“The contraction in Romania’s economy has negatively affected the banking system’s asset quality. In Fitch’s opinion, stabilizing and then improving asset quality is the main challenge currently facing Romanian banks; the agency expects NPLs to peak around end-2011, at a relatively high level compared with most CEE peers,” the rating agency said in its latest outlook report on the banks in central and eastern Europe.
Lending in Romania is still dominated by foreign-currency loans, which accounted for 64% of retail lending and 60% of corporate exposures at the end of first quarter, Fitch said.
It said lending activity has been severely affected by weak industrial output and subdued consumption since end-2008, while real loan growth was negative in both 2009 and 2010.
“Mortgage loans are an exception to this trend (up 18% in 2010 in EUR terms), supported by government guarantees offered under the “First Home” program, which is continuing during 2011,” the report noted.
Fitch expects to see positive real loan growth in 2011, driven by the pick-up in economic activity and a supportive policy stance from the central bank.
The ratings agency doesn’t expect Greek lenders will withdraw funding from their Romanian subsidiaries in case of a sovereign default. It said Greek subsidiaries are better capitalized than the system average, their liquidity position remains in line with that of the rest of the system, and there have been no indications of adverse movements in deposits.
However, a risk scenario “cannot be entirely discounted given considerable uncertainty surrounding developments at the parent institutions,” Fitch said.
The agency notes that Romanian banking system returned to profitability in the first quarter of 2011 and anticipates positive net income for the full year.
“The main driver of the improvement was a reduction in (loan impairment charges) LICs, which had rendered the sector loss-making in 2010 and absorbed virtually all pre-provision profit in 2009. Margins have improved markedly (by 100 basis points in 2010) due to an easing of deposit costs,” Fitch said.
Fitch views system capitalization as currently adequate, given the sector’s regulatory capital ratio of 14.8% at the end of first quarter, almost full (95%) reserve coverage of NPLs and the agency’s expectation of positive economic growth and a peak in loan impairments towards year-end.
However, capital adequacy remains highly dependent on the performance of the economy and the leu, the report noted.
Fitch has Romanian banking system at ‘D’, on a scale from ‘A’ (high quality) to ‘E’ (low quality). The outlook is stable.