Growing profits, high capital buffers and stable funding are pillars that will continue to support the prospects for banks in Bulgaria, according to Moody's Investors Service's analysis of the banking sector and financial stability in the country. Reports Investor.

The rating agency marks an improvement in Bulgaria's stability but at the same time draws attention to assets where it believes the risk is still significant.

"The profitability of Bulgarian banks is rising from a low base and we expect revenue growth to continue, albeit at a slower pace," commented Konstantinos Kypreos, Senior Vice President at Moody's Investors Service. "Growth in business opportunities along with rise in lending will support both interest and non-interest income," he added.

The net profit in the banking sector in Bulgaria increased by 41% in 2016, reaching BGN 1.3 billion, which is the equivalent of return on invested capital of 10.4%. Positive factors are also the lower provisions for credit losses as well as the reduction of costs.

Bulgarian banks, which are primarily focused on deposit business, also benefit from stable funding, mainly from deposits, and high liquidity. Deposits, excluding government and credit institutions, accounted for 79% of all assets as of December 2016.

One of the biggest challenges facing the Bulgarian banking sector remains the high level of risk in terms of assets. Significant indebtedness in the corporate sector, which was accumulated before the financial crisis, continues to pull profitability and investment downwards, increasing the risk of bankruptcy.

"Solving the problems of non-payment of long-term loans remains cumbersome, and while problem loans are declining, they do so from a high base," explains Moody's Vice President Melinda Scuridou.