Fitch: Economic environment likely to make 2009 and 2010 difficult years for banks

This is likely to lead to capital injections, which Fitch Ratings expects to be supported by foreign parents.

Although Romanian banks did not have any exposure to “troubled assets” related to US sub�]prime mortgages, the global financial crisis exposes Romanian banks to global liquidity pressures and the slowdown of the world economy.

Asset quality significantly deteriorated in 2008 and Q109. Fitch has concerns about the worsening operating environment, recent rapid loan growth, and the high proportion of unhedged foreign currency (FC) lending, which would result in materially weaker credit quality if there were a sharp depreciation of the Romanian leu.

Global financial market conditions remain unsettled following the downgrade of Romania, and in light of the adverse effects of the global financial crisis on the economic and financial situation in the country, the authorities requested support from the IMF, EU, and World Bank.

Although Romania’s IMF package is supportive of creditworthiness, the economic outlook remains challenging and the authorities need to meet rigorous policy targets to secure continued IMF support.

“Revenue growth will come under pressure due to the soaring cost of risk and the squeeze on margins from the rising cost of funds. Weak efficiency limits capacity to absorb increasing credit impairment charges. Fitch expects further deterioration in operating profitability in 2009 and 2010”, said Gulcin Orgun Director in Financial Institutions Group of Fitch Ratings.

About half of Romanian banks registered losses in Q109 under Romanian Accounting Standards (RAS), mainly due to high credit impairment charges.

Banks were also negatively affected by sluggish loan growth, which depressed fee and commission income.

Asset quality significantly deteriorated in 2008 and Q109. Given the severity of the downturn and the limited availability of credit, which is linked to the deleveraging process across the region, it is difficult to predict when the credit impairment losses in the system will peak.

The commitments of foreign parents to their Romanian subsidiaries in the context of the IMF programme provide some comfort.

The IDRs of foreign�]owned Romanian banks reflect the potential support they can expect from their majority shareholders, which is constrained by Romania’s ‘BBB’ country ceiling and negative outlook.

In Fitch’s opinion, higher capitalisation would provide a cushion against potential asset quality problems in a contracting economy.

The Fitch Banking System Indicator (BSI), which is derived from the average individual rating for Romanian banks, is ‘D’, which signals “low” systemic quality.

Unless there is a major improvement in the operating environment, which is not expected in the short term, as reflected in the Negative Outlook on the sovereign’s Long�]Term IDRs, upward movement in the banks’ Individual Ratings is likely to be limited given potential asset quality problems and pressures on profitability.

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