In Bucharest, the government is counting down the days that remain until Romania joins the EU. For the banking system, the times are set to get tougher and will vindicate years of restructuring. After seven bankruptcies and an investment of €3.7bn, Romania’s financial sector has put its murky past behind it. Now, 33 banks are locked in an ever-fiercer competition.
“After 2007, Romania’s banking sector will change dramatically,” says Steven van Groningen, president of Raiffeisen Bank, owned by Austria’s Raiffeisen Bank Group (RZB). “In 10 years, the sector will be hard to recognise.”
Rasvan Radu, chief executive of UniCredit Romania, has a less dramatic view. He does not foresee any major changes because, he says, “the presence of foreign capital has helped the banking sector prepare for the EU integration”.
Fiercer competition
But Messrs Radu and van Groningen agree on one thing: competition will sharpen. Their own experience substantiates that view. Mr Radu was a vice-president at Raiffeisen before being headhunted by UniCredit in 2005. Now, he is mounting a challenge to Raiffeisen’s third-place 8% market share in Romania.
This comes after Italy’s UniCredit took over Germany’s HVB. The merger of their Romanian subsidiaries came hot on the heels of HVB’s own acquisition of Banca Tiriac. In all, Raiffeisen’s 8% market share looks tenuous and temporary.
“We expect [after the UniCredit-HVB Tiriac merger] to become the third largest bank in the market,” Mr Radu says, adding: “We target a market share of at least 10%.”
There are other signs of the battle ahead. In December 2005, HVB Bank and Bancpost held third and fourth positions with a market share of 4.9% and 4.5% respectively. Six months later, they were overtaken by Banca Transilvania and state savings bank CEC. The former is one of the fast-growing banks in the market; the latter is up for sale.
The environment is likely to get even tougher as new banks enter the market. Millennium BCP, Portugal’s biggest financial group, is poised to open a bank with a strong network (50 units at once) and Belgium’s Fortis also has plans to enter the fray, according to Nicolae Cinteza, regulation and enforcement chief at the National Bank of Romania (BNR).
Preserving profits
With just over 800 new branches opened in one year (August 2005-August 2006), it seems clear that all the major players are staking their future on capturing market share, and fast. This raises the question of the banks’ ability to preserve profit growth alongside high investments.
Many bankers have cited the high costs of doing business in Romania as one obstacle to their growth. Mr Cinteza acknowledges the situation. “Banks have to bear higher costs in Romania than in other Western countries,” he says.
The application of Basel II standards will increase the cost of regulation. Basel II-compliant legislation has to be ready from January 2007, but banks have the option to ask for one more year before they apply it. It is unclear how many banks will choose to take this route.
“I expect that most banks may want to delay implementing Basel II,” says Mihai Bogza, chairman of the board at Bancpost and a former vice-governor at the central bank.
Virtuous circle
Despite these potential cost pressures, some bankers think there is opportunity to become leaner. Mr Bogza says a “virtuous circle” could be created through a higher volume of loans, which could make borrowing more attractive and contribute to a higher growth of the banking sector.
Raiffeisen’s Mr van Groningen believes there are opportunities in developing new products in Romania and selling them abroad, in countries like Bulgaria. “For this, we need a very efficient banking sector, able to innovate. Unfortunately, we cannot say the local banking system is a model of efficiency,” he says.
With the privatisation of Romanian Commercial Bank finalised, Austria’s Erste will take more than 66% of Romania’s largest bank. The transaction, signed in December last year, made Austria the main foreign investor in Romania’s banking sector, followed by Greece, the Netherlands and Italy. With only two state banks remaining – CEC and Eximbank – foreign capital will account for 80% of the sector. The transition of Romania’s banking sector will officially be over.
As the banking sector enters a new phase in its evolution, analysts and bankers expect further consolidation. Daniel Daianu, professor of economics and former finance minister, says that Romania’s banking sector is a virtual oligopoly.
The big players cannot be challenged, he argues. Competition is not strong enough because only a few big players have sufficient weight. In his view, consolidation will boost competition only as long as big foreign banks are coming into the market. Otherwise, the big fish will eat the small ones.
Small banks are the first to worry about EU integration. “Small banks will be under pressure,” says Mr Bogza. There are not many choices left for small banks. They could look for a niche market or try to merge with other banks.
With a 4.2% market share, Bancpost, whose major shareholder is Greece’s EFG Eurobank, went through a major restructuring two years ago. Now it is looking to preserve and grow its place in the market. “We try to stay as close as possible to the market makers,” Mr Bogza says. The bank’s strategy is focused on income-generating activities, such as small and medium-sized enterprise financing and private banking.
There are 15 banks with a market share of less than 2%. Among them, niche players Porsche Bank and Raiffeisen Housing Bank are unlikely to be threatened by EU integration. On the contrary: Romanians have a big appetite for new cars and houses. The current ratio of consumer loans to mortgage loans is 77 to 23, the reverse of that in other main EU countries. And that has to change.
Promising outlook
Many analysts consider Romania’s banking system as one of the most promising in central and eastern Europe. With a cleaner and stronger banking sector and a booming economy, non-governmental lending increased by 56.9% in the year to August. Lending in national currency has had a spectacular surge: 126% during the same period. Still, Romania’s level of financial intermediation indicates there is more room for future growth.
But EU entry is not “a triumphal march”, warns Mugur Isarescu, the governor of the National Bank of Romania. “The highest risk of all is euphoria – at all levels,” he says in an interview. While he acknowledges that the financial intermediation (non-government credit to gross domestic product) is still at low levels in Romania compared with the EU, he warns that a too-rapid credit growth “could turn things upside-down”.
Mr Isarescu says the reason behind his cautious attitude is that Romania’s development might hit a turning-point at which unemployment could go up, the economy could slow down and incomes could shrink.
Integration will push the NBR to ease some of the non-orthodox, prudential measures that it used to keep lending under control, such as limiting credit institutions exposure to 300% of their own funds when granting foreign-denominated loans to unhedged borrowers.
Mr Isarescu says this will happen at the beginning of 2007. With only interest rates at his disposal to keep euphoria in check, he has his work cut out for him.
