The 8% profit growth reported by the banking sector to 3.7 billion levs in 2024, which is a new record in nominal terms, testifies to the robustness of the financial system. It's also an important marker when set against the backdrop of the global trade turmoil that is eroding growth potential and even threatening to bring a global recession.
And this indicator is not the only one that sparks optimism. In fact, it is hard to find one that is not positive. Businesses are growing across all segments, and bad loans are shrinking not just as a share but in nominal terms. Capitalization remains high and provides the capacity to absorb even substantial losses in a potential crisis.
Perhaps the only note of concern comes from the rapid increases in mortgage lending and house prices, but even these are occurring against a backdrop of income growth that has kept housing affordability indicators broadly unchanged.
In reality, the picture is not that simple. On the one hand, good news is met by many at knifepoint. So much so that bankers are increasingly embarrassed to even boast about their performance, lest accusations rain down about how they charge fees for nothing and why they don't take a cut or raise interest rates (depending on which type of customer you ask).
On the other hand, the gains of the last two or three years can hardly be attributed to their own merits because they are more due to the interest rate cycle phase combined with the low investment culture in the country. As a consequence, banks accumulate excess liquidity and have no incentive to raise deposit rates, which, with the European Central Bank (ECB) raising interest rates, widens their margins.
Of course, with the rising uncertainty, an external shock could easily end their honeymoon, which is evident in Capital Weekly's fourteenth consecutive K10 ranking of the best banks in the country. However, the data for the first three months do not show any risk materializing; on the contrary - Moody's has raised the outlook for its assessment of the Bulgarian banking system from stable to positive with an eye on the expected benefits of the eventual adoption of the euro.
The Year of Big Shifts
The K10 ranking rarely produces sudden moves, which is normal. Processes in the banking sector are usually smooth and occupied market positions are hardly taken over by new players. And they give advantages on many of the metrics on which banks compete. Size enables economies of scale and hence efficiency. And, all other things being equal, it provides cheaper funding, with larger banks typically able to offer lower deposit rates without being as threatened by loss of market share.
Therefore, it is not so surprising that there is no change at the top and UniCredit Bulbank keeps its leading position. It is also the most frequent winner of the award with 9 first places in the 14 editions of the ranking so far. It was also the asset leader for most of them, and although it has been overtaken by DSK Bank and UBB in recent years due to consolidation in the sector, it remains close to them in terms of scale. They both also retain the next two places in the overall ranking.
Traditionally, the top of the K10 is dominated by banks that are part of international groups. This dominance remains, but the 2024 data almost evens out the ratio of domestic (4) to foreign (6) players in the top 10 for the first time. With significant jumps of 5-6 places each, International Asset Bank (#6) and Central Cooperative Bank (#7) make their debut in the top 10.
Mergers and acquisitions by major players, which have resulted in a decline in the number of foreign-owned banks, are also a factor. The total number of participants in the ranking remains unchanged from the previous edition at 16 (it excludes branches of foreign institutions as well as the state-owned Bulgarian Development Bank, BDB).
The only announced deal, first revealed back in the spring of April 2024 (The Bulgarian-American Credit Bank BACB to acquire the small Tokuda Bank), has still not been completed a year later and it is unclear at what stage it has reached. Apart from that, a pending deal was recently announced for TBI Bank as well, but this will not produce any mergers as both the seller and buyer (Advent International) are foreign investors with no other banking business in the country.
Overall, the data for 2024 shows more dynamics than usual, and there are losers as well as big winners. For example, BACB drops as many as six places after being the only bank in the sector to report a contraction in assets for the year.
Loans and Deposits: On a Familiar Trajectory
The past year 2024 did not highlight qualitatively new trends in the development of the main areas of banking operations. Lending continued to grow at double-digit rates across all segments. But while there was some cooling in corporate transactions, mostly due to the slight saturation following the boom in solar projects in recent years, households saw further acceleration.
In housing loans, growth reached almost 30% at the end of the year, which understandably (given that property remains the preferred form of investment for Bulgarians) is the most visible and publicly discussed topic. The question of whether there is a bubble and whether and when it will burst is periodically being raised, but there is no easy answer.
The view ahead
So far, bankers don't seem unduly concerned. Forecasts for the Bulgarian economy continue to show steady growth of 2.5-3% and the effects of trade uncertainty are expected to be limited and to come with a lag. Of course, all scenarios are conditional between a softening tone and a new escalation from the Donald Trump administration. The National Bank (BNB) estimates the direct and indirect exposure of Bulgarian exports to the US at 3.8%. Possible aftershocks through the problems and slowdown in demand from other countries are difficult to quantify, but at this stage no one is betting on this translating into difficulties for Bulgarian businesses, which could translate into defaults and non-performing loans and hence affect the banking system.
In the first two months of 2025, the banking system's profit shrank slightly by 9.5%, or 46 million levs, to 438 million levs. Profitability is expected to be under pressure all year due to the ECB lowering interest rates and hence all floating rates and yields. Continued lending growth will counteract this effect somewhat, so there may not be a material contraction in profit in nominal terms, but profitability metrics will contract.
With the adoption of the euro, two more factors of opposing impacts will be activated. On the one hand, banks will lose some of their income from currency translation fees. On the other hand, as mentioned, they will be able to derive income from the released reserves, which now sit with the BNB at 0% interest. How significant this will be in terms of value is difficult to predict with precision, but the direct effect on the sector is expected to be between neutral and slightly positive. In the longer term, bankers expect more benefits to be revealed.
The 8% profit growth reported by the banking sector to 3.7 billion levs in 2024, which is a new record in nominal terms, testifies to the robustness of the financial system. It's also an important marker when set against the backdrop of the global trade turmoil that is eroding growth potential and even threatening to bring a global recession.
And this indicator is not the only one that sparks optimism. In fact, it is hard to find one that is not positive. Businesses are growing across all segments, and bad loans are shrinking not just as a share but in nominal terms. Capitalization remains high and provides the capacity to absorb even substantial losses in a potential crisis.
