The report concludes that, for this year, Moody"s is likely to maintain negative outlooks for banking systems in Ukraine, Kazakhstan, Hungary, Romania, Bulgaria and the Baltic countries, due to continued negative pressure on financial fundamentals and the still challenging economic environment in many of those countries. Evidence of stabilisation have begun to emerge in a few countries however and the agency says that the outlook for the banking systems in Poland, Russia, Slovakia and Czech Republic could be changed to stable from negative in the second half of 2010.
Report Number: 124447/Romania
Tough economic conditions likely to prevail in 2010, thus underpinning the banking system’s negative credit outlook.
The credit outlook for the Romanian banking system is negative, driven mainly by the still difficult economic conditions in the country following a severe recession in 2009 as a result of the global financial crisis. The economic environment in 2010 is likely to be a challenging year for the banks,leading to sizeable loan loss provisions and lower profitability, although concerns about liquidity and capital have diminished following the liquidity crunch in the market in late-2008. However, any systemic risks are alleviated by the commitment that those foreign institutions with Romanian bank
subsidiaries have made to the IMF to support these entities and maintain their exposures in the country.
Minimum conditions to attain a stable outlook are as follows:
» An improving operating environment: sustainable positive GDP growth combined with a lower unemployment rate
» A halt in the deteriorating loan quality trend: stabilisation of the loan quality trends and a gradual reversal towards improvement
» Earnings to be less affected by credit costs: improvements in the banks’ bottom-line profitability,which was severely affected by loan loss provisions
» Liquidity metrics to be less of an issue: increased funding through deposits and reduced dependence on borrowings will lead to an improved liquidity profile
» Maintaining comfortable capitalisation: capitalisation remains strong with parent banks
continuing to support their Romanian subsidiaries in case of need
Expected credit trends in 2010:
Operating Environment – Negative impact: We regard the deteriorating operating environment in Romania in recent quarters as the most challenging aspect faced by the banking system, given the contraction in GDP of around 7.5% in 2009 and the relatively weak growth of around 2.3% expected in 2010. The knock-on effect on the country from the global financial crisis was considerable in 2009, characterised by a contracting economy, rising unemployment and challenging macroeconomic prospects. However, the €20 billion international aid package committed to the country – mainly from the IMF and the European Commission (EC) as well as from the World Bank and other international financial institutions – will help to restore market confidence following a sharp drop in
capital inflows. We believe that the operating environment will remain challenging, with GDP growth not expected to accelerate to around 4% before 2011.
Asset quality – Negative impact: Asset quality challenges arising from the tough economic conditions in the country have been the main source of concern for Romanian banks given the sharp increase in the level of problem loans and credit costs during 2009. Although Romanian banks did not have any exposure to toxic assets related to US sub-prime mortgages, the global deleveraging process that caused the slowdown in the Romanian economy has exposed them to loan quality problems following years of rapid credit growth averaging around 50% during 2004-2007. We are particularly concerned
regarding the high proportion of foreign currency lending mainly to unhedged households, as the weaker local currency elevates their credit risk profile. Loans classified as ‘doubtful’ and ‘loss’ under the relatively conservative local classification norms surged to 15.3% of total gross loans as at YE2009 from 6.5% at YE2008 and 4% at YE2007.
Capital adequacy – Neutral impact: Romanian banks’ adequate capitalisation was able to absorb the shocks in the economy, with no systemically important banks facing any solvency issues during the crisis period. The capital adequacy ratio (CAR) for the banking system was 14.03% at YE2009 while the leverage ratio (Tier 1 capital/Total Average Assets) was 7.11%, compared to 13.76% and 8.13%, respectively, at YE2008. We expect foreign banks to continue supporting their Romanian subsidiaries in case of any capital needs, given the significant growth potential presented by the relatively under-
banked Romanian market. Moreover, Romanian banks have to maintain at least a 10% CAR, as per the IMF’s recommendation to the local regulators, which provides ample buffer to absorb any future possible loan losses on the back of weaker internal capital generation expected in 2010.
Liquidity – Neutral impact: Stressed liquidity in the banking system in late-2008 was subsequently normalised in 2009, although liquidity ratios remain tight as foreign currency funding needs are mainly met by borrowings from the Romanian banks’ foreign parent banks (accounting for 85% of the system’s total assets). The loan-to-deposit ratio is still high at around 113% as at 2009, although lower than the 122% the prior year, reflecting the certain Romanian banks’ reliance on wholesale funding. However, the commitments made by foreign parent banks as part of the IMF/EC aid package to
support their Romanian subsidiaries provide some comfort.
Profitability – Negative impact: Higher loan loss provisions combined with higher funding costs during 2009 have depressed profitability, a scenario that is likely to continue throughout 2010. Profitability was significantly impacted in 2009, with the return on assets (RoA) for the whole banking system declining considerably to 0.24%, from 1.56% in 2008 and 1.01% in 2007. Return on equity (RoE) also declined in 2009 to a low 2.73%, from 17.04% in 2008 and 9.43% in 2007.
Conclusion: Looking ahead, Romanian banks’ financial performance and metrics are likely to remain under pressure amid still challenging macroeconomic prospects, underscoring the negative credit outlook we have assigned to the banking system. Any positive developments with regard to the above-mentioned rating drivers during 2010 would support a possible change in the credit outlook to stable from negative. The Romanian banking system has shown relative resilience to the various shocks in the global and local economy so far, although its creditworthiness weakened during 2009 as a result of the
lower earning streams and higher credit costs.
