Fitch report on Romanian banks

Fitch Ratings said in a special report that rapid loan growth continues at Romanian banks. However, profitability is under pressure from margin compression and higher expenses related to branch network expansion. «The strong growth of the economy, together with the increased availability of banking products and higher disposable income, has stimulated significant loan growth, mainly in long-term retail loans,» said Gulcin Orgun, Director at Fitch’s Bank team. «However, banking assets still remained at a low 50 percent of GDP, reflecting low penetration. This, coupled with expected continued economic development, suggests the potential for further growth.» «The Romanian banking sector’s performance has been negatively affected by margin compression from falling interest rates in a lower-inflation environment and increased competition, as well as from high costs related to the expansion of the branch networks,» adds Ms Orgun. «Efficiency is expected to gradually benefit from greater economies of scale, which should compensate for the expected fall in profitability to some extent together with improving non-interest income.» Rapid loan growth, on the other hand, and the still high level of unhedged foreign exchange (FX) lending, could create asset quality problems as loans mature and could also increase operational risk. Some bad signs There are signs of asset quality deterioration despite benign economic conditions. Nevertheless, improved risk management systems and restructuring of the banks, mainly through the involvement of foreign shareholders with advanced risk management practices, provides some comfort. Asset growth is being funded by a rising proportion of international funding. However, refinancing risk is considered limited, as this is largely financed by shareholders. Nevertheless, it is important that banks build a core deposit base and reduce their reliance on shareholder funding in order to maintain a relatively stable funding base for healthy growth. Current level of capital is considered just adequate by Fitch, given the high level of fixed assets constraining free capital and potential asset quality problems. Moves to manage capital at the lower regulatory minimum requirements would be viewed as negative by Fitch. The Romanian banking system remains concentrated, with the top five banks’ share of total assets at 59 percent. Foreign-owned banks dominate with an 89 percent share in total assets. The Issuer Default Ratings (IDRs) of foreign-owned Romanian banks reflect the potential support they can expect from their majority shareholders; they are currently constrained by the ‘A-‘ (A minus) Country Ceiling of Romania. The Fitch Banking System Indicator (BSI) for Romania is ‘D’, reflecting the weaknesses in the banks’ intrinsic strength. The future trend for the banks’ Individual Rating is likely to be stable, given the potential risks in the system that are balanced by an improving operating environment and the major restructuring of the banks by their highly rated foreign shareholders.