In 2023 Bulgarian economy slowed its growth compared to the previous year, but remained above the average levels for the EU and the Eurozone. It was influenced by both the negative effects of the war in Ukraine and the tightening of monetary policy in Europe and Bulgaria, which, albeit more slowly, began to affect the banking sector in our country. These processes also determined its activity in 2023. Despite high inflation and external shocks, the Bulgarian economy continues to grow in 2023, supported by the good performance of exports, income growth and increased consumption. The stronger performance of the economy also affects the results and activity of the banking sector. The past year was characterized by lower costs for impairments and accrued provisions, increased lending rates, increased interest rates and improved results of the banking sector.
As of December 31, 2023, 23 banks operate in Bulgaria, six of which are branches of foreign banks. The total amount of assets of the banking system increased by 10.7% to BGN 172.08 billion (EUR 87.98 billion) compared to 2022.
The share of loans and advances in total assets increased from 59.6% to 60.0% at the end of December 2023. The share of cash remained at 21% and that of securities portfolios decreased slightly from 15.2% to 15.1%.
Deposits attracted by banks continue to grow. At the end of December 2023, the total amount of deposits in the banking system reached BGN 147.3 billion (79% of the estimated GDP), marking an annual growth of 9.9%. Confidence in the banking system remains stable amid a high propensity to save on the part of households, which hold around two-thirds of deposits in the banking system (56.1% at the end of December 2023).
In 2023, the banking sector continued to maintain a solid capital position, maintaining capital adequacy and liquidity coverage ratios well above systemic and local regulatory requirements, as well as the European bank average.
At the end of 2023, the Common Equity Tier 1 (CET 1) ratio for the entire banking system was 20.07%, and the total capital adequacy ratio was 21.65%. The capital adequacy indicators of banks in Bulgaria are above the average levels for the European banks, which, according to ECB data, at the end of the third quarter of 2023. are 15.61%, for CET 1 and 19.69% for total capital adequacy.
The Liquidity Coverage Ratio (LCR) was 246.7% compared to 235% at the end of 2022. According to the ECB data, at the end of September 2023 the liquidity coverage ratio for banks participating in the Single Supervisory Mechanism stood at 160.7%.
The five largest banks according to the classification of the “Banking Supervision” department of the BNB (the so-called first group of banks) form 76.8% of the total amount of assets in the banking system. At the end of 2022, their market share reached 67.2%. As of December 31, 2023, the market share of the banks of the second group decreased from 29.4% to 20.7%, and those of the third group, which includes the branches of foreign banks, decreased from 3.4% to 2.5%.
The amount of non-performing loans continued to decrease in 2023 as well. As of December 31, 2023, the volume of non-performing loans (overdue over 90 days; excluding central banks and credit institutions) fell to BGN 2.2 billion (EUR 1.1 billion), or up to 2.27% as a share.
Although the level of non-performing loans is above the EU average, the banking system in Bulgaria continues to maintain a higher degree of coverage with impairment of gross non-performing loans compared to the average level for the EU countries.
At the end of 2023, the coverage rate of gross non-performing loans and advances in the Bulgarian banking system is at the level of 81.03%. According to the latest data from the EBA, the coverage rate for the European banks was 42.55% at the end of the third quarter of 2023.
Despite the economic challenges associated with the uncertain international environment, including close to Bulgaria, the banking sector remained stable and maintained a solid capital and liquidity position. The main trends for the banking sector in 2023 are the accelerated processes of digitization of banking products and services, instant BLINK payments, as well as the achievement of goals and regulatory requirements related to the transition to a green and sustainable economy.
The banks’ net interest income increased by 50.4% on an annual basis (with growth of 17% on an annual basis at the end of 2022) and as of December 2023 amounted to BGN 4.9 billion (EUR 2.48 billion) against the background of the increased credit activity during the year. At the end of 2023, net income from fees and commissions rose by 4.3% on an annual basis (with growth of 15.2% at the end of 2022) to BGN 1.5 billion (EUR 762 million). As of December 31, 2023, the net profit of the banking system was BGN 3.416 billion (EUR 1.75 billion), compared to BGN 2.079 billion (EUR 1.06 billion) a year earlier.
In 2023, economic activity faced weaker external demand, continuous price pressures and higher interest rates in the euro area. However, private consumption expanded, supported by the good performance of the labor market, as well as increased consumer confidence, reduced inflation and high credit activity, which is a determinant of the activity and results of the banking sector. The financial result of the banking system is influenced by the double-digit growth of the volume of loans in almost all business segments, which affects net interest income and net income from fees and commissions, the increase in interest rates on some loans that has started and the slower rate of growth of interest rates on deposits, as well as lower impairment charges.
As of December 31, 2023, the return on assets (ROA) increased to 2.1% from 1.4% as of December 31, 2022. The return on equity (ROE) increased to 18.5% from 12.3% for the same period.
In the past year 2023, a gradual increase in the average interest rates on the newly contracted deposits was observed. The average interest rate on deposits with agreed maturity for households in BGN increased by 62 basis points from 0.33% at the end of 2022 to 0.95%. An increase of 14 basis points from 1.27% to 1.41% is reported for deposits in euro. The average interest rate for newly negotiated deposits with contractual maturity for non-financial enterprises increased from 0.43% to 2.25% for deposits in levs and increased from 0.47% to 2.88% for those in euros.
As of the end of December 2023, the annual percentage rate (APR), which in addition to the interest rate includes all fees and commissions associated with the loan, decreased from 2.87% at the end of 2022 to 2.86% for home loans in levs and from 3.61% to 2.95% for those in euro. The APR level for consumer loans in levs is 10.14% and 3.86% for those in EUR (at 10.16% and 4.94%, respectively, at the end of last year). The average interest rates on newly granted loans to non-financial enterprises increased from 3.12% to 4.55% for those in BGN, and for those in EUR they increased from 3.92% to 5.85%.
The number of regulations and regulatory requirements also affect the performance of the banking sector.
As of June 1, 2023, the BNB increased the percentage of the minimum required reserves from 10% to 12%.
In 2023 eight banks have been designated by the BNB as domestic systemically important banks (O-SIIs), with O-SIIs buffer levels in the range of 0.50%-1%. From January 1, 2023, the countercyclical capital buffer was increased by the BNB from 1% to 1.5%, and from October 1, 2023 this capital buffer was increased to 2%. These changes had an impact on the capital indicators for the banks in the past year.
The activity of the banking system was also influenced by the preparation for the coming euro adoption.
Consolidated data for the banking system in Bulgaria as of December 31st, 2023
Balance sheet statement (Statement of financial position) – key positions:
