FITCH: THE QUALITY OF BANK ASSETS IN ROMANIA WILL WORSEN In 2014 Florin Cîţu: "The rate of non-performing loans could go as high as 35%"

Non-performing loans in the portfolios of our banks could reach a peak of 35% of the total volume of loans, economic analyst Florin Cîţu warns. In his opinion, the critical point of NPLs, in terms of the negative impact on the economy was reached last year, which can't be said about the peak, for which the rising trend will continue.

In a report published yesterday, ratings firm Fitch announced that it expects the deterioration of the assets of banks by the end of this year, as well as into the next. Key indicators of the domestic banking system had a negative evolution in the first nine months of 2013, against the firm's expectations, the report notes.

Florin Cîţu expressed his surprise at the fact that Fitch did not anticipate this year's dynamic of non-performing loans, given the difficult economic context. "Bank customers suffered from the crisis, due to the worsening of the economic conditions, compared to the period when they took out the loans. The only way this trend can be reversed is through the improvement of the economic context, which will not come in 2014, however, but a few years down the road", he said.

The reduction of the rate of non-performing loans through the improvement of the customers' payment behavior is hard to achieve, as the disposable income of households is lower than in 2008, and companies are facing an increasingly harsh and aggressive taxation, the economist stresses.

The alternative is for banks to achieve an efficient restructuring of loans granted, which is highly unlikely to happen, because the Romanian banking system in Romania is an oligopoly, rather than based on competition, says Florin Cîţu. "Romanian banks are protected by the NBR, as they are not truly at risk of default even if they were badly managed. Without the fear of default, there is no real motivation to achieve a real restructuring of the banking system", the economic analyst also stressed.

The ongoing deterioration of the quality of local banking assets, as well as the set-up of additional provisions, would put pressure on their capital needs, according to the report by Fitch. The profitability of Romanian lenders will remain low in the future as well, as the environment they operate in will remain difficult, and the recovery of the economy will remain fragile, but it will however increase slightly compared to this year, as the level of non-performing loans stabilizes, the document notes.

The increase of the value of NPLs in the first nine months of the year was similar to the one of last year, as it was further exacerbated by the reduction of the banks' loan volume, the ratings firm says. The representatives of Fitch estimate that the NPL flow will decrease in 2014, but he thinks that a stronger turnaround is possible, because the economic activity could improve slightly, and lenders are more concerned with dealing with troubled loans rather than extending new ones.

The rate of NPLs could increase by the end of this year, after the National Bank of Romania NBR began a reevaluation of the classification of loans and provisions, they also said.

Also, the risk associated with loans denominated in foreign currencies will not decrease any time soon, as a large part of these loans were granted over the medium and long term, and lending in lei is advancing slowly, according to the ratings firm.

The adequacy rate of the capital of domestic banks will reduce by the end of 2013, due to the increase of provisions, but it would then stabilize itself, Fitch claims.

The loan/deposit ratio fell 10% YOY, in Q3 2013, to 108%. This puts it below the constraints of the minimum required reserves, of 15%, for assets denominated in lei, and 20%, for those denominated in foreign currencies, the ratings firm says. "The banking sector has a comfortable liquidity, on the lei side, whereas the financing gap on the foreign currency side is still significant, but dropping", the report by Fitch notes.

The profitability of the banking sector in Romania would remain low, due to the low interest rates on loans, because the turnaround of lending has still not arrived yet, as well as due to the cost of provisions, which will remain high, say the analysts of the ratings firm, who expect the repositioning of some banks and potential consolidations in the coming period.