Moody’s rating agency has reaffirmed yesterday its negative outlook on the Romanian banking system, as it expects increased credit and funding costs to continue to weigh on Romanian banks' profitability over the short-to-medium term amid the challenging economic outlook, while the level of impaired loans is likely to remain high given their typical delayed reaction to any possible economic recovery.

“So far, however, despite their heightened risk profile, the banks have been able to absorb the various shocks and the country's IMF/EU support package and reform-focused new government have alleviated the macroeconomic pressures”, Moody’s said in its outlook.

Moody's negative outlook for the Romanian banking system expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.

"Conditions in the Romanian economy remain challenging following a significant contraction in economic activity and a rise in unemployment during 2009 on the back of the global financial crisis. As a result, the domestic currency came under pressure, loan delinquencies rose sharply and credit growth slowed considerably in light of the banks' risk aversion and limited wholesale funding resources, after years of rapid loan growth in both local and foreign currency," explains Nondas Nicolaides, a Moody's Vice-President/Senior Analyst and author of this report.

The vast majority of Romanian banks are part of larger European banking groups that provide their Romanian subsidiaries with most of their wholesale funding.

Moody's acknowledges that, despite the weakened conditions, the IMF/EU support package put in place during 2009 and the newly elected Romanian government's commitment to economic reforms have eased not only the macroeconomic pressures but also any significant concerns regarding the liquidity and solvency of the local banking system.

"Romanian banks' good capitalization and profitability levels have allowed them to absorb any immediate shocks in the economy, while their foreign parent banks' stated commitment to the IMF that they will continue supporting their subsidiaries and maintain their exposures within Romania provide additional comfort with regard to their creditworthiness," Nicolaides adds.

The capital adequacy ratio of the system is relatively sound at over 14% as of December 2009, with the foreign parent banks expected to provide their Romanian subsidiaries with additional capital funds in case of need and to ensure sufficient capacity to absorb any future loan losses. The system's liquidity remains tight with an overall loan-to-deposit ratio of more than 110% at the end of 2009, pointing to the need of Romanian banks to further strengthen their local deposit franchises.