On 28 February 2017, the European Commission (the “Commission”) issued its annual report for Bulgaria (the “Report”). The Report provides key information about the progress and developments of the banking and financial sector in Bulgaria.

The Report states that the banking sector has been improving. Some of the most significant findings show:

  • growing liquidity above the minimum requirements;
  • higher average return on assets (1.6 % in 2016);
  • increase of the aggregate profit by 40.5 %; and
  • significant decline in the corporate and household NPLs.

The Report focuses on the recently performed asset quality review (the “AQR”) of Bulgarian banking institutions and outlines the strengths and weaknesses of the exercise.

The Commission noted that the AQR’s scope provided a solid basis for a thorough review of the sector. The methodology used in the AQR was based on the one used by the European Central Bank during the Comprehensive Assessment of Euro area banks in 2014, as the Bulgarian regulator wanted to build on an already successful mechanism.

The Commission also addressed a number of the AQR’s shortcomings. First, it observed that the Bulgarian National Bank’s involvement might have led to less independence in the exercise. Further, the results that were published in relation to each of the reviewed banking institutions did not provide the same level of detail as was done in identical examinations throughout the European Union. In addition, the banks were required only to adhere to the guidelines imposed by the regulator, and were not required to develop their own models for determining future capital positions.

The Commission concluded that the ultimate success of the AQR largely depends on the implementation of the findings that were made. The Commission noted that some of the specific measures that should be taken include de-risking of assets, reducing risk-weighted assets, optimization of expenses, as well as raising new capital. Although we expect the Bulgarian National Bank to take further measures, none of them has been made publicly known. Lastly, additional oversight of the system is expected following the completion of a scheduled review of the sector by the IMF and the World Bank, which may lead to additional changes in the banking supervision in Bulgaria.