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How will Romania achieve its eurozone goal?

Despite strong GDP growth and increased market confidence, Romania still has economic improvements to make before it is in any shape to join the euro. Nick Kochan reports.
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It seems that Greece has fallen out of love with Romanian banks. In the past eight months, Greek banks have sold – out of a total of three local operations – two to other foreign buyers and one to a domestic bank. The sale of at least one other Greek operation in Romania is anticipated.

This flight from Bucharest comes as the Romanian economy gains a spring in its step. Romania is today the tiger of the EU, with gross domestic product (GDP) growth of 7%, fuelled by borrowing and resulting in what some believe is an unsustainable consumption boom. In the meantime, the country is engaged in a push to converge with other European financial measures and envisages joining the eurozone in no more than four years, a senior official of the National Bank of Romania told The Banker.

Greek exodus

The most recent sale of a Greek-owned Romanian banking operation was that of Piraeus Bank to JC Flowers, the US private equity house, announced in November 2017. In the same month, Banca Transilvania acquired Bancpost, owned by the Greek Eurobank Group. In July 2017, Hungary’s OTP Bank announced it had acquired National Bank of Greece’s 99.28% stake in Banca Romaneasca. It is understood the Romanian operations of Marfin Bank are also up for sale.

“The sales are an indication of the regulatory pressures on Greek banks at home,” says Sergiu Oprescu, chief executive of Alpha Bank and president of the Romanian Association of Banks. However, he adds that this does not “say anything about the state of Romanian banks”.

All three Greek operations were modest players in Romania. Piraeus had 99 branches in Romania and total assets of €1.5bn. Romaneasca had a network of about 110 branches and its acquisition will give OTP a 3.6% market share. Bancpost had total assets of €3.1bn and a network of 148 branches.

Dividing the market

Mainstream European banks dominate Romania. Société Générale’s BRD has 17% of the retail market, Erste Bank’s BCR 16% and Raiffeisenbank’s network 14%. Foreign banks control 90% of Romanian banking operations.

Bank of Transilvania, the acquisition-driven locally owned bank, had in 2015 acquired Austria’s Volksbank and it has just made an offer for a minority stake in Victoriabank, based in neighbouring Moldova. Bank of Transilvania has assets of €11.9bn and a 14% market share in its home country.

The top tier of Romania’s largest seven banks dominate the market with some 73% of total assets. Medium-sized banks in the second tier have 14% market share between, them while the remaining 23 banks have a further 13%.

Consolidation is the name of the game for Romanian banking, according to Mr Oprescu. “You would expect that this would be going on much faster, with banks from the first tier buying into the second or third tier,” he says. He expects private equity to be a player in the consolidation in the lower tiers.

“Romania doesn’t need to have 36 banks. It probably doesn’t even need to have half of that,” agrees James Stewart, chief executive at Raiffeisenbank. “We believe that there is going to be continued consolidation.”

The profitability of the smaller Romanian banks has also come under scrutiny from Mihai Tudose, the country’s former prime minister. He said in September 2017: “Out of the 36 active banks, half are very much in order, but half insist they are not able to make a profit, something I’m not buying. They say they end the financial year with losses.” According to Mr Tudose, Romania’s National Agency of Fiscal Administration has been investigating the smaller banks.

The tiger’s tale

Romania’s economy is one of Europe’s most volatile, swinging between boom and bust as its government pursues EU convergence. Today, the pendulum is swinging towards boom and confidence is surging.

“Romania is claiming to be a European tiger,” says Radu Craciun, director-general of BCR’s pensions arm. He adds, however, that erratic growth is driven by the government’s pro-cyclical fiscal policy. “When the engine of growth loses its momentum, the snap back will be painful. In good times we grow a lot, in bad times we drop a lot.”

Romania lags far behind in convergence with EU standards. The country is propping up the EU league table of 28 states in financial intermediation, consumer indebtedness, consumer banking and financial knowledge.

The commitment of its leaders to the EU is not in doubt, however. Daniel Daianu, a member of the board of the National Bank of Romania and the bank’s leading economist, said that the country is on a four-year journey to joining the eurozone, subject to it meeting some convergence criteria related to GDP per capita.

“Provided we continue to grow without any big hiatuses again, I believe that in the early 2020s and at the latest by 2024, Romania will achieve a critical mass of convergence,” he says. “We should not wait for absolute convergence to occur before joining the euro, which is why we are talking about a critical mass.”

The country is currently aiming for 70% of the EU area average GDP per capita against today’s level of 67%. “Assuming that the EU area reforms itself, gets more tools and arrangements, which make a monetary union function properly, then we should join, we could join,” says Mr Daianu.

Fit for membership?

Still, Romanian institutions remain an obstacle. “Romania has to be better prepared in terms of real convergence. Macro-economically, but also institutionally, we are too weak,” says Mr Daianu. “One of the lessons of the euro crisis is that the eurozone should not accept an economy that is too fragile. I do not believe that the heads of the EU area, the captains of the ship, will accept an economy which is not prepared, not yet.”

Romania and Bulgaria were the last of the EU members to join the bloc, in 2007 and Romania’s qualification for membership has long been the subject of dispute. Much attention has focused on governance and compliance with EU business and financial norms.

François Bloch, chief executive of BRD, Romania’s largest bank, believes the national bank’s timetable for eurozone membership may be optimistic. “Seven years is a more sensible expectation for joining the euro,” he says. “We need to see proper convergence. Joining before the economy is right would be detrimental to Romania.”

Given that convergence criteria are a key measure of Romania’s readiness for eurozone membership, there is concern over its level of financial intermediation, which at 29% is the lowest of any economy in the EU. It rose to 39.5% in 2011, but a re-evaluation of Romanian risk in the wake of the financial crisis led to a fall.

“This is an issue of demand and not of supply,” says Mr Oprescu. “Bank liquidity is very high but the lending opportunities are simply not there, within our acceptable risk criteria.”

Romanian banks – many under pressure from their foreign owners – have tightened disclosure requirements and diligence processes before granting loans both to corporate and retail consumers.

High levels of indebtedness accumulated during a consumer-driven boom prior to the crisis reduce scope for bank lending. Consumers are still paying back foreign currency borrowing, largely in Swiss francs, accumulated up to the peak of foreign exchange lending in September 2012.

Many of these borrowers have sought to force banks to reinstate original loan repayments by bringing lawsuits against them, according to Mr Stewart. “Some banks were better protected than others,” he adds. Indeed, Volksbank was sold to Banca Transilvania at the height of the crisis to protect the Austrian group against such lawsuits, according to former Banca Transilvania chief executive Robert Rekkers.

SME openings

The crisis also had a dramatic effect on Romanian loan-to-deposit ratios. These collapsed to 80% in September 2017, after racing to 137% at the peak of a borrowing boom in 2009.

Lending opportunities in the small- and medium-sized enterprise (SME) market are being targeted by BRD, according to Mr Bloch. “We have missed opportunities here. Now we are making a push,” he says. The bank is targeting companies in IT, healthcare, the auto industry and agriculture.

Yet, opportunities in the SME sector are limited because of low levels of entrepreneurship. The country ranks last in the EU index of entrepreneurialism, with just 23 companies per 1000 inhabitants. This compares with 140 companies per 1000 inhabitants in the Czech Republic and 40 per 1000 in Bulgaria.

SME lending was the basis for the early expansion of Banca Transilvania, Romania’s fastest growing bank, according to Mr Rekkers, now chief executive of Agricover Credit IFN. “We provided the levels of service for SMEs that state banks did not understand and big private banks lacked the ability to deliver,” he says.

Banks are also targeting Romania’s underdeveloped mortgage sector. This currently accounts for less than 8% of the country’s GDP of €176bn, a long way behind European averages, but, according to Mr Oprescu “salaries and living standards need to rise for demand to surface and the market to take off.” 

In addition, the removal of the so-called ‘prima casa’ subsidy on mortgage downpayments could hurt the development of a mortgage market, warns Dan Pascariu, chairman of the supervisory board of UniCredit Bank Romania.

No bailout

Levels of borrowing are being watched carefully by Romanian banks, according to Ionut Dumitriu, chief economist at Raiffeisen. “Total lending is growing between 5% and 10% a year,” he says. “Local currency lending is growing at about 20%, while foreign currency is contracting at about -20%. The domestic currency figure is very high.”

Uncontrollable non-performing loans (NPL) levels of 25% of many banks’ loan portfolios, which originated during an earlier boom, are only now being resolved, according to Mr Pascariu.

“Between 2007 and 2014, the Romanian banking system had to witness more than 20% of its total assets going down, or becoming non-performing,” he says. “At the same time, banks had to contribute a significant amount of provisions in the form of cash coverage to comply with the regulatory framework that was requested by the National Bank of Romania.” 

The National Bank requires NPLs to be provisioned up to 65% and bank shareholders have stumped up large sums to keep local Romanian banks afloat. The Romanian state “did not have to spend a euro bailing out Romanian banks in the crisis”, according to Mr Oprescu. “We have navigated through the crisis with the full support of the parent groups.”

Levels of NPLs have now fallen to 7.6% of loan portfolios, following pressure from the National Bank of Romania, which has set banks a 6% target for early 2018.

The country still has some way to go to meet the EU average of NPLs of 4%, says Mr Oprescu. Specialist packagers of NPLs have been key intermediaries in this massive offloading of Romanian bad loans, typically paying banks 30 cents on the euro for their loans. It is understood specialist packagers have acquired €5bn-worth of Romanian NPLs.

The National Bank has imposed a 5% reserve requirement on banks to rein in lending in today’s booming economy.

“For every 100 lei in deposits the banks are required to keep as minimum reserve requirement a certain percentage with the central bank,” says Mr Oprescu. “This increases correspondingly the cost of funding for the banks.”

Mr Pascariu notes that Romanian banks are “very liquid and very sound” with 38% of liquid (or near liquid) assets.

Playing catch-up

The pursuit of convergence is key to Romania raising its game inside the EU, and ultimately joining the eurozone, according to Mr Oprescu. This is “a very interesting opportunity for the banking system in Romania”, he says. “If you apply a convergence theory to the low level of financial intermediation, Romania has a great catching up exercise to take it to the average of the group of countries that we are chasing, where the average level is 50%.”

Romania represents a great opportunity for investors seeking to participate in EU convergence, he adds.

The country's level of financial inclusion is another area in which convergence has a long way to go. It currently stands at 65% but Mr Oprescu says the financial system needs to aim for 90%. “You have a huge growth opportunity within the Romanian market, because you have the ability to grow from 65% to 90% in order to catch up with the rest of Europe,” he says.

Estimates of the use of banking technology show Romania faring no better. The country props up the EU in terms of the Digital Economy and Society Index. However, Mr Oprescu says that the position is anomalous as Romania has “some of the best infrastructure in place. The Romanian broadband speed is the third fastest in Europe. So we do have the infrastructure, we have the highways of the internet technology, but we do not use it for the proper means.

“We rank second in Europe in terms of sending pictures and videos but we rank last in terms of real transactions such as shopping or bank transactions or bank transfers or payments.” 

Some 70% of mobile phone holders in Romania have a smartphone, he adds, but only 5% of those are using it for bank transactions or online shopping. “In Europe you will have something like 55% of smartphone penetration within the total pool of telephone holders, but 70% of them will do bank transactions,” says Mr Oprescu.

Romania needs to make a virtue of its laggard position by finding shortcuts around old technology to introduce the latest payment systems. “We are following the Payment System Directive 2, which is going to open up the bank accounts to second and third party providers,” says Mr Oprescu. In fact, the IT sector has expanded from 2.5% of the country’s GDP five years ago to 6% today. 

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Read more about:  Central & Eastern Europe , Romania