Moody’s – Bulgarian banks supported by rising profits, NPLs remain challenge

Rising profits, high capital buffers and stable funding will continue to support the outlook for Bulgarian banks, Moody’s Investors Service said.

However, asset risk, stemming primarily from corporate lending and the slow nonperforming loans (NPL) resolution processes, remains high, the ratings agency said in a press release on Monday.

“Bulgarian banks’ profitability has been rising from a low base, and we expect further earnings growth ahead, though at a slower pace,” Constantinos Kypreos, senior vice president at Moody’s said in the release which summarises the conclusions of a report of Moody’s on the Bulgarian banking system outlook.

Kypreos added that “increased business opportunities and credit growth will support both interest and non-interest income.”

The Bulgarian banking sector’s net profit rose 41% in 2016 to 1.3 billion levs ($774,427/664,624 euro), equivalent to a return on equity of 10.4%, as lower loan-loss provisions and tighter cost control supported earnings growth and organic capital generation. Aggregate common equity tier 1 and total capital ratios stood at 20.4% and 22.2%, respectively, as at December 2016.

Bulgarian banks, which are primarily deposit funded, also benefit from stable funding and high liquidity, Moody’s said. Deposits, excluding general government and credit institutions, accounted for 79% of total assets as at December 2016, with the loans to deposits ratio having improved to 75%, from 101% in December 2012. The banks maintain large liquidity buffers with liquid assets, primarily cash and interbank balances, accounting for over 40% of total assets.

One of the biggest challenges for Bulgarian banks is the high level of asset risk that they face. The high level of indebtedness in the corporate sector, accumulated before the financial crisis, remains a drag on corporate profitability and investment and is increasing the risk of bankruptcies.

“Resolving NPLs remains cumbersome and, while problem loans are declining, they are doing so from a high base”, adds Melina Skouridou, an Assistant Vice President at Moody’s.

NPLs, based on the Bulgarian National Bank’s broad definition declined to a high 18.5% of gross loans in 2016 from 20.6% in 2015. Loans in arrears 90 days or more stood at 13.0% of gross loans as of December 2016.