Something must be wrong. A year in which part of Europe is engaging in full-scale war, inflation is at its highest levels in decades, and energy shortages are rife, cannot also be a record year for the banking sector. Businesses and households should be reining in investment plans and consumption, and the appetite and opportunities for new loans should be cooling down.
The 2022 balance sheet, however, does not reflect that. The banking system realized a 47% increase in profit, which for the first time in nominal terms exceeded BGN 2 billion. Assets increased by BGN 20 billion, or almost 15%, to BGN 155.4 billion. And the post-pandemic boom in lending shows no serious sign of abating, particularly in mortgage and consumer loans for households.
Perhaps the most significant phenomenon for the financial sector in 2022 - the shock tightening of monetary policy by the major central banks, and especially by the ECB, did not greatly impact the Bulgarian banking system. It has been curiously insulated from the global rise in interest rates thanks to its abundant excess liquidity and continued inflow of deposits. For a large portion of the population, a bank deposit remains the only option for channeling savings, and they are reluctant to consider alternatives such as mutual funds even at near-zero interest rates.
In the first months of 2023, the overall calm landscape has been preserved, although a gradual rise in interest rates on deposits has emerged, which will inevitably affect loans too. For now, however, statistics continue to report average levels of housing loans at an interest rate of around 2.6% and there's little sign of levels reaching the 3.5-4% recorded in most countries of the Eurozone, or the 8% in Romania, Poland and Hungary.
The top 10
Data from financial statements for 2022 produced a shift at the top of the Q10. The new leader is Unicredit Bulbank, which has now topped the ranking 7 times. It displaced the only other bank that has occupied the top position (5 times in total) - DSK. Both banks report record profits, which in total exceed BGN 1 billion and account for more than half of the result of the entire sector.
DSK has traditionally shown strong performance in terms of profitability due to its good positions in retail banking and especially in consumer loans, where margins are higher. Unicredit Bulbank, on the other hand, always demonstrates strength in stability indicators thanks to its long-standing leadership position in the asset sector. Therefore, it can be counted as a consolation prize for DSK that at the end of 2022 it displaces its competitor and becomes the largest bank, with its balance sheet reaching almost BGN 29 billion.
The struggle for the top is also intensified by UBB (ranking 4th). In 2022, its owner, the Belgian financial group KBC, finalized the purchase of Raiffeisenbank's Bulgaria business (renamed KBC Bank Bulgaria) and all the necessary approvals for the upcoming merger are already in place. That is why in this year's K10, UBB is with the aggregated indicators of the two banks, which collectively rank it as number 1 in terms of assets with almost BGN 30 billion.
Apart from this shift, Capital's ranking continues to show its stable composition - the top places are dominated by banks that are part of foreign groups, and smaller institutions with local owners are mostly in the bottom half.
The biggest leap in the rankings is that of Bulgarian-American Credit Bank, which climbs five positions to number 7, making its debut in the top 10. However, this performance is heavily influenced by a one-time deal - at the very end of 2022, the bank sold and leased back its former headquarters at 16 Krakra Street in Sofia. The deal was financed by BACB itself with 9 million euros, and the operation strongly supported its profit (over 120% growth to nearly BGN 44 million) and its capital indicators.
The other strong local bank, although its profit is down year-on-year, is Fibank (#5), which has been struggling for years to clean up its balance sheet from legacy problems with large exposures, including to businesses related to its owners.
An increasingly concentrated sector
Beyond the purely quantitative arrangement of K10, the qualitative changes in the banking system continue. A series of mergers and acquisitions not only reduces the number of players, but also changes the dynamics between them this year.
Certainly, the trio at the top - Unicredit Bulbank, UBB and DSK - have the advantages of scale and are somehow emerging as a separate category. A bonus for some of them is that, in addition to banking, they also offer many other financial services. This applies to a large extent to DSK, which offers leasing, mutual funds, and pension insurance among others. UBB has an insurer, but the still ongoing merger will make it difficult for it to extract full-scale synergies from that.
Postbank (#3 in the ranking) remained outside the big three by a considerable distance. Somewhat understandably, it tried to bridge the gap with smaller acquisitions. At the end of last year, it announced an agreement to buy the branch of BNP Paribas Personal Finance in Bulgaria, which means a portfolio topping BGN 900 million in consumer loans, but even so it will still be behind the top three by more than BGN 10 billion.
Business prospects for smaller players are increasingly difficult. In the current climate of expanding margins and no wave of bad credit, the pressure is not felt. As we enter the next phase of the cycle, however, some of them may find it increasingly challenging to meet the tightening regulatory requirements, which will be an additional incentive for mergers.