to 2,15% for loans in EUR from 2,86% and 2,65%, respectively.
In the difficult situation in 2020 banks played an essential role as a partner to their customers by engaging in various programs aimed at lending to individuals and to large, small and medium-sized enterprises experiencing difficulties as a result of the COVID-19 pandemic.
In order to mitigate the effects of the pandemic and to support households and businesses in Bulgaria, the Association of Banks in Bulgaria proposed, and the Bulgarian National Bank approved in April 2020 Procedure for Deferral and Settlement of Liabilities Payable to Banks and their Subsidiaries – Financial Institutions in relation to the measures taken by the authorities of Republic of Bulgaria to limit the COVID-19 pandemic and its consequences (Approved by the BNB on 10.04.2020 and containing amendments approved by the BNB on 09.07.2020 and on 10.12.2020).
It is a result of enhanced cooperation, both within the banking sector and between the banks and the Bulgarian state authorities, and by the end of 2020 nearly 90 thousand requests for rescheduling of debts of individuals and companies worth a total of over BGN 8 billion (EUR 4,09 billion) were approved. The BNB data includes the borrowers that applied for, and subsequently voluntarily gave up using the benefits under the moratorium, and also those for whom the grace period had expired.
Despite being in the shadow of the economic and health crisis, in 2020 the Bulgarian lev was included in the Exchange rate mechanism (ERM II), which is an extremely important step for the country’s accession to the euro area. As of the 1st of October, 2020, Bulgaria joined the Single Supervisory Mechanism (SSM) launching the close cooperation between the BNB and European Central Bank, and the country also joined the Single Resolution Mechanism. As a result, five banks defined as significant, fell under the direct supervision of the ECB, which implies many new commitments for the banks.