Moldova’s banking system has kept accumulating bad loans, despite its profitability. The share of non-performing loans (NPLs) to total loans calculated at gross principal value increased by more than 6pp to 16.8% at the end of January, according to central bank data. 

The profits (ROA was nearly 2% last year and rose to 2.9% in January 2017) are a result of wide interest rate margins and they hide shrinking financial intermediation and declining credit quality.

Around $1bn (€900mn) was siphoned off from three Moldovan banks and the loss is shared by the central bank (by exchange rate variations) and government (by paying back the principal of the emergency aid extended to the three failed banks). This is an outstanding amount for a banking system the size of Moldova's. 

The stock of NPLs (gross value of principal) increased by 41% y/y to MDL5.8bn (€270mn) as of January 2017, while the total loans also measured at gross value of principal contracted by 10% y/y to MDL34.4bn. 

The highest NPL ratio was posted by Victoriabank, the country’s third largest bank, with a 34.7% NPL ratio up from 11.7% one year earlier. This is more than twice as high as the banking system’s average. The bank’s total loans contracted by 17% y/y, while bad loans expanded 2.5 times. 

The bank, whose ownership is still uncertain, has MDL1.7bn of bad loans out of the sector's total MDL4.9bn. Furthermore, it calculated allowances for impairment losses of only MDL587mn, or less than one third of the calculated amount of losses on asset and conditional commitments compared to more than 50% for the banking system’s average.

Other banks with high NPL ratios are two small-sized banks: BCR Chisinau which is part of Erste Bank group (25.5%) and Eximbank Gruppo Veneto (28.8%).

Moldovan banks’ profits are a direct result of the wide interest rate margin (it dropped marginally below 5pp in January from well above 5% during last year) partly driven by the central bank’s tight monetary policy. In turn, the wide interest rate margins charged by banks in order to preserve profitability put significant pressure on the credit market pushing down the overall stock of loans hence the credit quality ratios. At its recent monetary policy boards, the central bank has maintained the key interest rate at 9%, well above the average headline inflation projected for this year at 5.2% y/y to further ease at 4.9% y/y in 2018 under the latest forecast from the monetary authority.

The central bank argues that the loosened policy is working, pointing to a 19.6% y/y rise in new loans in January, versus a gain of 0.6% y/y in deposits. The average interest rate for new loans decreased 0.19pp to 11.55%, the NBM added. Nonetheless, financial intermediation is visibly shrinking and the high interest rates put pressure on asset quality as well, in addition to discouraging borrowing.