BULGARIA: An Introduction to Banking & Finance

Background

The Bulgarian economy has continued its relatively strong growth over the last three years. While foreign direct investments have been on a downward trend for some time now, the economy has held up relatively well, with stable domestic demand and increasing public expenditure following local COVID-19-induced support measures and European Union funding. Similar to the situation in Europe, inflation has been decreasing, especially recently. Bulgaria, which entered ERM II in 2022, is on track to join the eurozone in 2026. The country has been approved in principle to join the OECD, subject to satisfying a few remaining requirements. Bulgaria joined the border-free Schengen Area for travel by air and sea on 31 March 2024, and is slated to join as regards by land on 1 January 2025.

Bulgaria continues to be gripped by political instability, following a string of seven inconclusive general elections since 2021. Apart from a nine-month period straddling 2022 and 2023, during which Bulgaria was ruled by a de facto coalition of the two largest centre-right parties (the GERB and PPDB) with the critical support of DPS (a predominantly Turkish minority party), the country has been governed by caretaker cabinets appointed by the President. The last inconclusive election was held on 27 October 2024, and the parties are in the process of forming a regular government. If they are unsuccessful, the next general election will be held in the spring of 2025.

Banking

Following the blockbuster acquisition by KBC Bank of the Bulgarian operations of Raiffeisenbank and its affiliates (which closed in mid-2022), two more notable transactions took place.

In mid-2023, Eurobank Bulgaria (a subsidiary of Greece’s Eurobank Holdings) acquired the operations of BNP Paribas Personal Finance, Bulgaria Branch for approximately EUR40 million. As a result of the acquisition, BNP Paribas ended its nearly 30-year presence in the Bulgarian commercial banking market.

In mid-2024, Bulgarian American Credit Bank, a relatively small, privately owned commercial bank, agreed to acquire 99% of Tokuda Bank, one of the smallest local commercial banks owned by Japanese businessman Tarao Tokuda.

The commercial banking market is highly competitive. The market is two-tiered with five large banks – UniCredit Bulbank, DSK Bank, UBB, Eurobank and First Investment Bank – dominating it, and with approximately a dozen smaller banks (mostly privately owned and branches of foreign banks) covering the rest of the market. Bulgarian Development Bank (BDB), the only State-owned credit institution, is becoming increasingly active in microfinancing and other business support initiatives.

It is a peculiarity of the Bulgarian market that, while corporate and investment loans tend to be priced slightly higher than corporate credit in the eurozone and non-eurozone central European markets, the residential mortgage market commands lower pricing – margins of 2–2.5% per annum – than central European markets. There are concerns that such pricing has contributed to a property bubble which spurred the Bulgarian National Bank to enact a set of restrictions on residential mortgage loans in October 2024.

Similar to other eurozone countries, Bulgarian banks have tapped the MREL/Tier 2 capital market. UniCredit Bulbank has pioneered the market, successfully completing half a dozen issuances during the 2023–2024 period to a total amount of EUR445 million.

Finance

Major international financings continued to dominate big-ticket project financings and leveraged acquisitions. eurozone and other European banks continue to dominate such transactions, with few US-based institutions – chiefly Citi, JP Morgan and Bank of America – also participating. In contrast to other markets in central and eastern Europe, Chinese and Middle Eastern banks are not particularly active, except for financings involving acquisitions of Bulgarian assets by major Chinese or Middle Eastern players.

Multilateral (EBRD, EIB/EIF, IFC) financings have decreased markedly due to the wide availability of commercial bank credit and the increasing sophistication of the Bulgarian commercial banks, as well as BDB. International bank-led syndicates now routinely include first-tier Bulgarian banks.

Major corporate, project and investment financings, as well as mortgage loans, are predominantly euro-denominated, with US dollar-denominated ones a far second. Leva financings are prevalent in smaller-size credit transactions.

Given the current fairly favourable market conditions, it is perhaps unsurprising that very few insolvencies have been publicly announced. Several consensual corporate debt restructurings have occurred – most notably one involving Cineworld Group’s debt restructuring.

Trends and Developments

Despite such recent acquisitions by locally established players, the commercial banking market is still relatively fragmented in terms of number of outfits. Therefore, further consolidation can be expected, with likely acquisition targets including Allianz Bank (a subsidiary of Allianz SE) and a couple of smaller banks.

Some of the other systemic banks – chiefly DSK Bank and UBB – are expected to tap the MREL/Tier 2 capital market soon.

The “domestication” of big-ticket bank financings will continue to gather speed, fuelled largely by the excess liquidity in the local banking sector. The business areas most likely to benefit from this are renewable energy (solar PV, wind and BESS), commercial and residential real estate, and IT.

New Legislation

The Constitution was amended in late 2023. The amendments chiefly concern further reforming the judiciary and limiting the powers of the President to appoint caretaker governments.

Amendments to the Bulgarian National Bank Act 1997 were passed in mid-2024. Said amendments implement the ECB requirements regarding central bank independence and a few other technicalities that were left outstanding. Following such amendments, the government and central bank have confirmed that the Bulgarian legal framework is fully in place for the country’s adoption of the euro, once Bulgaria’s application to join the eurozone is approved by the competent EU bodies.