Bulgaria

Stress Test (ST) results reveal that the Bulgarian banking system is vulnerable to the extreme realization of internal and external risks coupled with the need to clean the balance sheets from nonperforming loans (NPLs). In the baseline scenario, characterized by a modest economic growth and decline in unemployment, as well as stable and low interest rates, two banks—including a systemic one—exhibit weakness in terms of capital buffers to cope with accumulated losses in the past. These banks experience substantial increase in their NPLs as a result of the asset quality review (AQR) adjustment. As the IMF ST approach excludes interest income from NPLs in both the baseline and adverse scenarios, the increase in NPLs leads to the reduction in the number of assets that generate cash-based interest income. With a significantly smaller base of performing loans, two banks do not generate enough recurring income to cover their interest expense and credit costs in the baseline scenario, which results in negative profits and declining capital levels.