Bancherul - BANCI / ENGLISH / Standard & Poor's raised its Banking Industry Country Risk Assessment (BICRA) on Romania

LONDON (Standard & Poor’s) Aug. 4, 2008--Standard & Poor’s Ratings Services said today that it raised its Banking Industry Country Risk Assessment (BICRA) on The Republic of Romania (foreign currency BBB-/Negative/A-3; local currency BBB/Negative/A-3) to Group 7 from Group 8. At the same time, Standard & Poor’s changed its estimate of the incidence of gross problematic assets (GPAs) in the Romanian financial system under a reasonable (but not catastrophic) scenario of economic recession to 25%-40% from 35%-50%.

The BICRA upgrade reflects the good growth and profitability performance of the Romanian banking sector, following several years of a healthy growth pace and accumulating wealth in the economy; and massive inflow of foreign investments into the banking sector, which has created a solid funding base for credit acceleration. The upgrade also reflects the stronger banking penetration and services coverage, and advancing banking technologies in the Romanian banking sector. These were to a large extent led by the import of Western banking technologies, EU convergence requirements, and the start-up of the adoption of Basel II principles.

Despite these improvements, the banking industry country risk in Romania is still higher than its peers (Bulgaria, Croatia, Hungary, Lithuania, and Poland). This is due to accumulating economic imbalances, negative spillovers from global financial market tensions, deteriorating operating flexibility due to the increasing scarcity of deposits and capital, high reliance on funding from parental foreign banks, balance sheet currency mismatches, and the country’s still-weak (although progressing) legal and supervisory framework.

The deteriorating credit profile of Romania has been a growing concern over 2007-2008. While the country was posting robust growth over the previous several years, the economy now shows clear signs of overheating. High external imbalances, a procyclical fiscal stance, rising inflation, less stable currency, and the global financial market turmoil are amplifying the risk of a hard landing. On the positive side, massive foreign capita inflows, growing domestic demand, and the 2007 EU accession represent significant potential for Romania.

The Romanian banking sector remains small and concentrated. About 50% of the sector’s assets are held by the five-largest banks, led by recently privatized Banca Comerciala Romana (BCR; BBB-/Stable/--) with a dominant 26% market share at end-2007. Foreign shareholders largely dominate the sector, controlling 88% of the total banking capital in Romania. Extensive foreign direct investments have had a strongly positive impact on the system, and we expect international owners to help maintain the creditworthiness and quality of the Romanian banking sector. The major impact would be felt through importing technologies and skilled management, and providing necessary funding and capital support, mitigating the still-high economic and industry risks.

Strong loan growth over the past several years (50% per year on average) has pushed up the scope of financial intermediation in Romania. The ratio of domestic credit to GDP surged to 37% at year-end 2007. Rapid lending growth is viewed with caution, however, as loans remain unseasoned, bankruptcy legislation and loan collateral are inefficient, and risk management technologies and policies are to be tested by the deteriorating Romanian economic environment. Besides, growth was largely funded through foreign funding, to a large extent provided by the new foreign owners of the banks. Current global market tension might reduce these sources of funding.

Strengthened regulatory framework by the National Bank of Romania (foreign currency, BBB-/Negative/A-3; local currency, BBB/Negative/A-3) has, in Standard & Poor’s view, provided a better mechanism for managing potential systemic problems, should they occur. The EU accession in January 2007 provides a strong anchor for the enhancement of banking regulations.

The BICRA reflects the strengths and weaknesses of a country’s banking system relative to those in other countries. BICRAs classify countries into 10 groups ranging from the strongest banking systems (Group 1) to the weakest (Group 10) from the perspective of country risk. (For a full list of BICRA and GPA groups, see "S&P’s Banking Industry Country Risk Assessments: Global Annual Roundup" published on Aug. 9, 2007, on RatingsDirect.)

Standard & Poor’s, a division of The McGraw-Hill Companies (NYSE:MHP), is the world’s foremost provider of financial market intelligence, including independent credit ratings, indices, risk evaluation, investment research, and data. With approximately 8,500 employees, including wholly owned affiliates, located in 23 countries, Standard & Poor’s is an essential part of the world’s financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit www.standardandpoors.com.