The grim macroeconomic outlook will continue to plague the performance of the Romanian banking system. The Romanian banking system has proven so far it is well equipped to weather the economic shocks, although ratings have been downgraded as a result of earnings drop and increase in borrowing costs.

According to Moody’s outlook, the negative credit trends are likely to persist this year for the local banking system, which will lead to a high level of impairment charges for non-performing loans and lower profitability accordingly, even though liquidity concerns and capital needs have abated.

However, systemic risks are outweighed by the international banks’ commitments to the International Monetary Fund to keep doing business in the country and to provide additional capital to their subsidiaries if needed.

Changing the outlook on the Romanian banking system from negative to stable would be possible only if the economy turned to a sustained recovery and unemployment rates declined. It will also depend on asset quality deterioration trend, banks’ profitability and earnings’ reliance on borrowing costs.

Moody’s says the capitalization of Romanian banks remains good, due to the support from parent banks.

Moody’s has affirmed repeatedly its negative outlook on the banking systems in countries within the Commonwealth of Independent Countries, the Baltic States and Eastern Europe reflecting the adverse impact of the global financial crisis and the economic downturn on the banks' asset quality, earnings, capitalisation and funding conditions.

In its report, the rating agency points out that, for this year, it would likely 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.

Moody's notes that changing the outlook on any of these banking systems to stable from negative will depend on sustainable improvements in the key credit drivers, including the country's macroeconomic environment, asset quality, revenue generation and funding conditions.

"In light of current uncertainties in the macroeconomic environment, negative credit trends are likely to persist this year for most European emerging markets banking systems," says Armen Dallakyan, a London-based Moody's Assistant Vice President-Analyst, and co-author of the report.