The banking system in Bulgaria in 2018 – facts and figures

In 2018 the positive impact on the banking sector was mainly due to the favorable state of the Bulgarian economy, characterized by faster growth than the average for the European and the world economy, low unemployment, increasing incomes, stable fiscal position and the lack of excessive imbalances. For the banking sector the past 2018 was marked by several tendencies – consolidations processes, increasing growth in deposits, continuing increase in lending accompanied by higher revenues, decrease in the share and the amount of non-performing loans and growing digital challenges.

As of 31st of December 2018, there were 25 banks operating in Bulgaria, five of which were foreign banks’ branches. Their total assets increased by 7,9% to the amount of BGN 150,6 billion (EUR 54 billion) compared to the end of 2018.

Source: BNB
Source: BNB

The share of loans and advances from the sum of the total assets increased to 63,3% compared to 61% at the end of December 2018. The share of cash dropped to 19,3% from 19,9% and the share of securities decreased to 12,9% from 14,3%.

The loan portfolio of the banking system grew at a moderate pace due to the favorable economic environment, low interest rates, competition and the higher loan demand. The banks use the favorable momentum and clean their loan portfolios intensively evidence for which is the tendency for the decline of non-performing loans (NPLs).

Deposits, accumulated by banks, continued to grow. As of the end of December 2018 they reached BGN 77,66 billion (EUR 39,7 billion), or 71,8% 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 (66,4%).

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 a system and local level as well as in comparison with the average levels for the European banks. At the end of 2018 the common equity tier 1 ratio (CET 1) for the whole banking system was 18,99% and the total capital adequacy was 20,38%. The capital adequacy ratios of the banks in Bulgaria are above the average levels for the European banks, which were 14,18% and 17,83%, respectively, according to the ECB data as of the end of September 2018. The liquidity coverage ratio (LCR) was 294,1% compared to 347,6% at the end of 2018. According to the ECB data, as of the end of September 2018 the LCR for the banks, participating in the Single Supervision Mechanism, stood at 140,93%.

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 59,4% of the assets in the banking system. As of the end of 2018 their share was 55,9%. As of 31st of December 2018, the market share of the banks falling in the second group declined from 41,7% to 37,7%. The share of the banks in the third group, including foreign branches, increased to 2,9% from 2,4%.

Source: BNB, own calculations
Source: BNB, own calculations

In 2018 the credit risk continued to determine the trends and the behavior of the banks, operating on the Bulgarian market. The current challenges which the banking system is facing are related with the improvement of profitability against the low interest margins, prudent credit risk management in the context of the expectations for changes in the economic and interest rate cycle, and the efforts for increasing efficiency, including through consolidation.

Considering the processes of consolidation – in 2018 the integration between United Bulgarian Bank (UBB) and CIBANK, DSK Bank conducted a deal for acquiring Societe Generale Expressbank and its other local subsidiaries and Investbank acquired Commercial Bank Victoria. BNP Paribas Personal Finance S.A. started operating as branch and at the end of the year the branch of Varengold Bank AG started functioning. In 2019 the deal for the acquiring of Piraeus Bank Bulgaria by Eurobank Bulgaria is expected to be finalized.

The continuing 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, 2018, the amount of non-performing loans (excluding Central Banks and Credit Institutions) declined to BGN 4,54 billion (EUR 2,3 billion) in absolute terms, or to 7,5% as a share, as the tendency for decline continues. 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.

The credit growth, the better quality of the loan portfolio, the lower impairments, the declining interest rates and some one-off effects influenced the financial result of the sector for 2018. The net interest income rose by 2,5% on an annual basis to BGN 2,74 billion (EUR 1,4 billion) from BGN 2,67 billion (EUR 1,37 billion) as of the end of 2018. The net income from fees and commissions income grew by 7% compared to 2018 to BGN 1,07 billion (EUR 547 million). As of 31st of December 2018 the net profit of the banking system was BGN 1,678 billion (EUR 858 million) compared to BGN 1,17 billion (EUR 598,2 million) a year earlier.

The financial performance of the system was influenced by the higher credit activity, which is a core activity for the banks, which affected positively the interest revenues and the revenues from payment services. The lower level of the interest rates on liabilities, lower impairment costs as well as some one-off effects like received dividends, revenues from sales of non-interest-bearing assets and the inclusion in Q2 2018 of a new entity – a foreign bank branch, also influenced the profitability of the credit institutions. The financial result of the system in 2018 was affected by the higher impairment costs made by a bank in the first group.

Taking into consideration all these factors and excluding the one-off effects occurred in 2018 and in 2018 it could be concluded that practically the net profit of the sector grew by 12% on an annual basis to BGN 1,44 billion (EUR 736 million). After excluding the net interest income of the new entity (BGN 82,5 million (EUR 42,2 million)), the net interest income of the banking system could have decreased by 0,6% on an annual basis to BGN 2,66 billion (EUR 1,36 billion) despite the increased lending activity. After excluding the net income from fees and commissions of the new entity (BGN 28,6 million (EUR 14,6 million)), the net income from fees and commissions for the banking system could have increased by 4% on an annual basis to BGN 1,037 billion (EUR 530 million).

Source: BNB, own calculations

As of December 31st, 2018, the value of Return on Assets (ROA) increased to 1,6% from 1,2%, recorded as of December 31st, 2017, and the Return on Equity (ROE) – to 12,1% from 9,3%

Source: BNB, own calculations

The previous year was characterized by a retention of the 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 3 basis points to 0,21% from 0,24%, as they were at the end of 2018. The increase in euro was by 2 basis points to 0,23% from 0,21%. The average interest rate on new business on deposits with agreed maturity for non-financial corporations fell to 0,06% from 0,09% for deposits in BGN and to 0,02% from 0,05% for deposits in EUR.

 
Source: BNB

The interest rates on loans declined more smoothly in 2018 compared with 2018. At the end of December 2018 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 3,57% for housing loans in BGN and to 3,94% for those in EUR. The average interest rates on new business loans for non-financial corporations fell to 3,48% for loans in BGN and to 2,91% for loans in EUR. The decrease was respectively from 3,71% and 3,38%. In combination with the favorable development of the Bulgarian economy, the lower interest rates provide an additional grounds for accelerating the lending activity.

Source: BNB

Overall, 2018 was characterized by growth in lending for the banking sector, an increase in the new business and a decline in the non-performing loans as at the same time the low interest rate levels and the challenges, posed by the regulatory environment, were kept.

The last year was of key importance for Bulgaria and its image. For the first time, the country took the presidency of the Council of the EU by rotation and owing to that the country became more visible on the European and international scale. At the very end of its presidency of the Council of the EU in June 2018 Bulgaria declared its intention to join the exchange rate mechanism – ERM II as well as simultaneous accession to the Single Supervisory Mechanism continuing on its natural path to the European integration, which can turn the country into the 20th member of the Euro area.

For the Bulgarian banking system 2019 is going to pass under the asset quality review and stress tests for couple of banks that are going to be performed by the ECB with the cooperation of the BNB due to the participation in ERM II and the Banking Union by establishing close cooperation with the ECB.

Consolidated data for the banking system in Bulgaria as of December 31st, 2018

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