Swiss franc (CHF) loans conversion law in Romania will have no immediat rating impact, says Fitch

A ruling, expected to be passed by parliament next week, allowing individuals to convert Swiss franc (CHF) loans into local currency at historical exchange rates will have no immediate rating impact on Romanian banks, says Fitch Ratings.

This is because CHF loans represent a negligible portion of overall lending at most of the banks rated by us and, where CHF portfolios are larger, sufficient reserves have been set aside to absorb potential conversion losses.

The depreciation of the Romanian leu against the CHF since the bulk of loans were written in 2007 and 2008 has made it increasingly difficult for borrowers dependent on leu-denominated income streams to service the loans. This is especially true for low-income retail mortgage borrowers. Retail mortgages represent the bulk of outstanding CHF loans. Data published by the Romanian Central Bank (BNR) says that the average debt service/income ratio for CHF mortgage borrowers was high at 60%, and 12.9% of CHF-denominated mortgages were non-performing at end-2015. Conversion discussions have been ongoing for some time.

BNR says that if all outstanding CHF loans to private individuals are converted at the exchange rates prevailing at the date when the loans were originated, the cost for the banking sector would reach RON2.4bn (EUR540m). This is equivalent to around 50% of the sector’s annualised 2016 net profit, based on 1H16 data. We understand that this estimate does not take into account any reserves already set aside by banks against the CHF portfolios. The actual figure could well come in below the estimate.

According to BNR data, there were RON4.7bn outstanding CHF-denominated retail loans in the banking sector at end-August 2016, equivalent to 4.2% of total household loans outstanding. Exposure is not evenly distributed, but all banks rated by us either have negligible exposure to these portfolios or have created sufficient reserve buffers to ensure they can absorb any exchange rate losses arising once conversion legislation is implemented. Banca Transilvania S.A. (BT, BB/Stable), for example, has already taken a proactive stance and offered its retail CHF mortgage borrowers the option to voluntarily convert loans on favourable terms.

Standalone Viability Ratings assigned by us to Romanian banks – Banca Comerciala Romana S.A. (BBB/Stable), BT and UniCredit Bank S.A. (BBB/Negative) – are in the ‘bb’ range, indicating speculative credit quality, driven predominantly by weak asset quality and the challenging operating environment. The proposed law will not immediately affect bank ratings, but is another example of how the legislative framework is increasingly moving toward debtor-friendly measures, protecting consumer rights to the detriment of banks.