This report covers the market developments and statistics data released up to mid-June 2014 – including short-term series as of Q1, 2014 and partly April 2014.

Foreign financial groups have kept draining money from Romania in 2013 – bringing the second deleveraging episode [2011-2013] to over EUR 6bn, compared to EUR 7.4bn in 2009. BIS-reporting banks’ exposure to Romania, measured as % of country’s banking assets halved in 2009-2013 to 18.7%. The share is well above emerging Europe’s [including Czech and Slovak Republics] 13.4% average.

Despite losing parent groups’ financing, the resources held by Romanian banks – at least apparently, increased over 2009-2013 by 15.2% of 2008 GDP. This was because the rise in domestic deposits. Despite apparently rather abundant resources in banks’ vaults, financial intermediation remains weak. And this is because the high NPL [22.3% at end-March] ratio. In other words, part of banks’ resources are carried to offset the NPLs. Until the banks settle their old loans business, financing is unlikely to resume at decent interest rates in line with the risk [and not with the risk of past businesses financed by banks]. And the central bank promised to pursue a four-step process of convincing banks to clean their balance sheets. At the end of the process, expected to complete before the end of the year, the NPL would decrease in the low two-digit area [13.6%, according to central bank’s estimate] from above 20% currently. At the end of the process, the loan to deposit ratio would decrease dramatically to significantly below 90% [non-government sector alone].

The aggregate net profit of the Romanian banking system increased by 20% y/y to RON 597mn (EUR 134mn) in the first quarter of 2014. Notably, the Romanian banks started this January adjusting downwards their provisions from the levels required by the central bank to the levels required under the IFRS regulations. The differential amounts to over EUR 2bn – money that would be accounted as profits but not taxed. The convergence to the IFRS provisions is scheduled to take five years. Romania’s central bank also adjusted backward the 2013 aggregate profit of the banking system by some EUR 100mn to only RON 49mn [EUR 11mn] from the previously announced RON 497mn [EUR 111mn].

The stock of non-government bank loans in Romania contracted by only 0.8% y/y as of end-April compared to minus 2.7% y/y a month earlier and minus 3.3% y/y at the end of 2013 – as local currency lending has further gained ground in the month, probably as a result of the central bank’s repeated monetary policy interest rate cuts, the latest data of the monetary authority revealed.

Romania remained roughly constant at the end of April from a month earlier both in absolute terms [EUR 7.5bn] and as a share of the total stock of loans [15.2%], according to calculations based on central bank data.

The non-performing loans ratio of the Romanian banking system increased by 3.18pps y/y to 22.26% at the end of March, the central bank reported. The ratio however dropped below the level seen a month earlier and even at end-January, yet remaining above the end-2013 value.The sudden improvement [visible in other ratios also as well as in the stock of IFRS/RAS provisions] was most likely driven by the sale of bad loans bundles to credit collection agencies – as it was also the case at the end of last year.

Key points:
• Industry, domestic consumption drive Romania’s Q1 GDP up 3.8% y/y [after 3.5% in 2013]
• Romania’s SBA with IMF remains in limbo until after fall’s elections
• Central bank to keep policy interest rate unchanged [at 3.5%] until end-2014, possibly end-2015; cuts end-2014 inflation forecast by 0.2pps to 3.3%.
• Romania to join single currency area in Jan 2019 – budget minister
• Speed of Western banks deleveraging vis-a-vis CESEE stagnates in Q4 2013
• NPL ratiuo hits 22.3% at end-March, 2014; central bank explains steps for cleaning banks’ balance sheets.
• Romania’s local currency lending gains ground in April 2014
• Romania’s fiscal gap narrows 78% y/y to 0.14% of GDP in Q1...
• … and further shrinks by 71% y/y to 0.14%/GDP in April 2014.
• ESA public debt hits 40% of GDP at end-Feb 2014