- As of September 2024, banks' profits in Bulgaria show minimal annual growth, with return on assets and equity already declining as the interest rate driver weakens.
- Bank expenses, including salaries and provisions, continue to rise, with major players now also subject to an increased 15% tax rate.
- Despite this, lending continues to grow at double-digit rates, especially in the mortgage and consumer loan segments.
It's hardly surprising that, after the European Central Bank (ECB) rate hikes propelled Bulgarian banks to record profits, the recent shift towards monetary easing from Frankfurt is now beginning to have the opposite effect. By September, this shift isn't yet apparent in nominal terms-reported profits stand at 2.72 billion levs (1.39 billion euro), just 14.5 million above the same period in 2023. However, annual growth has now slowed to around 0.5%.
In real terms, profitability indicators are declining, as banks continue to expand. Previously, return on assets (ROA) was over 2% for four consecutive quarters, but it has now dropped to 1.94%. Similarly, return on equity (ROE) has decreased from around 18.2% a year ago to 16.4% now. In other words, the booming lending environment, which logically generates higher income, has not compensated for the negatives of margin compression and rising costs.
The peak seems to have been reached, and without substantial one-off effects, it's possible that in Q4 2024, profits will continue to shrink, and last year's record of 3.4 billion levs (1.74 billion euro) may not be surpassed. This should not necessarily be considered an alarming signal; at present, out of 23 banks and branches operating in the country, only one small lender has reported a loss. However, the golden period appears to be over, and following peak performance, heightened attention is warranted.
Weak interest rate
The mechanism behind the surge in bank profits across Europe was similar. The ECB's rate hikes were transferred more quickly to borrowers than to depositors, creating a temporary surplus income that led to significant windfall profits. In Bulgaria, there were some particularities. Due to the system's excess liquidity, the effect was hardly felt in the retail market for a long time. Additionally, the major advantage for local banks was the ability to derive returns by investing their cheap excess resources at decent rates, whereas previously, they were forced to hold these at negative interest rates with the Bulgarian National Bank (BNB).
The still-strong performance of the banking sector can be attributed to the growth of net interest income, which reached 4.14 billion levs for the first nine months of 2024, or 576 million levs above the level in September 2023. In percentage terms, the increase is 16%, which, although solid, pales compared to last year's growth of over 50%. It's essential to note that many effects of the changing monetary policy come with a delay and that the income is generated from a larger volume of loans, meaning margins are already shrinking.
In terms of net income from fees and commissions, the growth rate remains steady, driven by increased number of new business and slight economic acceleration. For the nine months thrigh September the total amount is 1.2 billion levs, which is 7.3% or just over 80 million levs higher compared to the same period in 2023.
No brake on expenses
On the expense side, there's no sign of relief. Administrative expenses for the nine months approached 1.8 billion levs, nearly 200 million levs higher than in 2023. Salary growth remains a key cost factor.
A relatively new development is the accelerated increase in provisions, which reached 450 million levs, up by 188 million levs or over 70% compared to the same period last year. It's worth noting that the distribution is extremely uneven. The most significant clean-up of balance sheets continues at First Investment Bank, which accounts for 141 million levs of provisions, or almost one-third of the total amount, with the highest increase-more than 50 million levs. Other banks with active provisioning are mainly those specialized in, or with a large market share in, consumer lending, such as TBI Bank and DSK Bank.
- As of September 2024, banks' profits in Bulgaria show minimal annual growth, with return on assets and equity already declining as the interest rate driver weakens.
- Bank expenses, including salaries and provisions, continue to rise, with major players now also subject to an increased 15% tax rate.
- Despite this, lending continues to grow at double-digit rates, especially in the mortgage and consumer loan segments.
It's hardly surprising that, after the European Central Bank (ECB) rate hikes propelled Bulgarian banks to record profits, the recent shift towards monetary easing from Frankfurt is now beginning to have the opposite effect. By September, this shift isn't yet apparent in nominal terms-reported profits stand at 2.72 billion levs (1.39 billion euro), just 14.5 million above the same period in 2023. However, annual growth has now slowed to around 0.5%.
