Romania Braces for `Shock' on Bad Loans After Bank Probe

Romania’s banking industry will witness a ‘‘shock’’ increase in its non-performing loan ratio in the last two months of this year following a central bank investigation into lenders’ practices on reporting bad debts.

The proportion of non-performing credits was 21.7 percent of all loans at the end of October, Nicolae Cinteza, the head of the central bank’s supervision department, said at a conference in Bucharest today. That will jump after the regulator started a probe in September when it registered inconsistencies in how bad loans were being reported.

“We will see a shock in November and December because of our probe,” Cinteza said at a conference in Bucharest today. “We want to see banks’ NPLs as close to reality on Jan. 1.”

The Black Sea state’s banking industry -- dominated by units of western-European lenders -- will return to profit this year, Cinteza said, after three years of losses following the collapse of a real-estate boom during the economic crisis.

Foreign-owned banks control about 90 percent of the market and include Erste Group Bank AG’s Banca Comerciala Romana SA, Societe Generale SA (GLE)’s BRD unit, Raiffeisen Bank (RBI) Romania SA, UniCredit Tiriac Bank SA and units of Greece’s Eurobank Ergasias (EUROB) SA, Alpha Bank (ALPHA) AE and National Bank of Greece SA.

Worsening Loans

The Romanian leu was little changed at 4.467 per euro at 2:10 p.m. in Bucharest after sliding to its weakest in more than two months yesterday. The cost of insuring Romanian bonds against non-payment with credit- default swaps for five years increased 12 basis points to 201, the biggest move since June.

Romania’s central bank is looking into loan reporting at 20 banks this quarter and will investigate the country’s remaining 20 lenders after talks with the International Monetary Fund in 2014, Cinteza said. Following the November-December jump, growth in bad loans should slow to October’s levels, when they increased just 0.1 percentage point from a month earlier.

“As NPLs continue to grow at a smaller pace similar to October, I don’t think it’s going to be a problem,” he said.

The country’s banks posted a combined 1.6 billion-lei ($487 million) profit at the end of October, up from 1.5 billion lei a month earlier, he said.

That followed a loss of 2.1 billion lei in 2012, when non-performing loans rose to 16.8 percent, the sixth worst in the world, according to World Bank data.

Funding Diversification

Romanian banks are trying to diversify their funding sources as they cover rising bad loan costs and western parents pull back funding. They paid back about 5 billion euros ($6.8 billion) to their owners in the past year and a half, while getting capital boosts of 1.7 billion euros.

Banks that are found hiding non-performing loans through restructuring practices will be required to bring in extra capital, Cinteza said on Nov. 28. He added it was unacceptable to have local banks compensating for non-performing loans by attracting domestic funding while they simultaneously reimbursed international parents.

The central bank has completed a draft law on covered bonds, or debt instruments backed by collateral, and will submit it to the government to meet pledges to the IMF. Cinteza said the central bank would only allow lenders to issue such bonds with its approval.

“We want to make sure the banks that hide NPLs won’t get this approval,” he said. “We require full transparency.”

To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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