The NBR last year penalised a medium-sized bank and/or several small banks accounting for 4.1% of the banking system assets by relegating them from the rating category 2 to 3 due to their rising vulnerability to possible shocks such as severe interest rate or exchange rate fluctuations.
At the same time, no lending institution met the efficiency and financial strength conditions imposed by the maximum rating, 1, in 2006, either, a situation that has not changed since 2003.
Last but not least, one or two small banks may have been downgraded to the rating category 4, indicating very low profitability. The weight of balance assets of banks rated 4 in the total rose from 0.4% in December 2005 to 0.5% in September 2006 and then to 0.6% in December 2006.
The NBR uses a 5-step bank classification scheme, from 1 to 5, with the banks rated 5 being in a difficult financial situation and no longer allowed to draw deposits from natural persons.
The percentage of banks the NBR granted a rating of 2 to has been steadily shrinking since 2004, when it stood at 86.9%, dropping to 74.1% in December 2006. The trend was most visible last year. For instance, the NBR possibly downgraded one or several small banks from 2 to 3, with the weight of banks rated 2 dropping by 0.6%, according to the data released by the central bank.
By contract, the weight of assets owned by banks included in the rating 3 category continued to increases.
These came to account for 25.3% in the overall assets of the banking system in December 2006, from 21.4% in 2005. Rating 3 banks have a bigger risk exposure and a weaker quality of assets, respectively.
NBR's downgrading moves can point to a rising exposure of banks to a possible weakening quality of their loan portfolios, particularly in the case of smaller banks.
At the same time, the moves came amid a downward trend of profitability indicators at the level of the entire banking sector: return on assets decreased in 2006 by 0.3%, reaching an average of 1.3%, while return on equity thinned out by 2%, to 10.7%.
The weaker ratings granted to banks are justified either by the low quality of management, low profitability or shareholder quality.
In the following years, banks will inevitably witness loan portfolio deterioration due to the risks they take. Bankers hope to cover these risks by boosting the volume of granted loans.
At the same time, banks are seeing their profitability dwindle given the rough competition on the market.
On the corporate segment, bankers rely on minimum gains they hope to offset through the loans released on the retail segment.
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