“The deteriorating quality of bank assets is likely to become an important vulnerability in the Central and Eastern European region, particularly in economies affected by large contractions in output. The quality of loan portfolios has deteriorated as labour market conditions weakened, incomes declined and real interest rates increased,” said the ECB report. According to ECB, stress tests conducted on countries in the region indicated that Romania could register the highest nonperforming loan (NPL) ratio, of 18 percent. Slovakia’s NPL ratio could amount to 15 percent, while Estonia and Bulgaria might register 10.5 and 10 percent, respectively.
The solvency rate of local lenders will remain above the minimum requirement, but some banks could need capital increases. According to the National Bank of Romania, the solvency of the local banking system is of 13.7 percent, while the minimum limit is of eight percent.
The report indicates that an economic vulnerability in Eastern European countries is that a significant share of bank loans is granted in other currencies than the borrowers’ income. “In countries with a large stock of outstanding foreign currency credit, a renewed weakening of these currencies could trigger a significant further deterioration in banks’ asset quality,” stated the ECB report. At the end of the first nine months of this year, one euro was worth RON 4.1981, 12.4 percent weaker year-on-year. The Polish zloty depreciated 24 percent against the euro, to 4.2226 zloty from 3.4083 zloty, while the Hungarian forint lost over 11 percent, to 270.36.
Retail and corporate foreign currency-denominated loans, make up 24 percent of Romania’s gross domestic product, 48 percent in Hungary and 28 percent in Poland.
