(The following statement was released by the rating agency)
Dec 3 - Fitch Ratings says that banking systems in emerging
Europe continue to face structural problems. However, the
agency considers banking systems with greater funding and
capital flexibility, such as Turkey, the Czech Republic, the
Slovak Republic and Poland to be better placed, according to a
special report published today that examines 12 banking systems
in the region.
The report highlights growing reliance on collateral to
cover potential loan losses. This is particularly evident in
markets such as the Baltics where there has been the greatest
decline in property prices. The reliance on collateral
relative to available capital in the banking system is also
highest in Latvia and Lithuania, suggesting these markets will
be in greater need of new capital should collateral not achieve
expected valuations.
"The banking systems with greater funding and capital
flexibility will be able to support economic growth, while
those with the greatest imbalances, such as the Baltic
countries, will be less able to support future growth," says
Michael Steinbarth, Senior Director in Fitch's Financial
Institutions team, based in London.
"Future growth will also depend on the extent of continued
asset quality deterioration, together with the prospects for
convergence between the banking systems in the region and the
more developed banking systems in Europe." says Mark Young,
Managing Director in Fitch's Financial Institutions team.
"Structural issues include the need for more balanced funding
strategies between parents and their subsidiaries, a reduction
in the proportion of lending in foreign currency, and the need
to replenish capital." Fitch considers the unwinding of
structural macro-economic imbalances to be a necessary but
long-lasting process.
The full impact of the global recession does not appear to
have fully filtered through into pre-provision profits, given
the level of GDP contraction in most banking systems, reduced
growth in assets, and still elevated funding costs, and based
on financial results for the first six months of 2009. The cost
of risk, however, varies significantly, with operating profits
in the Baltic states being completely eroded in 6M09, whereas
other banking systems still have some buffer to absorb higher
credit costs.
According to Fitch, non-performing loans are likely to
continue to increase at the region's banks. However, the rate
of inflow of non-performing loans in banks across the region
should gradually slow and peak during 2010 as long as there is
no deterioration in operating environment, the agency believes.
Given significant levels of restructured loans, which do not
feature in NPL numbers, and growing reliance on collateral,
particularly in property, sizeable losses will be incurred.
In Fitch's opinion, event risk remains considerable. This
could take the form of the devaluation of a local currency,
collapse of market confidence over a large international
cross-border group or social/political pressures arising from
economic conditions.
The report, "Banking Systems in Emerging Europe -
Structural Problems Remain" is available for the next 7 days on
www.fitchratings.com. It covers the banking systems in Poland,
the Czech Republic, Hungary, Romania, Turkey, Croatia,
Slovakia, Slovenia, Bulgaria, Lithuania, Estonia and Latvia.
((Bangalore Ratings Team, +9180 4135 5469;
bharat.katal@thomsonreuters.com, Reuters Messaging:
bharat.katal.thomsonreuters.com@reuters.net))
