At the end of July 2018, the Bulgarian National Bank (BNB) issued its report for the first quarter of 2018 (“Report”), which outlines the state of the Bulgarian economy while focusing primarily on the banking system.

According to the BNB, the internal and external economic environment continues to exert a positive impact on the activity of the banking sector. The national regulator expects that in the second and third quarters of 2018 GDP will gradually increase. A major contributing factor in this rise will be an upsurge in spending by individuals as well as increased investment activity by companies. The report further states that the economic environment will result in a rise in demand for loans. Low interest rates as well as an increase in profits and income will encourage potential borrowers to seek financing for their spending habits and investments.

A potential risk for credit institutions is growing real estate prices. The BNB has advised that banks shall not underestimate the risks associated with factors that could adversely affect the loan servicing capabilities of borrowers. The regulator recommends that adequate risk assessment procedures be part of credit approval decisions in order to account for potential negative tendencies in the economy.

Furthermore, the capital position of Bulgarian banks continues to have a significant capital surplus above regulatory requirements. A challenge for banks is to find a balance between increases in the rate of lending and the maintenance of adequate levels of capital. A positive development in the banking system has been the sale by banks of non-performing loans. At the end of March 2018, the level of non-serviced exposures in the Bulgarian banking sector was 9.3%.