The law on the conversion of Swiss francs (CHF) loans allowing individuals to convert Swiss franc (CHF) loans into local currency at historical exchange rates and that is going to be passed by Romanian Parliament next week, will have no immediate rating impact on Romanian banks, says Fitch Ratings on Thursday.
“This is because CHF loans represent a negligible portion of overall lending at most of the banks rated by us and, where CHF portfolios are larger, sufficient reserves have been set aside to absorb potential conversion losses. The depreciation of the Romanian leu against the CHF since the bulk of loans were written in 2007 and 2008 has made it increasingly difficult for borrowers dependent on leu-denominated income streams to service the loans. This is especially true for low-income retail mortgage borrowers,” the rating agency notes.
Retail mortgages represent the bulk of outstanding CHF loans. According to Romanian Central Bank (BNR), the average debt service/income ratio for CHF mortgage borrowers was high at 60 percent, and 12.9 percent of CHF-denominated mortgages were non-performing at end-2015.
BNR says that if all outstanding CHF loans to private individuals are converted at the exchange rates prevailing at the date when the loans were originated, the cost for the banking sector would reach RON2.4 billion (EUR 540 million). This is equivalent to around 50 percent of the sector’s annualised 2016 net profit, based on H1 of 2016 data.
Also, there were RON 4.7 billion outstanding CHF-denominated retail loans in the banking sector at end-August 2016, equivalent to 4.2 percent of total household loans outstanding.
Banca Transilvania S.A. (BT, BB/Stable), for example, has already taken a proactive stance and offered its retail CHF mortgage borrowers the option to voluntarily convert loans on favourable terms. Standalone Viability Ratings assigned by us to Romanian banks – Banca Comerciala Romana S.A. (BBB/Stable), BT and UniCredit Bank S.A. (BBB/Negative) – are in the ‘bb’ range, indicating speculative credit quality, driven predominantly by weak asset quality and the challenging operating environment.
“The proposed law will not immediately affect bank ratings, but is another example of how the legislative framework is increasingly moving toward debtor-friendly measures, protecting consumer rights to the detriment of banks,” Fitch concluded.