Dimitar Radev: The Bulgarian banking sector - opportunities and
challenges
Publication by Mr Dimitar Radev, Governor of the Bulgarian National Bank, in the Bulletin of the
Association of Banks in Bulgaria, issue 69, January 2022.
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It is a tradition to start a calendar year by reviewing the achievements of the banking sector in the
previous year and outlining the opportunities and challenges in the new one.
In 2021 the Covid crisis continued to put the banking sector to a serious test. Unlike the stress
tests in 2016 and 2019, the results of this test were not hypothetical, but provided a real
assessment of the state of the sector and its capacity to operate under highly adverse
conditions. This assessment can be summarised as follows: not only were Bulgarian banks not
weakened during the pandemic, but they enter 2022 with performance better than, or at worst
consistent with, that at the start of the pandemic, including in terms of capital, liquidity, asset
quality and profitability. According to the latest data for 2021, the overall capital adequacy ratio is
22.4% and the liquidity coverage ratio is 325.4%, i.e. above the EU average. At the same time,
the gross amount of non-performing loans and advances continued to decline, and profits
approached their historically high levels of 2019.
The short explanation for these results is that the banking sector was well prepared to operate in
a complex and challenging macroeconomic environment, as has been the environment over the
past two years. This has allowed the banking sector to have a different focus from the one it had
during the global financial crisis in 2008 or during the local problems in the sector in 2014. In
these previous episodes, the banking sector was mainly engaged in solving problems within the
sector. In the Covid crisis over the recent two years, the banking sector was not concerned with
its own problems, but mainly with alleviating the effects of the crisis on businesses and
households and subsequently with the recovery and speed-up of the economy.
In this sense, the Covid crisis legitimised an important qualitative change in the position of the
banking sector - from a source of problems in the past to an important factor in their resolution in
recent years. Significantly, the banking sector absorbed and implemented successfully and
without shocks the anti-crisis package of measures approved by the BNB, amounting to about
9% of the GDP, as well as a private moratorium on loan repayments by businesses and
households. At the same time, credit activity not only did not stagnate, but increased. According
to the latest data from the 2021 monetary statistics, loans to businesses and households grew
year-on-year by 4.1% and 12.5%, respectively.
Good operational performance was underpinned by progress on important strategic tasks.
October 2021 marked the one-year anniversary of the country's accession as a full member to
the European Banking Union. The assessment of this participation by both the ECB and the BNB
is unequivocally positive. This assessment has to be seen outside the narrow context of the
banking sector. First, it shows that Bulgaria can be a successful and full participant in euro area
institutions, given that the Banking Union is the first such institution in which the country has
participated; and second, it is a good example of institutional development to be followed in an
environment of still serious institutional deficits.
In 2021, we also marked one year since the Bulgarian Lev joined the EU Exchange Rate
Mechanism. This participation confirms and further proves the currency stability of the country.
Another important strategic aspect is the consolidation process continuing in our banking sector.
This process follows global trends of seeking to streamline the structure and efficiency of the
banking sector in the light of increasing competition and the pressure by new providers of
financial services, as well as rising costs of complying with regulatory and legal norms.
In spite of the difficult and complicated environment created by the pandemic, in 2021 we saw
the biggest acquisition, in terms of size and price, in the Bulgarian banking sector. A deal like this
i s the most accurate market evaluation of the condition of the banking sector and its
attractiveness to strategic investors.
Therefore, the sector stayed in very good shape and so far succeeded through the pandemic.
Now our focus must shift onto meeting the challenges of the year 2022, keeping the strategic
context, namely the process of Bulgaria's accession to the euro area, in which the banking
sector will play a key role.
In general, we expect that the macroeconomic environment in 2022 will be a little more
favourable, but not less challenging. Although we are at the peak of another wave of the Covid
crisis, we suppose that the negative health effects would subside and lessen over the year and,
consequently, measures restricting the economic activity would be eased and become more
flexible. Such a development would promote the improvement in the economic environment.
On the other hand, banks will be faced with greater dynamics of the risks associated with the
balance-sheet value of assets and liabilities and of returns. This dynamics will primarily depend
on the development of the macroeconomic processes in Europe and, in a more global aspect,
on the anticipated changes in the actions of the leading central banks. The withdrawal of the
accommodative monetary policy, typical of recent years, will be visible in the reversal of the
interest-rate cycle. These processes, which will be running globally with varying intensity and
supported by different instruments of central banks, will largely determine the financial conditions
in our country.
In the context of the ongoing global macroeconomic processes, inflation will continue to receive
special attention. We expect that the rate at which the prices in Bulgaria will be rising in 2022 will
reach its peak, on an annual basis, within the first half of the year, and at the end of the year,
again on an annual basis, it will fall below that reported as of December 2021. The concrete
nominal levels of the general price index will depend on the combined effect of the
antiinflationary and pro-inflationary factors, including on the dynamics of the energy prices in the
international market and the prices of foodstuffs.
We believe that the coming discussions on the adoption of the 2022 budget will give additional
indications of the development of the macroeconomic processes in Bulgaria. In this regard, the
topics important for the banking sector are: the annual and medium-term macroeconomic
framework; the level and management of the debt; the incomes policy; and the level and
management of the so-called 'contingent liabilities' in the energy, transport and social security
sectors.
In the context of the ongoing global and local macroeconomic processes and the still open
issues, in 2022 the banking sector will have to find a balance between the possibilities of
expanding the lending, as a result of the anticipated improvement in the economic environment,
and the areas of economic uncertainty coming mainly from the evolution of inflation and the still
unresolved risks caused by the pandemic. A major criterion for reaching an optimum balance for
each bank will be the preservation of, and even improvement in, the quality of assets.
For its part, the BNB is ready, as it has been thus far, to implement the full range of measures,
within its mandate, to mitigate and neutralise the manifestation of risks in relation to banks. The
overarching objective of these measures is to preserve and further strengthen the capital
reserves and the high loss-absorbing capacity of banks against potential deterioration in their
loan portfolios and to ensure that the stability of the system is maintained, including in the event
of less favourable than expected exogenous economic and financial developments.
In 2021, the BNB twice increased the level of the countercyclical capital buffer to reach 1.5% and
confirmed the level of the systemic risk buffer at 3%. The BNB will continue to require banks to
maintain adequate capital buffers against potential losses arising from the realisation of cyclical
systemic risk. This risk currently arises mainly from active residential lending to households, as
well as lending secured by commercial real estate. At this stage, the focus will continue to be on
the implementation of macroprudential measures targeting banks' capital, but the BNB stands
ready to implement additional measures, if necessary, including borrower-based.
More strategically, the BNB has already mobilised serious efforts in the project for the adoption of
the euro in Bulgaria. The tasks on the way to achieving this goal go beyond the banking sector,
but will also strongly involve the banks.
The dynamics of the political cycle in 2021 led to a pause in the institutions' work in the process
in the country. All the factors are now in place for its resumption through the continuation of the
Coordination Council for Bulgaria's preparations for euro area membership; and the
institutionalisation of the Euro Adoption Plan. The draft of this plan, adopted by the Coordination
Council on 30.06.2021, has already gone through the formal procedure of public consultation and
inter-agency coordination, and has the support of our external partners.
In spite of the delay in the formal process, the BNB remained the institution that continued to
work actively in all areas related to the euro area accession, falling within the scope of our
responsibilities. To this end, we established the necessary internal organisation of work and good
operational communication with the European Central Bank. Specific individuals and channels
for partnership were identified on both sides. In this sense, the central bank is ready to carry out
the huge amount of technical work related to the adoption of the euro in a timely manner,
notwithstanding the emerging tighter work schedule.
In conclusion, 2022 is promising to be a year of challenges but also opportunities for the banking
sector. The achievements of 2021 show that the sector is in a strong starting position to meet
the challenges and make good use of the opportunities.