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Romania’s banking sector is moving toward greater stability and creditworthiness, but the economic and industry risks facing the system remain high, according to a report published recently by Standard & Poor’s Ratings Services.

“Political stability and improved economic management have supported relatively strong banking industry growth over the past three years,” says Standard & Poor’s credit analyst Ekaterina Trofimova, one of the authors of the report. “This growth has been enhanced by increased liquidity as confidence in the banking system has improved, and by increased foreign participation and a reinforced supervisory framework.”

Romania’s banks have experienced rapid loan growth in recent years: annual lending growth reached 30% in real terms in 2002, and maintained the same pace during the first half of 2003. Still, financial intermediation remains low, with domestic credit at only 11% of GDP in 2002.

The brighter macroeconomic environment, restructuring, and tighter supervision and regulation have also improved the quality of banks’ loan portfolios. According to the guidelines prescribed by the National Bank of Romania, non-performing loans fell to 3.7% of total loans at September 2003, from a high 58.5% at year-end 1998 and 35.4% in 1999. The restructuring of weak banks, write-offs, and softer classification rules have played key roles in this decline.

Nevertheless, Standard & Poor’s still views asset risk as fairly high in Romania, given the relatively poor credit culture and rapid loan growth. In a reasonable scenario of economic recession, Standard & Poor’s estimates that gross problematic assets in Romania would fall in the range of 50-75% of total system assets, which corresponds to 5-7% of GDP.

“A major recession would hurt most companies in Romania, and the banking sector would be particularly hard hit,” says Standard & Poor’s credit analyst Magar Kouyoumdjian, who co-authored the report. “Moreover, the concentration of economic activity within a limited number of sectors adds to the lending risk.”