The outlook for the Romanian banking system is stable, says Moody’s Investors Service in its latest Banking System Outlook for the country. While Romania’s under-banked economy provides good prospects for growth, but credit risks remain high. «The banks’ financial strength ratings (FSRs) reflect the country’s improving operating environment, with the political and economic alignment with the European Union and solid economic performance having spurred the growth of the banking sector,» says Constantinos Kypreos, a Moody’s Analyst and author of the new report. The active involvement of foreign banks in the Romanian market has also raised the level of expertise in the system, contributing to the banks’ franchise development, while strengthening the sector in terms of technological expertise, product support and the transfer of banking know-how, as well as providing capital and funding support. At the same time, the current ratings also reflect Moody’s concerns with regard to the high credit risks embedded in the banks’ operations, and still developing risk management systems. The rating agency believes that notable progress has been made in the field of banking regulation and supervision over the past few years, but ongoing development is required, with banking supervision focusing increasingly on the qualitative aspects of banking activity, and in particular on upgrading its risk-assessment capacity. «The banks’ current financial metrics would support higher FSRs, with relatively low non-performing loan levels, adequate profitability and strong capital and liquidity levels,» says Kypreos. «However, we do see risks with regard to the sustainability or longer-term adequacy of some of these ratios,» the analyst adds. Profitability is now under pressure due to declining interest margins (a function of declining interest rates, high reserve requirements and increased competition) as well as increased costs relating to the banks’ branch expansion strategies. In addition, Moody’s notes that asset quality indicators may deteriorate as the portfolio matures or the operating environment displays signs of volatility, while mismatches in the maturity profile of assets/liabilities indicate the banks’ need to diversify and lengthen their funding base. Moody’s foreign currency deposit ratings for the large rated Romanian banks (BCR, BRD, Raiffeisen) are set at the Baa3/P-3 country ceiling (with a stable outlook), higher than would be inferred by their financial strength ratings.