Solvency of the banking system – the ratio between banks’ risk-bearing capital and risk-weighted assets – fell between July and September for the third consecutive quarter, to 13.4% at the end of September, which compares with 15% in December last year.
According to data from the BNR or National Bank of Romania, the banking system recorded a negative average return on equity (ROE) of 3.37%, after it had amounted to 5% in 1Q.
The minimum solvency ratio required by the central bank since 2009 is 10% (it was raised because of the crisis from the previous 8%), so banks continue to have sufficient room to absorb prospective shocks. This is the lowest solvency ratio recorded in the banking system since March 2009.
“The deterioration of solvency was inevitable at a time when banks are making losses, which affects the adequacy ratio unless capital is added. But the level is a very good one, allowing for prospective shocks to be absorbed and for the time being there are no needs to further capitalize the banks,” comments Ionut Dumitru, chief economist of Raiffeisen Bank.
The banking system made losses again in the third quarter after it had posted an aggregate profit of around RON95 million (EUR23 million) six months into the year, show central bank data. ROE for the overall banking system was -3.37% at the end of September, which compares with 0.62% in June and 5% three months into 2011.
Several banks, such as BCR, Volksbank and Bancpost have recently announced capital increases to counter the effects of the crisis on balance sheets, while the shareholders of several other banks have added several tens of millions to their capital since the beginning of the year.
“Even though we see an acceptable level of banks’ solvency ratio, banks judge the situation based on several factors and seek to prevent dangers, which can be significant during these uncertain times. The fact that many banks continue to record losses increases the need for prudence. They are now seeking to regain balance and trust of markets,” believes financial analyst Aurelian Dochia.
He expects banks to continue to have a high liquidity level considering the current economic context and that the local banking system cannot remain outside of European talks on the need to recapitalize banks.
The losses recorded by banks come at a time when loan portfolios continue to be under pressure, and a significant portion of operating profits go to provisions.
For instance, the share of loans more than 90 days behind climbed by 2.5% in the last year, to 14.2% in September. Loans whose payments are more than 90 days behind are included in the loss category and entirely provisioned for.
“I don’t think non-performing loans have peaked yet, considering that the economy is still fragile, but we will see a slowdown.” (EUR1=RON4.2056 – average exchange rate in the first six months of 2011).