Fitch: Local banking sector-weak performance in 2013, negative outlook for 2014

Rating agency Fitch expects further deterioration of the Romanian banking sector’s reported asset quality to end-2013 and into 2014, accompanied by additional impairment provisions, putting pressure on regulatory capital. “Banks’ profitability is likely to remain weak in 2014, as the operating environment will remain difficult and the economic recovery fragile, but should pick up slightly, relative to 2013, as non performing loans (NPL) start to plateau”, Fitch said in <<Banks 2014 Outlook: CEE Banks>> report.
Contrary to rating agency’s expectations a year ago, the key credit metrics of the Romanian banking system continued to deteriorate markedly over 9 months 2013. The increase of the NPL stock in absolute terms was similar to that in 9 months 2012 and the increase of the NPL ratio was exacerbated by the shrinking loan book. Fitch expects the inflow of NPLs to slow in 2014, but a broader recovery does not seem likely due to our expectations of an only moderate pick – up in economic activity and the sector’s general focus on solving legacy NPLs rather than on new lending.
The sector’s funding profile is gradually improving, with the loan- to -deposit ratio falling by around 10 percentage points yoy to 108 percent in 3Q 2013. According to Fitch, the sector is comfortably liquid in local currency, while the foreign – currency funding gap is still material, albeit gradually closing. The sector’s loans/deposits ratio is suppressed by high mandatory reserve requirement ratios (20 percent for foreign – currency and 15 percent for local – currency liabilities).
A combination of lower lei interest rates, delayed recovery in lending, and more focus on domestic funding sources is likely to constrain net interest income and total revenue.
Although inflow of new NPLs may slow in 2014, impairment charges are likely to remain high, driven partly by the need to increase provision coverage of existing NPLs. Against this backdrop, focus on cost efficiency and economies of scale is evident and, in Fitch’s view, may lead to repositioning of some banks and possibly to further consolidate on of the sector.

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