14/04/2010 - Bulgarian Banking System in 2009

ulgarian banking industry developed very rapidly during the past decade. Consequently, bank privatization and subsequent transactions related to mergers and acquisitions, a number of reputable  foreign financial institutions entered the local banking market. Some of the biggest Greek, Italian, French and Austrian financial groups operate in the  sector.

With Bulgaria's EU accession in 2007, penetration of banking services surged dramatically. Parent banks through their local subsidiaries allocated billions of euro in to the small economy of Bulgaria. In the form of bank loans, these funds reached households and businesses. Credit expansion contributed to the renovation and expansion of production capacity of the economy, but a significant proportion of the capital was directed to low productive real estate market and related sectors. Considerable part of bank loans were used by households and firms to buy luxury goods (cars, electronics, imported furniture), which led to a significant capital outflow from the country and loaded current account to a record level (25 percent of GDP for 2007 and 2008)

After the outbreak of the financial crisis that easily turned in to a general economic one, situation changed dramatically. Non-performing loans increased in line with unemployment, declining exports, decline in sales of businesses and growth in business claims.

The banking system remains stable, but the effects of the crisis are beginning to be felt more strongly.

Unconditional growth in assets, loans and profits stay in the past. Bank assets and loan portfolio of the system increased in 2009 with the symbolic 1.9 and 3.6 percent respectively, while profit declined by preliminary data by almost  44 percent. Banks have become very demanding in terms of the solvency of customers, while significantly enhanced requirements to the borrowers. Meanwhile, credit conditions become less favorable, which also contributed to the decline in volume of new businesses on loans. The war on deposits battlefield as the main source of funding at a time when parent banks cannot finance their Bulgarian divisions led to a significant increase in interest rates on borrowed resources from households and businesses.

While over 80 percent of banks’ assets and capital in Bulgaria are controlled by foreign banks or financial institutions, the ownership is well distributed in countries (Greece, Italy, Austria, France, Hungary, etc.), so now is unlikely to develop a negative scenario of the Baltic banks, ownership of which is concentrated in the hands of Nordic banking groups, which stopped funding its subsidiaries, and even withdrew capital.

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