National Bank of Romania BNR
(National Bank of Romania)

Romanian banks’ exposure to gov debt is the highest in the EU

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The exposure of the Romanian banking system to domestic sovereign debt securities reached the highest level in the European Union, as banks hold in their portfolio Government papers (bonds and bills) worth 7% of GDP and this may be risky, according to Florian Neagu, deputy director of the Stability Department within the National Bank of Romania (BNR)

A simulation made by the BNR shows that an increase in interest rates could bring significant losses
of up to 17.6% of the banking sector’s own funds.

“Overall, the image of the Romanian banking system is good, in many sectors better than the EU average. However, we notice that when it is good, the seeds of risk are planted” Neagu told a conference organized by Finmedia.

The banking system’s profitability is high (13% return on equity versus 7.6% in the EU) and the solvency ratio is strong (22.08% compared to an average of 17.1% in the EU) the official said.

The solvency ratio is above average largely due to the non-distribution of dividends.

However, all these can deteriorate under certain circumstances. The solvency ratio could lose two percentage points from the distribution of dividends. In the coming months, banks could start distributing the dividends related to profits from the past years. The decision will be taken by the National Committee for Macroprudential Supervision (CNSM). In addition, another two percentage points could be lost when building up provisions in 2022.

Meanwhile, the losses generated by adverse developments of the interests and yield curve would come on top of these two effects.

At end-August 2021, loans to non-government sector granted by credit institutions increased 1% (0.8 % in real terms) from July 2021 to RON 309,691.2 million, BNR data showed. RON-denominated loans, representing 71.3% of total volume of loans to non-government sector, moved up 1.3%, whilst foreign currency-denominated loans, representing 28.7% of total loans to non-government sector, increased 0.3% when expressed in RON (down 0.03% when expressed in EUR). Credit to general government went up 0.5% last month from July to RON 160,434.0 million and 18.0 percent (12.1% in real terms) year on year, the central bank said.

Meanwhile, broad money (M3) amounted to RON 533,282.4 million in August, up 1.5% (1.3% in real terms) month on month and 17.8% (11.9% in real terms) year on year.

CFA Romania analysts said they expect the country’s gross domestic product (GDP) to increase by 7.2% this year, and the budget gap to be equivalent to 6.8% of GDP. The association of investment professionals also sees public debt reaching 53% of GDP in the following 12 months and inflation standing at 4.38%.