The banking system in Bulgaria in 2021 – facts and figures

The state of the Bulgarian economy and the gradual recovery of the economic sectors from the pandemic of COVID-19 predetermined the activity of the banking sector in 2021. Although the forecasts of a different European and international institutions are for potentially slower growth of the Bulgarian economy compared to the European and the world economy, the expectations for the Bulgarian economy in 2022 are that it is going to return to the levels last observed in 2019 or before the coronavirus crisis. However, the recent developments in the international political environment should also be taken into account. Last year was characterized by lower impairment expenses and accrued provisions, accelerated lending activity, low and negative interest rates and improvement of the financial results of the banking sector.

As of 31st of December 2021, there were 25 banks operating in Bulgaria, seven of which were foreign banks’ branches. The total assets of the banking system increased by 9,2% to the amount of BGN 135,41 billion (EUR 69,23 billion) compared to 2020.

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Source: BNB
Chart by Visualizer
Chart by Visualizer
Source: BNB

The share of loans and advances as a part of the total assets decreased to 58,2% compared to 58,9% at the end of December 2020. The share of cash dropped to 21% from 21,9% and the share of securities grew to 16,7% from 14,6% a year ago.

Deposits, accumulated by the banks, continued to grow. As of the end of December 2021 they reached BGN 101,9 billion (EUR 52,1 billion), or 78% of GDP, despite the low interest rate levels. This was 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 holding approximately two thirds of the deposits in the banking system (65,3% as of the end of December 2021).

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 2021 the common equity tier 1 ratio (CET 1) for the whole banking system was 21,66% and the total capital adequacy was 22,62%. The capital adequacy ratios of the banks in Bulgaria are above the average levels calculated for the European banks, which were 15,47% and 19,30%, respectively, according to the ECB data as of the end of Q3 2021.

According to the Bulgarian National Bank (BNB), the dynamics in the capital ratios was due to the regulatory changes, dynamics in the total amount of the risk exposures and realized profits.

The liquidity coverage ratio (LCR) was 274,1% compared to 279% at the end of 2020. According to the ECB data, as of the end of September 2021 the LCR for the banks, participating in the Single Supervision Mechanism, stood at 173,78%.

The top five banks falling in the so called first group of banks according to the classification of the Banking Supervision Department at the BNB hold 66,9% of the assets in the banking system. As of the end of 2020 their share was 66,6%. As of 31st of December 2021, the market share of the banks falling in the second group declined from 30,2% to 30,1%. The share of the banks in the third group, including foreign branches, decreased to 3% from 3,2%.

Regarding the consolidation processes – in 2021 the Belgian bank KBC and the Austrian based Raiffeisen Bank International agreed that KBC would acquire 100% of the shares of Raiffeisenbank Bulgaria, which is in the second group of banks, according to the classification of the BNB.

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Source: BNB, own calculations
Chart by Visualizer
Source: BNB, own calculations

Due to the gradual economic recovery from the COVID-19 pandemic, the lending growth accelerated, while the share and the amount of the non-performing loans (NPLs) continued to decline. At the end of 2021 the application of the Procedure for deferral of loans expired. As of December 31, 2021, the amount of non-performing loans (past due 90 days, excluding Central Banks and Credit Institutions) declined to BGN 3,07 billion (EUR 1,57 billion) in absolute terms, or to 4,05% 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 2021 the impairment coverage ratio of gross non-performing loans in the Bulgarian banking system was 72,1%. In comparison, the coverage ratio for the European banks, according to the ECB data for Q3 2021 was 43,34%.

Despite operating in a challenging economic and regulatory environment the banking sector continued to be stable, profitable, with high levels of capital adequacy and liquidity. The main trends for the banking sector are the accelerated processes of digital transformation, cybersecurity and the management of processes and procedures aiming at the transition and achievement of a green and sustainable economy.

The net interest income increased by 4,5% on an annual basis (after a drop by 3,5% on an annual basis at the end of 2020) to BGN 2,76 billion (EUR 1,41 billion) as of the end of December 2021, due to the higher lending activity throughout the year. As of the end of 2021 the net income from fees and commissions grew by 19,5% on an annual basis (after a decline by 6,1% at the end of 2020) to BGN 1,24 billion (EUR 634 million). As of 31st of December 2021 the net profit of the banking system was BGN 1,416 billion (EUR 724 million) compared to BGN 814,7 million (EUR 416,6 million) a year earlier.

The state of the Bulgarian economy and its gradual recovery from the COVID-19 pandemic continued to affect the activities and the results of the banking sector. The substantially lower impairment expenses and the accrued provisions, the accelerated lending and business activity, which affect the level of the net interest income and the net income from fees and commissions, the low interest rates and the management of the quality of the credit portfolio influenced the financial result of the sector. The lower expenses for restructuring funds and deposit guarantee schemes, as well as some one-off effects observed in the financial statements of some banks, as well as received dividends from bank subsidiaries, but the higher administrative expenses as well, also influenced the financial result of the system.

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Source: BNB, own calculations
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Chart by Visualizer

As of December 31st, 2021, the value of Return on Assets (ROA) increased to 1,05% from 0,66%, recorded as of December 31st, 2020. For the same period the Return on Equity (ROE) grew to 8,5% from 5,3%.

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Chart by Visualizer
Source: BNB, own calculations

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 lev (BGN) declined by 4 basis points to 0,10% from 0,14%, as they were at the end of 2020. The decrease in euro was by 6 basis points to 0,08% from 0,14%. The average interest rate on new business on deposits with agreed maturity for non-financial corporations fell to -0,19% from -0,05% for deposits in BGN and increased to 0,06% from 0,02% for deposits in EUR.

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Chart by Visualizer
Source: BNB

At the end of December 2021, 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 2,86% from 3,07% for housing loans in BGN and to 3,16% from 3,61% for those in EUR a year earlier. The APR for consumer loans in BGN was 9,04% and 3,33% in EUR compared to 9,53% and 3,96%, respectively, at the end of the previous year. The average interest rates on new business loans for non-financial corporations fell to 2,39% from 2,80% for loans in BGN and increased slightly to 2,17% from 2,15% for loans in EUR.

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Chart by Visualizer
Source: BNB

Along with the economic recovery, the impact of a number of regulations and regulatory requirements also influenced the banking sector.

As part of Basel III regulatory framework, as from June 2021 the net stable funding ratio is applied pursuant to point (d) of Article 430(1) (d) of Regulation (EU) No 575/2013. The reporting frequency by all credit institutions in Bulgaria (excluding EU Member States foreign bank branches) is quarterly on an individual and consolidated basis. According to the regulatory requirement, as of the end of June 2021 they should maintain a level of the ratio equal to or greater than 100%. According to the BNB, as of 30th of September 2021, all banks in Bulgaria comply with this requirement, and the aggregate value of the NSFR for the banking system was 163%. The amount of the available stable funding was BGN 103,7 billion (EUR 53 billion) and that of the required stable funding (the NSFR denominator) reached BGN 63,6 billion (EUR 32,52 billion).

In September 2021 the BNB determined the levels of the buffer for Other Systemically Important Institutions (O-SIIs) for eight banks, which would be between 0,50% and 1% from January 1, 2022. The increase of the counter-cyclical capital buffer from 0,5% to 1% as of October 2022 and the announced increase to 1,5% from January 1, 2023, is also going to influence the capital indicators of the system. During the year the regular two-year review of the systemic risk buffer was also performed. Its level was confirmed by the BNB Governing Council at 3% of the bank’s local risk exposures.

The activity of the banking system was also influenced by the membership in the Single Supervisory Mechanism and the Single Resolution Mechanism, the established close cooperation between the BNB and the ECB and the inclusion of the Bulgarian lev in the Exchange rate mechanism (ERM II). In this context, Bulgaria is working on a plan for the adoption of the euro with a technical deadline of January 1, 2024.

Consolidated data for the banking system in Bulgaria as of December 31st, 2021

Balance sheet statement (Statement of financial position) – key positions:
Assets
Assets
Liabilities
Liabilities
Equity
Equity
Statement of profit or loss – key positions
Statement of profit or loss – key positions