The credit outlook of Bulgaria's banking system was stable despite concerns over future asset quality, global credit rating agency Moody's Investors Service said on July 23. Most banks had solid profitability levels, elevated business volumes, healthy interest margins and comfortable capital levels, the agency said in a report on Bulgarian banks.

"Bulgaria's improving regulatory and supervisory environment and the positive economic cycle are supportive for the franchise development of the country's banks," Moody's analyst and report author Elena Panayiotou said.

"However, the banks increasingly face challenging funding conditions due to both intense competition domestically and the rising uncertainty in the global financial markets, which has had an adverse impact on their foreign parents' financial standing and ability to continue channelling funds to their Bulgarian subsidiaries at very low costs," she said.

The increasingly limited access to external funds would likely tighten profit margins, but the country's banks should still be able to generate good returns on their business volumes, the credit agency said.

Rapid credit growth would continue, which "could result in a high level of non-performing loans in the system in an economic downturn and that rising consumer indebtedness raises concerns about the future performance of these borrowers," the report said.

Competition betwee Western European banks, who own most of the lending institutions in Bulgaria, was another factor contributing to the strong credit growth.

Foreign owners brought in greater expertise and Bulgarian banks have improved the quality of services offered, but there was still room for improvement, Moody's said. In particular, corporate governance practices could and transparency were two of the areas that would benefit from more effort toward improvement, in Moody's opinion.

That observation applied to the regulatory and supervisory framework as well, though the agency said it regarded positively the measures taken by the central bank to enhance supervision and oversight.

Moody's stable outlook for the Bulgarian banking system expressed only its view of the sector over the next 12 to 18 months,  not a projection of rating upgrades or downgrades, the credit rating firm said.