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October 22, 2021

Moody’s warns Romania, banking system under pressure

The Romanian banking system is largely dependent on the economic and financial market dynamics of the euro area and as such, the escalation of the European banking and sovereign debt crisis negatively affect the Romanian banking system, says Moody’s Investors Service in a new Special Comment published yesterday, a press release informs. Moody’s believes that the crisis will affect Romania’s banking system through a weakening demand for exports and a slowdown in foreign direct investment (FDI); the high level of foreign-currency (FX) lending in the system, accounting for over than 60 pc of total loans; and a potential weakening of parent banks’ commitment to their operations in the country. These transmission mechanisms will likely reduce funding availability, weaken asset quality, increase losses and pressure capital; which, in turn, may increasingly exert pressure on bank ratings in Romania. Moody’s analysts expect that the weakening operating environment will cause asset quality to deteriorate, or at the very least remain under significant pressure. Non-performing loans could rise further if the local currency weakens, as it would expose foreign-currency borrowers to a higher debt servicing burden. A significant proportion of these borrowers have no FX revenue.

Moody’s also believes that the banks face an increasing likelihood that their foreign parent banks will reduce their operations in the country, which would affect the banks’ capital positions and suppress lending growth. Deleveraging would be further exacerbated by the banks’ significant reliance on funding from the parent banks, especially for their foreign-currency loans. Within the local market, the banks would have to realign their business models, which would likely suppress profits due to slower growth and more intense competition on lending and deposit margins.

Overall, Moody’s considers that the largest financial institutions are better positioned to adapt to this challenging environment; smaller banks are more likely to lose market shares in certain business segments as competition intensifies, which will impair their profitability.

In response, Adrian Vasilescu, adviser to the central bank governor, stated during a banking forum: “Rating agencies are once bitten, twice shy. They want to make sure they won’t be taken by surprise again. The sure thing is there are alternative reports on the state of the banking system in Romania. Moody’s fails to get the Romanian paradox – an economic crisis without a financial crisis. Or it’s pretending not to get it. The IMF, the World Bank and the European Commission are keeping a constant watch on Romania”.

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