Fitch: Romanian Banks Face Pressure On Exchange Rate

The ongoing global financial crisis has exposed Romanian banks to increased risks, through mounting pressure on the exchange rate in an operating environment dominated by foreign banks, Fitch Ratings said in a special report Monday.

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"Credit risk arising from foreign currency loans to un-hedged borrowers is one of the primary risks in Romania," said Levent Topcu, Assistant Director in Fitch's Financial Institutions team.

"More than half of total loans and household lending are denominated in foreign currency," he added.

Fitch noted the foreign banks control 88% of Romania's banking assets. The ratings agency expects to see lower availability of new funding at the parent level and higher funding costs to translate into slower loan growth, and higher impaired lending and lower profitability in 2009.

Romania agreed with the International Monetary Fund, the European Commission and other international financial institutions a EUR19.95 billion financial package to support the country’s external and internal deficits.

While a number of foreign parent banks, representing a total of 70% market share, have pledged to maintain the capitalization of their subsidiaries in the context of the IMF program, Fitch noted that these pledges have yet to be tested.

“The economic outlook remains challenging, and it will be important for the authorities to adhere to the IMF program's attached policy conditions,” Fitch said.

Fitch forecasts that Romania's GDP will shrink 4.5% in 2009. Its sizable external gap has left Romania exposed to weakening international investor risk appetite and tighter funding conditions for the largely foreign-owned banking sector.

The proposed financial package and commitments from foreign parent banks to support Romania's banking sector would help to plug the country's external financing gap and provide an opportunity to rebalance the economy.

In an attempt to slow the growth in foreign currency loans, the National Bank of Romania tightened prudential requirements, which have slowed lending by the end of 2008. The share of doubtful and loss-making loans continued to increase to 6.9% of total loans at end-2008 from 4.3% year ago, the ratings agency said.

Fitch expects to see further increases in non-performing loans in 2009, and considers the reserve coverage of problematic loans to be low. The capacity of Romanian banks' to absorb the impact of potential credit losses in 2009 could come under pressure from challenging operating conditions.

Liquidity in Romania's banking system has benefited from the high reserve requirements, which together with a more comprehensive deposit guarantee system, are designed to ensure ongoing funding stability.

While Romanian banks have been mainly funded by customer deposits, the share of borrowings in total funding has increased with the contribution of foreign shareholders. However, Fitch said this source of funding to become less dominant in the near term due to global de-leveraging.

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