Gloomy scenarios for Romania: billion-dollar losses expected for local lenders

Western Europe banks may reach 37.2 billion dollar losses according to the “ugly” scenario, mainly driven by the credits provided in Romania, reveals a recent research of Danske Bank.

Only Russia and Poland outrank Romania in the hierarchy of markets in the region, where western banks have a broad exposure, with losses estimated at 44.5 bln dollars, and 57.5 bln dollars respectively.

The “ugly” scenario finds Austria the hardest hit by a possible decline of Romanian economy, with losses estimated at 14 bln dollars, followed by France that could face a 5.3 bln-dollar loss, and Italy with 3.9 bln dollars.

Danske Bank’s analysts have also painted a mild risk picture, in which the banks in euro area would face only 12.4 bln dollar loss.

As the “hard risk scenario” predicts, the hardest hit country will be Austria again, with losses expected at 7 bln dollars, followed by France with 2.6 bln dollars. The total loses of western bank’s subsidiaries in Romania will amount 18 bln dollar, research found.

Furthermore, ING predicts weaker earnings for banks in emerging countries in Europe and Middle East, while many banks would probably have to recapitalize. However, BRD-SocGen is one of the banks that would be less affected.

ING analysts say the banks in former Soviet Union block, Israel, and Austria will face mounting risks, whereas the slowdown of asset growth will not necessarily be more acute in these states than in other financial markets.

ING deems Poland-based Komercni Banka and Romanian-based BRD-SocGen together with other Turkish banks less hit and recommends investors to broaden exposure on the banks in emerging countries.

“The credit quality surfaced as the biggest risk factor, and given the lending uncertainties, medium-term asset growth fears are also well-founded”, reads ING report that reduced profit projections by roughly 28%.

ING said that after concluding stress tests on capitals and earnings, the banks with low margins and high indebtedness level as in Israel and Austria were the most vulnerable.

Nevertheless, the banks with high capital reserves, as in former Soviet Union, could experience the biggest asset-quality related problems, ING said.

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