Moody’s downgrades three Romanian banks

Moody's Investors Service has downgraded the ratings of three Romanian commercial banks in light of its global review of systemic support indicators for the country's banking system, and also because of the asset quality challenges faced by Romanian banks in the currently difficult operating environment.
The affected banks are Banca Comerciala Romana SA (Erste Group), BRD — Groupe Societe Generale and Raiffeisen Bank SA., with total assets among them of EUR 32.6 bln.
Consistent with the analytical criteria specified in a Special Comment published earlier this year, and given Romania's current situation and future prospects, Moody's has changed the systemic support input for Romanian banks' ratings to Baa2 from the Aa3 local currency deposit ceiling (LCDC). The new Baa2 systemic support anchor for Romanian banks is placed one notch above the Baa3 local currency government debt rating. As a result of this, the local currency deposit ratings of Romanian banks have been downgraded, affecting each bank differently.
In deciding whether the systemic support anchor can be higher than the local-currency debt rating of the national government, Moody's considered a number of factors for each banking system: the size of the banking sector relative to the government's resources; the level of stress in the banking system and in the economy; the FC obligations of the banking system relative to the government's own FC resources; political and historical patterns; and the possibility of any drastic shift in government priorities.
Moody's regards the systemic importance of the Romanian banking system as moderate given the ratio of banking assets to GDP of around 63%, with a weighted average bank financial strength rating (BFSR) of D for the rated Romanian commercial banks. The level of stress in the Romanian banking system has increased due to the deep recession in the country, with the proportion of non-performing loans (NPLs) growing steeply in recent quarters, reaching around 13.4% as of August 2009 based on local standards (loans classified as doubtful and loss).
Moody's notes that the impact of the downturn on the Romanian economy is significant given the slump on export-oriented sectors and on local retail demand for goods and services. The rating agency also notes that the banking system's FC obligations relative to the overall economy and the central bank's (NBR) FC reserves are quite significant, mainly in the form of deposits denominated in FC as well as FC borrowings that banks usually obtain from their European parent banks.
Political and historical evidence suggests that Romania's government is likely to show moderate support towards its banking system, although in Moody's opinion its stance towards supporting the systemically important banks has not changed and is not likely to change in the foreseeable future. That said, Moody's notes that Romania is currently facing presidential elections which will determine the stability and functioning of the country's government. The new government will need to regain the confidence of international investors. At the same time, the government will also need to undertake the necessary economic reforms to ensure the timeliness of a EUR20 bln international aid package, mainly coming from the IIMF and the European Commission.