Banks pass new milestone

Even chronic problems such as zero or negative interest rates are unable to dampen spirits. The ongoing economic revival is boosting balance sheets and giving banks space to continue with the clean-up of the effects of the crisis. The recovery can also be seen as an opportunity for banks to prepare for the forthcoming reviews by the European Central Bank, part of the requirements on Bulgaria's path to entry into the EU's Banking Union.

The final step to the top

Long-running organic growth in banking was the main driver towards the 100-billion-levs peak in assets but one technical insert at the last moment really spurred the increase. Starting from the second quarter, the results of personal loans company BNP Paribas Personal Finance - Bulgaria branch were included in the data. Until then the branch had been focused on non-bank lending, but now it is looking towards consumer loans. According to the Bulgarian National Bank (BNB), the branch added 550 million levs to the assets of the banking system, helping it exceed the 100-billion-levs mark by 137 million levs.

Profit add-ons

Consumer loans were a significant contributor not only to asset growth but to profit rise as well in the second quarter. Leading the rise was UniCredit Consumer Financing, which paid just over 100 million levs as dividend to its parent - market leader UniCredit Bulbank. Whereas in previous years the branch kept profits in-house, in 2018 its dividend pay-off helped boost UniCredit Bulbank's profit by 21.3% to 237 million levs as of end-June - a whopping 30% of the combined 800 million levs profit of the entire banking sector.

Even without the effect from both the dividend pay-off and BNP Paribas Personal Finance, annualized profit growth still stands at 3% mid-year, with decreasing depreciation costs as the main catalyst. Intensified credit activity is also a plus as it boosts income from bank fees.

On the downside, the main component of bank income - net interest income, continued to fall in the second quarter, while administrative costs continued to swell.

Focusing on consumers

Banks in Bulgaria are increasingly focusing on the new sweet spot - retail lending, where big margins are still possible despite low interest rates. Almost no bank registered a cash outflow in the second quarter, whereas household deposits in large foreign-owned banks continued to grow.

Growth can be seen across the board in household lending as well. First-quarter leaders DSK Bank, Raiffeisenbank and Fibank are still at the front, maintaining the highest growth rates in the sector.

The growth of business lending seems to be slowing down, though. Sector-wide data shows that the pace is accelerating but the high rate of acceleration is determined by huge increases in lending by the branches of Citibank and ING in the country typically driven by a few deals. If those deals are excluded from the overall balance, the pace of growth of lending to businesses will be lower in the second quarter, as compared to the first quarter. On the plus side, the increase is welcome considering the lackluster investment activity in the private sector.

Another continuing positive trend is the decreasing ratio of non-performing loans in the banking system, helped by both credit growth and sales of packages of bad debt. According to BNB data, gross non-performing loans (NPLs) totaled 7.7 billion levs at the end of June, or 9.1% of all loans. Three months earlier the NPL ratio was 9.3%.