This report covers developments in Romania’s financial sector through September 2013, including a survey of the regional context and the macro outlook. The report also includes corporate news for firms including Germany’s ProCredit Group, Volksbank Romania, and Portugal’s Millenium BCP.

Romania’s banking system remained in recovery mode during H1 2013 and the outlook remains gloomy. The banking system reported net profits in both Q1 and Q2, and the quarterly profits were among the highest in recent years. Moody’s rating agency has downgraded by two notches the long-term deposit ratings on Romania’s largest banks BCR–Erste Group and BRD–Société Générale, placing a question mark over the whole local banking system.

BIS-reporting banks reduced their exposure to the Romanian banking system by USD 2.1bn in Q1 to USD 27.25bn at the end of March, according to our calculations based on BIS data. The funds withdrawn by BIS-reporting banks in the quarter hit the highest level since Q3 of 2009 and accounted for 6.9% of the banks’ exposure at the beginning of the quarter—or 1.5% of the banking system’s total assets at the beginning of the period. Foreign banks operating in Romania have withdrawn in the past six quarters ending June 2013 some EUR 5bn of the financing previously extended to local subsidiaries. The Romanian central bank suspects that some commercial banks have restructured part of their bad loans only for capital adequacy purposes and not because the debtors are really able to pay back their dues under the looser terms.

Key Points:

• In corporate news, Portuguese bank Millenium BCP will try to sell its Romanian subsidiary or will close it down.

• German group ProCredit bought another 60% of ProCredit Bank Romania, thus raising its total stake in the local lender to 95%.

• Volksbank AG Group has earmarked EUR 60mn for a EUR 120mn capital increase at its Romanian subsidiary, Volksbank Romania.

• Banks’ IFRS impairment cost increased 88% y/y to EUR 418mn in Q2. The value of adjustments for the IFRS impairment of Romanian banks increased by RON 1,862mn (EUR 418mn) in Q2 to RON 33bn (EUR 7.4bn) at the end of June.

• NPL hit 20.3% at the end of June up from 16.8% one year earlier.

• The deterioration in market sentiment vis-à-vis emerging market countries that started in late May may intensify funding reductions in CESEE, the EBRD said, concluding that assessing the systemic risks of continuing deleveraging in the region remains very important.