In 2023, banks in Bulgaria reported a new record profit of 3.4 billion levs (1.7 billion euro), which is an increase of nearly 65% compared to 2022. However, this impressive performance has been met with cautious optimism by the lenders, as it not only stirs dissatisfaction among bank customers in Bulgaria but also whets the appetite of finance ministers who see an opportunity to patch budget gaps with a potential extra tax.
Asset growth, although slightly slower, remained above 10%, reaching 172 billion levs. Despite global and local upheavals, lending continued to grow, with mortgage loans increasing by more than 20%. Surprisingly, interest rates in Bulgaria remained among the lowest in the EU. Liquidity and capital ratios comfortably exceeded local regulatory requirements and those in the Eurozone.
On the threshold of joining the Eurozone, the Bulgarian banking sector appears robust against the backdrop of economic slowdown and chronic political instability. For the thirteenth consecutive year, the Capital Weekly has compiled the K10 ranking of the best banks in the country. The 2023 ranking clearly shows both the overall favorable environment and improvements across nearly all market participants.
As of the beginning of 2024, there seems to be no sharp change in last year's trends. With inflation abating, expectations are that the global peak of the interest rate cycle has been reached, and the European Central Bank (ECB) is likely to start loosening its monetary policy by mid-year, thus reducing the risks of external shocks for the Bulgarian banking sector.
The benefit of scale
UniCredit Bulbank maintains its lead in the K10 ranking for yet another year in 2023. It also holds the record for most first-place finishes in the ranking, with a total of eight. Although UniCredit Bulbank lost the top spot in terms of assets due to sector consolidation, the Bulgarian unit of Italy's UniCredit Group remains in the top trio of giants of similar stature. It traditionally performs strongly in the 'Stability and Risk' category, where it continues to hold the number one position.
Second place goes to DSK Bank, which maintains the lead in 'Efficiency and Profitability' category. As the largest retail banking institution in the country, it typically achieves higher margins due to its significant share in the more expensive consumer lending market. In 2023, it became the first financial institution in Bulgaria to record a profit exceeding 1 billion levs.
Climbing to the position of the largest bank in the country, United Bulgarian Bank (UBB) with 34 billion levs in assets takes third place in the overall ranking. This achievement also places UBB as the leader in K10's new 'Size and Dynamics' category.
The fact that the top positions are occupied by banking giants is not particularly surprising. In today's world of tightening and increasingly costly regulations, scale becomes more important for performance. However, scale is not the sole determinant, and smaller players also climb to top spots in the ranking. The fastest progressing institution in the ranking is Allianz Bank (No. 4), which advanced four places.
Overall, the top of the ranking continues to be dominated by banks that are parts of international groups, with locally-owned Bulgarian American Credit Bank (BACB) (No. 6) and First Investment Bank (No. 7) further ahead, while all other local players occupy positions outside the top ten. Last year saw the completion of the merger between UBB and KBC Bank (formerly Raiffeisenbank Bulgaria), as well as the acquisition by Postbank of the branch of BNP Paribas Personal Finance. However, there were no new deals to further consolidate the sector, so the number of banks in K10 remained at 16 (branches of foreign lenders and state-owned Bulgarian Development Bank are not included in the ranking). Next year, there may be one less, as in mid-April BACB announced an agreement to acquire the smaller Tokuda Bank (No. 15).
Crossing the interest rate wave
The European Central Bank's swift increase in interest rates to levels unseen since the establishment of the eurozone has been transferred more moderately and smoothly to Bulgaria. This effect has been almost solely felt in the corporate segment, where a large portion of the loans are in euro and/or tied to the European interbank index Euribor, which has jumped in sync with the ECB's tightening. For households, the impact is practically non-existent-the interest rates on deposits have barely moved, with some banks offering slightly more attractive rates, but the bulk remains close to zero.
The reason for this anomaly is the banks' enormous excess liquidity. The abundance of resources has created incentives for deployment, evident from lending growth (now at over 20% on an annual comparison basis for mortgage loans), which has prompted analysts to increasingly warn of a risk of overheating. In such a competitive environment, it is understandable that interest rates on loans have difficulty rising.
New focus
Undoubtedly, preparations for Bulgaria's expected entry into the Eurozone are the main focus of banks this year. Whether this will happen on January 1, 2025, which is the official government target, or later, will likely become clear in June when the convergence reports from the European Commission and ECB are expected to be published. Currently, Bulgaria does not meet the price stability criterion, and although inflation is subsiding and approaching the required level, this target is unlikely to be met within the next 2-3 months. However, the government that resigned in March actively lobbied and launched the idea of an extraordinary convergence report in the fall to confirm the entry date of January 1 or possibly set a later date during 2025.
Regardless of the uncertainty, the banking sector is working hard to be ready for the start of 2025. This is undoubtedly a costly exercise, with the government estimating that it will cost banks 147 million levs to adapt their information and accounting systems. But more significantly, besides money, this project also consumes a lot of human resources, with banks reporting that a major part of their IT capacity is dedicated to it.
Methodology
The ranking of banks is based on several indicators divided into three groups: stability and risk; efficiency and profitability; size and dynamics. Each indicator is weighted differently to reflect its significance as well as how much it is distorted by one-time effects or accounting policies. We have tried not to give significant weight to indicators that depend on the size of the bank (such as assets, deposits, and loans) and those that banks have regulatory or marketing incentives to embellish (such as non-performing loans, net profit, and capital ratios).
The ranking excludes the state-owned Bulgarian Development Bank, as it essentially does not compete with other banks and supports government policies. Moreover, it operates under non-market conditions as it is financed with implicit or explicit state guarantees.
In 2023, banks in Bulgaria reported a new record profit of 3.4 billion levs (1.7 billion euro), which is an increase of nearly 65% compared to 2022. However, this impressive performance has been met with cautious optimism by the lenders, as it not only stirs dissatisfaction among bank customers in Bulgaria but also whets the appetite of finance ministers who see an opportunity to patch budget gaps with a potential extra tax.
Asset growth, although slightly slower, remained above 10%, reaching 172 billion levs. Despite global and local upheavals, lending continued to grow, with mortgage loans increasing by more than 20%. Surprisingly, interest rates in Bulgaria remained among the lowest in the EU. Liquidity and capital ratios comfortably exceeded local regulatory requirements and those in the Eurozone.
