The Bulgarian banking system is concentrated, with most of the system's assets owned by large Western European institutions with a strong presence in South Eastern Europe.

The information was reported in a review released by Moody's Investor Service Thursday.

"Competition in the market remains strong, particularly given Bulgaria's current economic downturn, as all the banks find it increasingly difficult to find good-quality lending opportunities to grow their business," the analysis states.

Moody's analysts point out that following many years of rapid banking system growth of around 30%-40%, Bulgarian banks' loan portfolios expanded by a modest 4.5% during 2009, mainly reflecting the weak economic conditions in the country.

Yet, while the domestic operating environment has been negatively affected by the global financial crisis, which led to lower inflow of foreign direct investment (FDI) in the country, lower credit demand, and banks taking a more cautious approach towards lending. the involvement of foreign banks in the domestic banking system during the recent years is viewed positively.

"This has contributed to improved risk-management processes and to the banks' franchise development through, better quality of service and greater product innovation. Additionally, it has strengthened the sector in terms of improved corporate governance practices and enhanced transparency, although we believe there is still scope for improvement in these areas, especially for some banks that remain under the control of domestic investors.

"Overall, we consider that the Bulgarian regulatory system is well-established with a good level of supervision exercised by the banking regulator, the Bulgarian National Bank (BNB). The regulatory and supervisory framework is continuously evolving in line with EU's regulations and standards. We consider the Bulgarian National Bank to be an independent body that exercises its policies to ensure banking system stability. Its ability, however, to act as a lender of last resort and provide direct support to the Bulgarian banks, is limited by the currency board, which has been in place since 1997," Moody's explains.

The report points out that the Bulgarian financial system comprises 30 commercial banks (24 locally-incorporated entities and six foreign banks' branches); and 219 non-banking financial institutions such as leasing, finance and investment companies, brokerage and money-exchange houses. Commercial banks dominate the system and are supervised by the BNB.

The system is highly fragmented with the top five banks controlling 55% (as of 30.09.2010) of banking system assets, while the top 10 account for 77%. Almost all the banks are privately held, with most being foreign-owned by Western European groups.

Around 82% (as of 30.09.2010; 82.4% as of 30.06.2010) of the banking system assets are under foreign investor control.

The largest bank in the system is Unicredit Bulbank (part of the Unicredit group) with a market share of around 16% in banking system assets, followed by DSK Bank PLC (Baa3/P-3/D+), which is the largest rated bank and part of OTP Bank Hungary, with a share of around 12% in banking assets. United Bulgarian Bank (owned by National Bank of Greece) and Raiffeisenbank (Bulgaria) EAD (which is part of Raiffeisenbank International) (Baa3/P-3/D+) are the third and fourth largest banks with market shares of 10.9% and 9.3%, respectively.

"Bulgaria's currency board that has been in place since 1997 limits the BNB's ability to provide support to a financial institution in times of distress. Nonetheless, in our view the authorities would be willing and able to provide support indirectly to the banks in order to safeguard the stability of the system in case of need. There is historical evidence demonstrating the BNB's direct intervention to provide support to troubled financial institutions. This took place during the Bulgarian banking crisis in 1996-1997, and before the introduction of the currency board in 1997 that aimed to bring stability to the financial system. Since then, the law has limited the ability of the BNB to extend direct liquidity support to solvent banks," the report says.

"Nonetheless, in our view BNB would be willing and able to provide support indirectly to the banks in order to safeguard the stability of the system in case of need. Evidence of indirect support was demonstrated in 2008, when BNB intervened and made a public statement about a Bulgarian bank that had incurred a deposit outflow due to market rumors. The regulator's statement, which confirmed the bank's solvency, stopped the market rumors and constrained the bank's outflow of deposits. According to the authorities, indirect support could include other means of support in case of need, in order to safeguard the stability of the banking system," Moody's states.

The Moody's report reminds that FDI in Bulgaria also declined to 9.4% of GDP in 2009 following several years of strong capital inflows in the country (i.e. 29.4% in 2007 and 18.9% in 2008). It estimates that FDI fell by 66% between 2007 and 2009 with the global crisis leading investors either to reduce or to postpone their investments.

FULL TEXT of the Moody's Investor Service Review of the Bulgarian banking system READ HERE

The Bulgarian Finance Ministry reminds that at the end of 2010, Moody's confirmed Bulgaria's credit rating at Baa3 with a positive perspective "as a result of the prudent fiscal policy of the government, the low public debt, and the maintenance of substantial fiscal reserves."

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