Moody’s: Romania’s largest banks to cut NPLs further, costs to rise

Romania’s three rated banks – Banca Comerciala Romana (BCR), BRD-Groupe Societe Generale and Raiffeisen Bank – work to reduce the large stock of problem loans on their books, Moody’s Investors Service says in a report published recently.

“Romania’s growing economy will gradually improve borrowers’ debt servicing capacity and create more opportunities for banks selling their problem loans,” Armen Dallakyan, Vice President-Senior Analyst at Moody’s points out.

As a result, the rating agency expects nonperforming loans (NPLs) as a proportion of total loans at the three aforementioned rated banks to decline by two to three percentage points over the next 12 to 18 months.

As noted in June 2016, Moody’s expects robust real GDP growth of 4.2 percent and 3.7 percent in Romania for 2016 and 2017, respectively, driven by strong private and public consumption. In addition, declining unemployment and one of the lowest levels of private-sector indebtedness in EU will support banks’ asset quality and boost business opportunities.

NPLs for BCR and BRD have already reduced significantly over the past few years as a result of balance sheet clean-up measures; the NPL ratio for the former dropped to 14 percent in June 2016 from 29.2 percent in December 2013, while the latter’s declined to 14.4 percent from 24.5 percent over the same period.

Moody’s estimates Raiffeisen’s impaired loan ratio at 8.5 percent as of December 2015, an improvement from 10.4 percent in 2013.

“While asset quality is likely to improve, however, profitability could face challenges. New banking laws in Romania – one that allows mortgage borrowers to walk away from their loans, and another in process that would mandate a conversion of Swiss franc mortgages into local currency – will increase costs materially over the next 12 to 18 months,” according to the rating agency.

However, Moody’s notes that the benign economic conditions will moderate the impact of these laws for the three rated banks and that additional provisioning costs incurred as a result of rising defaults on mortgages will likely be covered by banks’ revenues.