In 2019 the banks performed their activities on the back of expectations for slower economic growth and low levels of the interest rates, considering the signals from the external environment and the decisions of the leading central banks. The environment of low and negative interest rates will continue to affect the cost of financing, the levels of net interest income and the interest margins of the banks. The consolidation processes that have been ongoing during 2019 have not completed yet.
As of 31st of December 2019, there were 25 banks operating in Bulgaria, six of which were foreign banks’ branches. The total assets of the banking system increased by 8,2% on an annual basis to the amount of BGN 114,2 billion (EUR 58,4 billion) compared to the end of 2018.
The share of loans and advances as a part of the total assets increased to 65,7% compared to 63,3% at the end of December 2018. The share of cash dropped to 15,9% from 19,3% and the share of securities grew to 13% from 12,9% a year ago.
The loan portfolio of the banking system increased 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 as the evidence for which is the tendency for the decline in the share of non-performing loans (NPLs).
Deposits, accumulated by the banks, continued to grow. As of the end of December 2019 they reached BGN 85,16 billion (EUR 45,54 billion), or 71,8% 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 high propensity to save by the households. Approximately two thirds of the deposits were held by the household sector (65,3% as of the end of December 2019).
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 2019 the common equity tier 1 ratio (CET 1) for the whole banking system was 19,04% and the total capital adequacy was 20,16%. The capital adequacy ratios of the banks in Bulgaria are above the average levels calculated for the European banks, which were 14,37% and 18,05%, respectively, according to the ECB data as of the end of Q3 2019.
The liquidity coverage ratio (LCR) was 269,9% compared to 294,1% at the end of 2018. According to the ECB data, as of the end of September 2019 the LCR for the banks, participating in the Single Supervision Mechanism, stood at 145,16%.
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 62,1% of the assets in the banking system. As of the end of 2018 their share was 59,4%. As of 31st of December 2019, the market share of the banks falling in the second group declined from 37,7% to 34,7%. The share of the banks in the third group, including foreign branches, increased to 3,2% from 2,9%.
Regarding the consolidation processes – in 2019 the merger of Piraeus Bank Bulgaria – from the second group of banks, into Eurobank Bulgaria, which is in the first group of banks, according to the classification of the BNB, was finalized.
Lending continued its rate of high growth and the continuing active efforts of the banks for optimizing their portfolios led to a gradual decline in the share and the amount of the NPLs in all segments. As of December 31st, 2019, the amount of non-performing loans (excluding Central Banks and Credit Institutions) declined to BGN 3,94 billion (EUR 2 billion) in absolute terms, or to 5,9% 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.
At the end of 2019 the impairment coverage ratio of gross non-performing loans in the Bulgarian banking system was 59%. In comparison, the coverage ratio for the European banks, according to the ECB data for Q3 2019 was 44,45%.
On the back of the regulatory challenges, competition, efficiency, digitalization processes and sound credit risk governance according to the expectations for changes of the economic cycle, the banks reported good financial results in 2019.
The net interest income slowed its rate of growth to 0,1% on an annual basis (from 2,5% on an annual basis at the end of 2018) to BGN 2,745 billion (EUR 1,4 billion) as of the end of December 2019 despite the higher lending activity throughout the year. As of the end of 2019 the growth of net income from fees and commissions slowed down to 3,8% on an annual basis (after an increase by 7% at the end of 2018) to BGN 1,1 billion (EUR 562 million). As of 31st of December 2019 the net profit of the banking system was BGN 1,675 billion (EUR 856,4 million) compared to BGN 1,678 billion (EUR 857,9 million) a year earlier.
The financial performance of the system was influenced by the higher credit activity, low interest rates, lower impairment costs, expenditure optimization, the better quality of the credit portfolio as well as some one-off effects incurred in 2018 and in 2019.
After excluding the one-off effects, it could be noted that the net profit of the banking system in 2019 was at the amount of BGN 1,6 billion (EUR 818 million) compared to the adjusted net profit of BGN 1,44 billion (EUR 736 million) for the previous year.
The net profit was realized on the back of a slower growth of the net interest income, despite the higher lending activity, as well as of the net income from fees and commissions.
As of December 31st, 2019, the value of Return on Assets (ROA) decreased to 1,47% from 1,59%, recorded as of December 31st, 2018. For the same period the Return on Equity (ROE) dropped to 11,63% from 12,11%.
The previous year was characterized by a minimum decline of the average interest rates on new deposits. The average interest rate on deposits with agreed maturity for households on new business in Bulgarian levs (BGN) declined by 4 basis points to 0,17% from 0,21%, as they were at the end of 2018. The decrease in euro was by 3 basis points to 0,20% from 0,23%. The average interest rate on new business on deposits with agreed maturity for non-financial corporations fell to 0,05% from 0,06% for deposits in BGN and to -0,04% from 0,02% for deposits in EUR.
At the end of December 2019 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 3,32% for housing loans in BGN and to 3,50% for those in EUR from 3,58% and 3,97%, respectively, a year earlier. The average interest rates on new business loans for non-financial corporations fell to 2,86% for loans in BGN and to 2,65% for loans in EUR from 3,48% and 2,93%, respectively.
Overall, the year of 2019 was characterized by growth in lending, an increase in the new business amounts and a decline in the non-performing loans as at the same time the low interest rate levels and the challenges, imposed by the regulatory environment and the economic perspectives, were kept.
Higher capital requirements were applied in 2019. Since the beginning of 2019 an increase in the buffer for Other Systemically Important Institutions (O-SIIs) between 0,25% and 0,75% on an individual basis for the banks defined as O-SIIs has been foreseen. The activation of the counter-cyclical capital buffer as of October 2019, which is going to be set at the at level of 0,5% and the announced increase to 1% for the period April-December 2020 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.
With a view of preparation for joining the exchange rate mechanism – ERM II and joining the Single Supervisory Mechanism simultaneously by establishing close cooperation with the ECB, in 2019 the ECB carried out an asset quality review and stress tests of six banks. The development of the process of accession to the exchange rate mechanism ERM II and the Banking Union would have a strategic impact on the banking sector and the economy of Bulgaria, continuing the natural path of European integration.