December 5 (SeeNews) - Moody's Investors Service said on Wednesday its outlook for Bulgarian bank financial strength ratings (BFSRs) is stable to positive, reflecting the system's good earning capacity supported by growing business volumes but warned of the potential perils of rapid credit expansion.
"The rated Bulgarian banks have a weighted average BFSR of D, which reflects their generally good franchises, improving regulatory and supervisory environment, good profitability levels, sufficient capitalisation and strong liquidity," Stathis Kyriakides, Moody's analyst and co-author of the agency's latest Banking System Outlook for Bulgaria report, said in a statement.
Kyriakides noted that the improved financial performance of the Bulgarian banking system in recent years has been partly driven by the country's positive economic cycle but said: "Bulgaria's highly competitive market poses challenges for their future franchise development and exerts pressure on their interest rate margins."
Moody's said it welcomes the banks' efforts to diversify risk by expanding their retail and mortgage lending operations, which traditionally offer greater income inflow stability and higher margins than corporate banking. Bulgarian banks' franchises have benefited in recent years from the favourable domestic economic conditions, primarily driven by rapid credit growth in retail banking and mortgage finance, it added.
The agency however warned that rapid credit expansion in Bulgaria could result in a high level of non-performing loans in an economic downturn.
"Rising consumer indebtedness raises concerns over the future performance of such borrowers, particularly in the context of a relatively unseasoned credit portfolio and concerns over the possibility that consumer lending may be clustered within a narrower and more leveraged customer class," Moody's analyst and report's co-author Elena Panayiotou said in the statement.
Other potential risks for the banking system relate to banks' relatively high single-party exposure to large Bulgarian corporates and concerns over the rapid price rises in certain asset classes in recent years, which could impact the sector in the event of a correction, Panayiotou added.
The active involvement of foreign banks in the Bulgarian banking system has raised the level of expertise in the sector and contributed to the Bulgarian banks' franchise development through improved risk management processes, better quality of service and greater product innovation, Moody's said.
"Although foreign banks have contributed towards the strengthening of the sector in terms of better corporate governance practices and enhanced transparency, Moody's believes there is still room for improvement in these areas, especially for the banks that remain in the hands of domestic investors," it added.
Bulgaria has 24 domestically registered banks and the branches of five foreign banks.