The outlook for bank financial strength ratings (BFSRs) in Bulgaria is stable to positive, reflecting the system’s good earning capacity supported by growing business volumes but also increasing concerns over future credit quality metrics, Moody’s  Investors Service said in its new Banking System Outlook for Bulgaria.
“The rated Bulgarian banks have a weighted average BFSR of D, which reflects their generally good franchises, improving regulatory and supervisory environment, good profitability levels, sufficient capitalisation and strong liquidity. It also recognises that the banks’ improved financial performance in recent years has partly been driven by the positive economic cycle, while Bulgaria’s highly competitive market poses challenges for their future franchise development and exerts pressure on their interest rate margins,” said Stathis Kyriakides, a Moody’s analyst and co-author of the report.
Although Bulgaria’s banks’ franchises have benefited in recent years from the benign domestic economic conditions, primarily driven by rapid credit growth in retail banking and mortgage finance, in particular, Moody’s noted that corporate and commercial lending continues to drive bank intermediation — although to a lesser degree than in previous years.
The rating agency welcomed the banks’ efforts to diversify banking risk by expanding their retail and mortgage lending operations, as these traditionally offer greater income stream stability and higher margins than corporate banking and believes that, provided banks are prudent in offering household loans, this strategic focus should contribute to their franchise enhancement and boost revenue generation.
“However, we do caution that the rapid credit expansion could result in a high level of non-performing loans in an economic downturn. Rising consumer indebtedness raises concerns over the future performance of such borrowers, particularly in the context of a relatively unseasoned credit portfolio and concerns over the possibility that consumer lending may be clustered within a narrower and more leveraged customer class,” explained Elena Panayiotou, analyst and report co-author.
Other potential risks relate to banks’ relatively high single-party exposure to large Bulgarian corporates and concerns over the rapid price rises in certain asset classes in recent years, which could impact the sector in the event of a correction.
Meanwhile the active involvement of foreign banks in
Although foreign banks have contributed towards the strengthening of the sector in terms of better corporate governance practices and enhanced transparency, Moody’s believes there is still room for improvement in these areas, especially for the banks that remain in the hands of domestic investors.
