Petia Dimitrova: In 2025, banks will continue to invest in modern technologies to ensure a smooth and efficient transition to the euro

 
Ms. Dimitrova, as Chairperson of the ABB Management Board, could you share how 2024 was for the banking sector in Bulgaria?
First, let me extend my greetings on December 6th to everyone, both those celebrating Saint Nicholas’ Day and those observing their professional holiday. May their names be celebrated! To all my colleagues in the sector, I wish good health above all. May they continue to achieve professional success, deliver strong results, and accomplish financial goals with dedication!
I will attempt to provide an overview by highlighting some key moments from the year.
This has been another strong year for the banking system, particularly in terms of lending, especially to households. As of the third quarter, mortgage loans grew by 24% year-on-year, and consumer loans by 16%. This reflects the strong state of the economy and the increase in real incomes, allowing households to take on larger long-term commitments. There has been a slight slowdown in corporate lending, but nothing concerning at this stage. Deposits are also growing faster than last year. For instance, households saved 5.3 billion BGN in the first nine months of this year, compared to 4.7 billion BGN during the same period last year. For businesses, the growth was more than double—from 535 million BGN to over 1.3 billion BGN this year.
Bank revenue growth is slowing, which, combined with a double-digit increase in expenses, has resulted in financial results like last year’s. The reasons for this are complex. The ECB has started lowering interest rates on loans, which negatively affects bank revenues. At the same time, interest expenses are rising sharply. This is not only due to gradually increasing deposit interest costs but also to new requirements for capital and minimum acceptable liabilities, forcing banks to attract costly long-term financing from international financial markets. We must also consider the costs banks are incurring for the euro adoption. Our initial estimate was around 300–400 million BGN, but due to the postponement of the euro adoption date, the final cost will undoubtedly be higher.
Despite the anticipated euro adoption, the minimum reserve requirements for deposits remain at 12%, compared to only 1% in the eurozone. For us, this difference translates to foregone revenue exceeding 500 million BGN annually, essentially functioning as a quasi-tax on banks. Additionally, most Bulgarian banks, being part of international financial groups, now pay a 15% profit tax instead of the 10% rate applicable to most Bulgarian companies.
For Postbank, this year has also been very successful. More and more clients trust us, enabling us to grow by double digits in lending and deposits while gaining market share and reaching record levels in the bank’s history. With the acquisition of BNP Paribas Personal Finance, completed mid-last year, we entered new segments that are thriving, demonstrating that we have a well-constructed strategy that delivers results.
 
What were the main areas of investment and focus for banks?
The banking sector has made strategic and significant investments in digital technologies to improve efficiency and accessibility. These investments have enabled banks to offer more convenient and flexible solutions for clients, such as mobile apps, online banking, and automated customer service systems.
Digitalization has optimized and enhanced customer service by reducing transaction times and facilitating access to essential services. Investments in new technologies have also improved data security, ensured higher levels of customer information protection and increasing consumer trust.
Another critical factor in strong financial performance was prudent management decisions and strict control of assets and liabilities. This allowed banks to optimize resources and provide reliable services. Improvements in credit risk management and product adaptation to evolving client needs helped stabilize the sector and provided sustainable support for businesses and households.
In response to growing market needs, banks developed new, more flexible, and innovative products and services. These included various financial solutions supporting businesses and clients during times of inflation and changing financial conditions while promoting sustainable economic development.
Postbank also continued to invest actively in new systems and services. Throughout the year, we worked on several strategic projects set to finalize next year, which will distinguish us from competitors. Much of our effort focused on euro adoption, as we are committed to being ready by the start of next year. Clients can already see some of these changes, such as dual displays of amounts in BGN and EUR on POS terminals, account statements in online banking, and soon, dual displays on ATM receipts and screens.
 
What are your expectations for 2025?
The focus next year will undoubtedly be on the successful transition to the eurozone, expected to enhance economic integration and strengthen the country’s competitiveness. This will boost international trade and facilitate Bulgarian companies’ access to new markets. The euro adoption will provide Bulgarian firms with easier access to cheaper capital and foster the development of capital markets, offering new investment opportunities and enabling long-term project financing. Joining the eurozone will increase confidence in Bulgaria’s economy and reduce currency risk, making the country more attractive to foreign investors.
I would like to remind you that as of late March 2024, Bulgaria became a full member of the Schengen area for air and water transport, with land entry expected soon. This will provide additional advantages for Bulgarian businesses and is anticipated to have a positive impact on the country’s economy.
For our part, banks will continue to play a key role as reliable partners for businesses and households, supporting the transition to the euro. I expect the banking sector to focus on enhancing financial literacy and assisting businesses and households in adapting to the new euro conditions.
In 2025, we will continue to invest in modern technologies and innovations to ensure a smooth and efficient transition to the euro while meeting the needs of our clients.
 
Everyone is talking about the euro and its benefits. What would happen if we miss this opportunity?
Let me answer your question with another question: Why do none of the opponents of the euro explain what the alternative would be if we don’t adopt the single European currency and how much we would lose as a result? This loss may not be felt immediately and directly, but sooner or later, every one of us will experience it.
The final step on our path to the euro lies ahead, and the moment for it has come. There is no alternative because if we don’t take this last step, we will remain on the periphery of Europe—not in a geographical sense, but in every other aspect.
 
How do you expect interest rates to evolve, and what impact will they have on households?
Interest rates on household loans remained relatively stable during the period of rising rates by the European Central Bank (ECB), primarily due to the surplus of liquid assets held by banks, which was fueled by the high savings of households in recent years. The ECB and the Federal Reserve are now entering a period of rate reductions, meaning we missed the peak and didn’t experience the worst of the rate cycle. There was even a time when mortgage rates in Bulgaria were the lowest among EU member states. Currently, they remain at about 2.5%.
My expectation is that interest rates will remain relatively unchanged until Bulgaria joins the eurozone. A change could occur only if deposit rates rise significantly. While they are gradually increasing, the pace is not substantial enough to provoke a shift in banks’ interest rate policies.
 
How will interest rate movements affect businesses?
Some business loan interest rates were tied to the EURIBOR index, meaning some companies experienced increased credit servicing costs over the past two years. However, we are now seeing the opposite trend—ECB rate reductions are normalizing the situation, and rates on newly issued loans have even been gradually declining over the past two months.
Business lending in Bulgaria continues to grow, but not beyond the economy’s sustainable limits. In fact, the opposite is true. Business loans accounted for 30% of GDP as of September 2024, compared to 35% five years ago and 45% ten years ago.
As of the end of September 2024, business loans amounted to 60.7 billion BGN, growing by 7% year-on-year. This represents a slowdown compared to the end of last year when growth was 11% year-on-year, reflecting the impact of political instability and challenging international conditions on business plans.
The unstable political environment and increasing budget expenditures are already affecting the investment climate, putting economic development at risk. As of September, the state’s capital expenditures were only 750 million BGN—just 22% of the planned 3.3 billion BGN for the year—indicating that the state isn’t investing. Moreover, it lacks the resources to do so, with a budget deficit of 4 billion BGN at the end of October, compared to an allowable limit of 6.2 billion BGN for the year.
Foreign direct investment is also lacking—by September, net foreign investments in equity stakes in Bulgarian enterprises were only 45 million euros, 10 times less than the previous year.
As a result, businesses primarily rely on their own funds and bank loans for investments. Now, imagine what would happen if the proposed additional tax on banks were introduced—a topic currently under discussion. We would be forced to reduce lending because we wouldn’t be able to generate sufficient profits to maintain previous lending levels. Businesses would be the first to suffer, as corporate lending is riskier and less profitable than retail banking.
Despite these challenges, we remain optimistic that common sense will prevail, and that next year will bring stable governance, sound decision-making, and a return to healthy growth rates and economic recovery.