Between January and August 2018 the profit of all 26 commercial banks in Bulgaria crossed the psychological boundary of BGN 1 billion (EUR 556 million). Moreover, the banks’ profit increased with 20% as compared to the same period last year. In one year only the profit of the seventeen biggest companies in this country amounted to EUR 724 million. And here is another banking record- the assets of the financial institutions crossed the threshold of BGN 100 billion (EUR 51 billion). Bank deposits also saw increase to EUR 26 billion!

All these figures show that the financial sector in Bulgaria is in excellent condition. However, this is due to a big extent to the flourishing local economy and the increased wealth of the Bulgarian citizens. The number of people who have enough money to buy essentials and make savings has increased recently. Moreover, the country’s public finance is also in a very good condition and the budget surplus in 2018 is expected to amount to nearly EUR 1 billion.

The financial results of the Bulgarian banks are impressive, because the interest rates on bank credits have reached record lows. Usually, the banks’ profits are formed from the margin between the borrowed capital and the money given to companies and citizens as bank loans. When interest rates on bank loans are low, however, the bankers have the difficult task to increase the volumes of bank loans in order to make up for the low interest rates. This is what exactly happened in Bulgaria recently. According to official statistics, the bank credits amounted to EUR 32 billion.

This sounds very promising against the backdrop of the expected stress tests on the Bulgarian banks by the European Central Bank. This should happen very soon, because Bulgaria has already applied to enter the ERM2 mechanism (the Eurozone’s waiting room) until the summer of 2019. The Bulgarian authorities and bankers are not worried about the forthcoming stress tests, because last year the Bulgarian National Bank made a series of financial inspections in the country’s commercial banks.

Despite the recent excellent financial results, the Bulgarian banks have been facing a series of problems and challenges as well. The levels of bad loans have already reached 10% of their total assets, which pose a risk to the stability of the banking sector. That is why the banks sometimes sell some of their bad loans with a discount to other financial institutions. Several days ago the biggest bank in Bulgaria sold bad loans to the tune of EUR 250 million.

According to financial experts and observers, the number of banks in Bulgaria has to be reduced, i.e. a consolidation in the banking sector is necessary. In their view, a country with a population of just under 7 million people does not need 26 banks, because the financial marker is too fragmented. Apparently, such statements make sense, because we have already witnessed bank mergers and acquisitions in Bulgaria in 2018. The positive development of the Bulgarian banking sector is also due to the fact that most financial institutions in Bulgaria are subsidiaries of large international banking institutions, mainly based in the European Union. Some banks in Bulgaria are subsidiaries of French, Greek, Italian and Belgian banks. Most of them are based in the Eurozone which is expected to help Bulgaria in its Eurozone accession bid. So far optimism prevails in the Bulgarian banking sector, which proves that Bulgaria is a country with good financial condition which deserves confidence.

English version: Kostadin Atanasov