Dark scenarios: Losses for Romanian banks and a sagging local currency

Danske Bank scenario

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.

ING - weaker earnings for banks in emerging countries

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.

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.

“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%.

The leu will start running out of gas soon

The leu and the other emerging currencies will start losing ground in the coming period, the recent rally, including the joint statements of the governors in the region, being a chance to speculate on currencies in the region on short term, said the Swedish bank SEB.

The co-ordinated statements of central banks’ governors in Poland, Hungary, Romania and Czech have revived currencies in the region, which were taking an upward path. However, SEB says they will resume their bearish trend in the coming period.

“Unfortunately, I don’t think we’ve seen the worst. We think the recent rally is an attractive opportunity to open positions at short time horizon on the currencies in the region”, SEB research found.

SEB analysts agree with the central bankers in the region, who say the buyout spree of foreign currencies in the region have been exaggerated, yet, the Swedish bank says the generally rising trend has been justified.

On the other hand, SEB’s analysts exclude the possibility of a joint intervention of central banks.

“We believe the verbal intervention was an efficient intimidation tactic, as long as CEE’s central banks act to preserve the currencies as much as possible, given the further cash outflow” said SEB.

The emerging currencies in the region followed a severe year-to-date slump, losing between 6% and 12%, due to the generally negative sentiment in the region.

Central bankers in Romania, Czech, Hungary and Poland hammered out a joint action to support the local currencies, after the recent declines. However, experts stressed that the liquidities needed to be backed up by facts, to disperse fears.

BNR governor, Mugur Isarescu said the current level exchange rate was sustainable, and that BNR was ready to act in response to any move that could shake up the market.

Feedback of Greek banks

Greek banks can overcome the financial problems unfolding in southeastern Europe, as they are exposed to a less extent than its west European rivals and have the required capital to absorb loan losses, said the governor of the central bank, Reuters informs.

“In South East Europe, the economic activity is weakening. It is a worrying slowdown, and we are keeping tabs on the situation on a regular basis”, said the governor of the central bank, George Provopoulos.

Greek banks hold subsidiaries in Bulgaria, Romania, Serbia, Albania, Turkey, Poland and Ukraine. Financial institutions such as National Bank of Greece, Alpha, Eurobank and Piraeuse Bank have largely contributed to a solid growth of lending activity in lending activity in South-East Europe.

The new credit flow in these emerging economies dropped heavily. The credit expansion in Romania, for example that was rising at 70% pace slowed down at the end of 2008, and it could lag even more this year.

“Greek banks have expanded in the region, but not as much as other banks in other countries, such as Austria. The loans granted by Greek banks amount roughly 55 bln euros, or 16-17%of the country’s GDP, while in Austria it accounts 70% of GDP”, Provopoulos added.

Investments made by Greek banks in the southeastern European emerging economies are a vote of confidence for the respective countries, and the temporary difficulties will not change this, said Provopoulos