Mortgage lending boosts Bulgarian banks’ 2024 profit to 3.7 bln levs

The strong performance comes as a bit of a surprise, given that just a month earlier, in November, banking system data showed a slight year-on-year decline in profits. However, a strong December performance reversed the trend, as banks posted a record-high monthly profit of 413 million levs, partly supported by an unusually high seasonal dividend income for UniCredit Bulbank. Another factor was the relatively lower impairment costs at the end of the year, following a period of more aggressive provisioning by banks in previous months.

Despite the record profits, bank executives are likely to have mixed feelings about the news, given recent discussions about a potential windfall tax on excess earnings. The proposal was initially removed from the caretaker government's budget draft, and the current elected administration has stated that it does not intend to introduce new taxes or increase existing ones. However, given ongoing concerns about the deficit in public finances and the reluctance to impose unpopular fiscal measures, the debate could resurface at any moment.

One argument from the banking sector against additional taxation is that banks operating as part of international groups are already subject to the increased 15% corporate tax rate. As a result, the total corporate tax paid by the sector for 2024 stands at 568 million levs, compared to approximately 350 million levs in 2023.

Volume matters

As interest rates decline, loan volumes are becoming increasingly crucial for maintaining revenue. Thanks to this factor, net interest income has surged by an impressive 720 million levs year-on-year, reaching over 5.5 billion levs. This represents an increase of nearly 15%, roughly in line with the lending growth rate in 2024.

The slowdown from the surge of over 50% recorded in 2023 is evident, both due to the higher base effect and the easing of the ECB's monetary policy. This trend is particularly visible in liquidity management, as interest income from funds held with other banks (mostly parent institutions) has shrunk from over 1 billion levs to 730 million levs. At the same time, revenue from corporate loans has grown by 336 million levs, mortgage lending by 128 million levs, and consumer loans by 288 million levs. Since effective interest rates have remained largely unchanged, these higher income figures are primarily a result of rising loan volumes. Interest income from government securities has also increased, rising by 250 million levs, with banks' bond portfolios expanding by approximately 7 billion levs.

The growth of net fee and commission income has also accelerated in 2024, rising by 145 million levs, or nearly 10%, to reach 1.62 billion levs. Again, the primary reason for this increase is new business expansion, driven by higher lending activity and a moderate pick-up in overall economic activity.

Rising cost pressures

On the expense side, cost pressures continue to intensify. Administrative expenses have increased by 265 million levs, or 12% year-on-year, approaching 2.5 billion levs. Unsurprisingly, the main driver of this increase is the general rise in wages across the country.

Provisions for loan impairments have jumped by 234 million levs, or 55%, reaching 661 million levs. Since regulatory data does not yet indicate a rise in non-performing loans, these higher provisions likely reflect banks' assessment of increasing macroeconomic risks that could lead to future credit losses. However, provisioning levels remain highly uneven across the sector. A significant portion-193 million levs-was allocated by First Investment Bank (FiBank), which has been cleaning up legacy problem assets over the past few years. Other institutions with higher impairment charges include TBI Bank (146.6 million levs), which specializes in consumer lending, as well as DSK Bank (101 million levs) and Postbank (90.4 million levs), both of which have a strong presence in the consumer loan segment.

Profit leaders

In a favorable banking environment, nearly all banks in Bulgaria remained profitable in 2024. DSK Bank once again led in absolute profit terms, posting 976 million levs, though slightly below its record 1 billion levs in 2023. UniCredit Bulbank followed with 947 million levs, 140 million levs higher than the previous year, partly due to an unusually large dividend income of 211 million levs.

Among the notable gainers, Postbank saw a significant 33.7% profit surge, to 412 million levs, partly driven by one-off effects from its acquisition of BNP Paribas Personal Finance in 2023. United Bulgarian Bank (UBB) also posted a record profit of 496 million levs, though its growth was more modest, at 5.2%.

In terms of assets, Belgian KBC-owned UBB remained the largest bank with 37.5 billion levs, extending its lead over DSK (36.46 billion levs) and UniCredit Bulbank (34.9 billion levs). The fastest-growing player was TBI Bank, which entered the top 10, surpassing Investbank with 3.5 billion levs in assets.

Intensifying competition in lending

Liquidity in the banking system remains high, keeping competition for deposits subdued. However, banks are fiercely competing for market share in lending, particularly in mortgages, consumer loans, and corporate credit.

Mortgage lending grew by 5.5 billion levs year-on-year in 2024, with the four largest banks accounting for 1.53 billion levs of the increase. DSK (455 million levs) and UBB (446 million levs) led the segment. Consumer loans rose by over 3 billion levs in 2024, with UBB (140 million levs) surpassing TBI Bank (134 million levs), DSK (125 million levs), and Postbank (113 million levs) in quarterly loan growth.

Corporate lending saw the most aggressive expansion. UBB increased its portfolio by 1.2 billion levs, becoming the second bank with over 10 billion levs in corporate loans and closing the gap with UniCredit Bulbank. Postbank also grew strongly (379 million levs), approaching 6.5 billion levs.

Outlook for 2025

The key factor shaping bank profitability in 2025 will be the pace of ECB rate cuts. While mortgage and consumer loan rates in Bulgaria may remain largely unchanged, lower interest rates in corporate lending, government securities, and liquidity management will pressure margins.

Additionally, Bulgaria's potential entry into the eurozone remains a critical event that could significantly impact the banking sector's landscape.