One more international voice adds to the warning chorus connected to the passing to pay bill which would allow retail mortgage borrowers to return real estate collateral to banks. The current version of the law, which is subject to Parliamentary review in coming weeks, “could disrupt the Romanian banking sector’s improving performance,” says international rating agency Fitch Ratings.
The proposed law would apply to new and outstanding mortgages under EUR150,000, which, according to Fitch, applies to 99 percent of Romanian mortgage borrowers.
“We believe the law would be negative for bank performance on several fronts if passed in its current form. Retail mortgage lending could come under pressure as banks tighten their lending criteria and require higher down payments to protect themselves against potential weakened credit discipline,” Fitch said.
The agency added that the main effect of the bill will most probably Prima Casa program’s end. “The impact could potentially be substantial as about 20% of total retail loans have been made under the programme since it was launched in 2009. Retail mortgages under the Prima Casa programme require a low 5% down payment and the state guarantees 50% of the loan. But the draft law appears to raise doubts about enforceability of the government guarantee,” Fitch goes on to say.
With sector non-performing exposures at 13.6 percent at the end of 2015, the agency does not expect a high take-up rate of the debt/asset swap option among retail customers who are owner-occupiers and current on repayments or a significant deterioration in asset quality in the event that the debt/asset swap is introduced.
However, risks are rising for borrowers under Prima Casa, where LTV ratios are typically high, to go for the swap option in the event of falling real estate prices, which can occur once new house credits start being more restricted. This, in turn, the agency states, would also affect the value of other collateral held by banks, potentially leading to additional loan impairment charges and pressure on earnings.
“Capital ratios could also come under pressure given a likely increase in risk-weighted assets, as banks would no longer benefit from capital relief on Prima Casa loans. Sector capitalisation would however still remain comfortable, given a total capital adequacy ratio of 17.5% at end-2015,” Fitch said.
Romanian banks have been voicing concern since the law has first came into focus, with nervousness already triggering a tightening of lending standards, with several large banks announcing increases in down payment requirements on mortgage loans to 35 percent from a current 15 percent average for standard retail local currency mortgage loans.
“Our outlook for the sector is stable but this could come under pressure in the event of asset quality deterioration, resulting in increased stress on capital,” the rating agency concludes.