Fitch: The banks will face credit losses and profitability drop

Fitch Ratings is warning that the recession will probably lead to a significant growth of the losses caused by nonperforming credits and to the steep drop of bank profitability in Romania in 2009 and 2010, a scenario that brings out the necessity of capital hikes from the mother-banks, Mediafax informs.

'The revenue growth will be affected by the hiking of the risk costs and by the shrinking of the profit margins as a consequence of the growth in the cost of financing. The weak efficiency limits the capacity to absorb the increasingly larger commissions for bad credits,' Gulcin Orgun, Fitch's director for financial institutions, stated in a communique issued yesterday.

Although they were not exposed to the 'toxic assets' that were at the center of the sub-prime crisis in the United States, as a consequence of the global financial crisis the banks in Romania are facing a drop of liquidity at global level and the effects of the global recession, the rating agency writes.

Because of the high commissions, approximately half of the 42 banks in Romania have finished Q1 of this year with losses as per the Romanian accountability standards, Fitch reminds.

At the same time the banks were affected by the contraction of the crediting growth rhythm, a contraction that has strongly lowered the commission revenues, with the assets' quality registering significant deteriorations both last year and in the first part of 2009. 'It is possible for this trend to continue, considering the severity of the recession and the low availability of crediting. It is difficult to foresee when the losses caused by bad credits will pass the maximum point within the Romanian banking system,' the communique reads.

At the same time, the high degree of 'un-hedged' indebtedness denominated in foreign currencies could lead to deterioration in the quality of credit portfolios in a scenario that would see the strong depreciation of the RON, Fitch considers. The unhedged debts represent credits denominated in foreign currency that have not been insured by the banks through hedging agreements against the possible violent fluctuations of the currency exchange rate. The average rate of Romanian capital adequacy within the Romanian banking system stood at 12.03 per cent at the end of Q1 of this year, Fitch notes.

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