- From January to April, banks' profit reached 1 billion levs, promising a new record year for the sector.
- The result is mainly due to the widening spread between interest rates on business loans, which are on the rise, and deposit rates which banks, awash with liquidity, still have no incentive to raise.
- Lending continues to accelerate in all segments.
The banking sector in Bulgaria reported over 2 billion levs (1 billion euro) in profit for last year. Now, in the first four months of 2023, the financial result has already surpassed 1 billion levs, setting the stage for new records in nominal terms. Bank results until the end of April are up by 61.5% or 395 million levs compared to the same period in 2022. Of course, we should take into account that traditionally the first quarter is stronger for banks because of the dividends received from subsidiary companies.
The interest accelerator
The widening interest rate spread remains the main reason for the banks' strong operating performance. The tightening of monetary policy by the European Central Bank (ECB) and the rising Euribor are reflected in the increasing business lending rates, which are often linked to the index. At the same time, the still available excess liquidity in the banking system does not create incentives for lenders to raise interest rates on deposits, thus expanding their net interest income. This is, of course, aided by the ongoing credit boom, especially in the household sector.
Interest income reached 1.45 billion levs in January - April, up almost 50% year-on-year. In April alone, it hit a record high of 381.5 million levs. The biggest contribution to the rise in interest income came from funds allocated to credit institutions. These primarily include excess liquidity placed on the interbank market or through the headquarters of the ECB, where the income rises by 320 million levs on an annual basis, followed by corporate loans (215 million levs). In the case of consumer loans, the increase in interest income amounts to 61 million levs, and in mortgages it is only 11 million levs.
There is also growth in net income from fees and commissions, but it is only 6% and is slowing down. For the four months under review, revenues on this line came in at 475 million levs, which is 27 million levs more than the year-ago figure.
The banking system's total assets decreased by 713 million levs, returning to a level slightly below 160 billion levs. The Bulgarian National Bank attributes the drop mainly to the merger of KBC Bank Bulgaria (previously Raiffeisenbank Bulgaria) into United Bulgarian Bank, which was finalized on April 10. Traditionally, such a merger can optimize capital and liquidity management and return resources to the parent bank. The exact impact of the transaction on the balance sheet of UBB will be seen in the middle of the year when banks will provide more detailed data.
Deposits from households continued to grow in January-April (by 904 million levs, or 1.2% up year-on-year), while there was a decline in corporate deposits (by 577 million levs, or 1.3%), which can be explained by seasonal factors. In spring, traditionally more tax payments are made compared to the remainder of the year, and companies also start distributing their annual dividends.
Lending increased across all segments in April. Loans to households were up by 392 million levs (1.1% higher year-on-year), and loans to non-financial enterprises rose by 222 million levs (up 0.5% year-on-year). Loans to other financial enterprises grew by 161 million levs (up 2.3% year-on-year), and lending to the state administration increased by 25 million levs (up 2.8% year-on-year).
The annual growth rate in housing portfolios was 17%, reaching 19.3 billion levs, and in consumer portfolios, the increase was 12.7% to 16.8 billion levs. High interest rates continue to temper expansion in corporate lending, slowing the increase to 8.2% year-on-wear, to 45.7 billion levs.