These are halcyon days for Romania’s banks. As the country makes its final step towards membership of the EU, probably in January 2007, Romanian companies and households are finally enjoying the brisk economic growth rates that eluded the country in the 1990s.
The statistics say it all. Despite a sharp drop in GDP growth last year to 4.1%, down from a sprightly 8.4% in 2004, the economy is being driven by robust domestic demand. According to the latest figures from the National Bank of Romania (NBR), private consumption grew by 9% last year and investments increased by 13%. A recent note on Romania by HSBC says: “The rise in households’ expectations of future income [as Romanian salaries start to converge with west European levels] makes them more inclined to borrow.”
Credit grows
In a new report on Romania, rating agency Moody’s says: “Consumer spending has been expanding rapidly, powered by cheaper imports, easy credit and large increases in real income. Real disposable incomes increased sharply in 2005 due to the introduction of a flat tax and large [public sector] wage increases.” According to an IMF working paper, credit growth in Romania soared by 166% between 2000 and 2004, outpacing rapid growth rates in other central and eastern European countries, notably in Bulgaria.
For the 38 lenders that comprise Romania’s banking industry – 85% of whose assets are now in foreign hands following last December’s €3.75bn acquisition of Banca Comerciala Romana (BCR), the country’s largest bank, by Austria’s Erste Bank – this is a boon. All the more so given that Romania remains one of the most underpenetrated banking markets in the region, with a loans/gross domestic product ratio of only 21.6%, compared with 32% in Poland, 54% in Slovenia and an EU average of 115%.
Sound footing
Romania’s economic reforms and macroeconomic stabilisation since the late 1990s are most evident in – and have partly been driven by – the far-reaching changes in the banking industry. Banks’ balance sheets have been cleaned up and the sector is benefiting from increased foreign participation and a sound regulatory framework.
“This is a totally different sector [to the one in the 1990s]. It is sounder and better managed. There have been a number of accelerated steps, partly driven by EU accession. In many ways, it’s a simple story: [financial] intermediation is very low, this is a large market offering [good prospects] for different segments of the business and customers deserve good products,” says Nicolae Danila, the chief executive of BCR.
Dan Pascariu, chief executive of HVB Bank Romania, now part of Italy’s UniCredit, says: “There is no comparison [with the 1990s]. The vast majority of the assets are now in foreign hands and the sector has been cleaned up.
“Until the late 1990s, banks were often lending to companies that looked fine on paper but in reality were bankrupt. Then the government stepped in and took over $4bn in non-performing assets. The sector learned a hard lesson, the lending culture improved dramatically and banks injected discipline into the real economy,” he says.
Steven van Groningen, chief executive of Raiffeisen Bank in Bucharest, says that banks are now a safer bet. “The sector is more or less a fully functioning banking system. There are no banks at risk of falling over tomorrow,” he says. “What we have seen in terms of privatisation and improved management is part of the whole changing image of Romania. We still lag behind in penetration but it’s just a matter of time before we catch up [with the more advanced central European countries].”
Focus on retail
A consumption boom, stemming from buoyant economic growth and rising incomes, is hastening further reforms in the banking industry (notably in the area of risk management) and attracting interest in the sector among foreign investors. On the demand side, brisk growth has lifted households’ confidence that rises in disposable incomes will be permanent. On the supply side, bank privatisations and large capital inflows stemming from low credit demand abroad have increased banks’ propensity to lend.
“The growth figures [in retail lending] are unheard of in most other parts of Europe. But you have to remember that the market only took off in 2003. In the past, retail products simply didn’t exist. All of a sudden, it became easy to borrow money,” says Mr van Groningen.
“Until very recently, corporate loans were driving lending but now retail is all the rage,” says Mr Pascariu. “Banks are competing like crazy for market share. Consumer and mortgage loans are growing very fast. [Interest] rates are much lower and maturities are longer. But I’m a little bit worried because we are witnessing some crazy behaviour by some banks [which offer extremely cheap mortgage loans].”
According to a report on the Romanian banking sector by rating agency Fitch, while retail loans (a large proportion of them in foreign currency) only account for one-third of lending, they accounted for 70% of the increase in lending in the first half of 2005. “Last year, we experienced an 86% increase in retail lending. We opened 60 new branches and this year we plan to add another 70 to 100,” says Mr Danila.
In many Romanian villages, there are either no bank branches or just one or two to service the entire population. With only 35% of Romanians having a bank account, retail lending is in its infancy.
“Until very recently, banks would have never thought of venturing into towns with less than 40,000 people. But things are changing fast,” says Mr Pascariu. “The mortgage market has taken off because Romanians like to own their homes. The regulatory environment [for lending] is good, partly because of tough restrictions on borrowing. Salaries are rising. Monthly instalments [for mortgage loans] used to account for 30% of net salaries, now it is 20%.”
Clever strategy
Erste Bank’s acquisition of BCR, which has nearly three million customers and roughly 30% of the sector’s deposits, was viewed by analysts as a clever strategic move on the part of the Austrian lender, designed to exploit the Romanian bank’s leading position in the fast-growing retail market. “Erste did its homework. It identified a good quality bank. I don’t think the price it paid was a surprise to anyone,” says Mr Danila.
Casa de Economii si Consemnatiuni (CEC), Romania’s state-owned savings bank, which is in the process of being privatised, has attracted foreign interest because of its nationwide network of 1400 branches, more than all the other banks combined. Although CEC, which has just begun to function as a commercial lender as opposed to an arm of the finance ministry, has only 5% of the market (ranking it as the fourth-largest lender behind BCR, Société Générale-owned BRD and Raiffeisen), its presence in small towns is seen as a competitive advantage.
“It’s not possible right now to make money in poor regions,” says Eugen Radulescu, CEC’s new chief executive. “But two major developments are starting to happen. Lots of money is flowing back into these towns from young people who used to work abroad and now want to set up their own businesses. Second, Romania is joining the EU and our bank will be disbursing the funds [in small towns]. The consumption [and investment] boom has only just started. It’s really only happening in Bucharest, Cluj-Napoca and Timisoara.”
NBR tries to cool lending
Romania’s consumption boom, which has pushed up the country’s import bill, has exacerbated macroeconomic imbalances, causing the current account deficit to surge to 8.7% of GDP last year and making it difficult for the central bank to curb inflation. As in Croatia, banks’ foreign borrowing – mainly from their parent firms abroad – is funding a large proportion of the credit. The NBR is concerned about banks’ external debt given that most of it is short term.
In an effort to curb foreign borrowing, the central bank, which now operates an inflation-targeting regime, has tightened households’ eligibility for loans by lowering the cap on the maximum monthly instalment/net income ratios, standardising the down payment for mortgages at 25% and tightening collateral requirements. It also raised the minimum reserve requirement on foreign currency-denominated bank liabilities to 40% and placed curbs on banks’ foreign lending to unhedged borrowers.
Meagre result
The measures have so far had a limited effect. Although credit growth slowed to 40.5% in 2004 from 57% in 2003, it grew by 50% last year and, according to the latest figures from the central bank, expanded by 38.5% this February, compared with 33.8% in February 2005.
Commercial banks, not surprisingly, oppose the measures and believe they are misguided. “The central bank is using a prudential angle to justify imposing administrative measures. It’s clear why parent companies are lending to their subsidiaries: they see opportunities to make high returns here. By imposing curbs, we simply find ways to skirt them,” says Mr Pascariu.
“The NBR shouldn’t be doing our job of risk management,” says Mr van Groningen. “This isn’t standard prudential supervision. We can’t convince customers to take leu loans [partly] because if I want to give a long-term leu loan, I have to lend in euros. We can’t just suddenly stop lending in euros. Why aren’t consumer finance companies regulated? The regulations are creating a messy and untransparent situation.”
Mugur Isarescu, the governor of Romania’s central bank, says the NBR “had no guarantees that if the banks regulated themselves, foreign borrowing would decrease significantly. We had to use unorthodox measures. The other solution was to have very restrictive fiscal policy, but that was impossible. In any event, this is a temporary problem of one or two years”.
Pressure on margins
As interest rates have dropped, reducing the spread between lending and deposit rates, and reserve requirements have risen, banks’ margins are coming under pressure. “We’re not in the Croatian situation yet, but clearly all these things add to the challenge of remaining profitable,” says Mr van Groningen, whose bank nevertheless managed to double its net profit last year, earning €51.8m.
“Margins are coming down,” says Mr Danila. “But we have a clear strategy to grow [lending] volumes. We were the first bank to launch mortgage loans and I’m very glad we’re on top of events.”
“So far, so good,” says Mr Pascariu. “We’re increasing lending volumes and our profits are still high. But as margins decline, we have to find ways to boost fee and commission income. We’re trying to sell asset management and building society products but cross-selling takes time. There’s not yet a culture for this in Romania.”
According to Mr Radulescu: “The main challenge for the Romanian banking sector in the coming years is going to be to adjust to significantly lower margins. For us, this means cost-cutting, boosting fee income and growing our loan book. The potential for further lending, even at a rate of 30%-40% a year for the next decade, is huge. Our main advantage is that we have an enormous sales force that was dormant for 15 years and has now woken up and is being trained.”
Raiffeisen believes that the next stage of lending is targeting small and medium-sized enterprises (SMEs) and rural communities. “We’re now looking at rural areas, which is why we are also looking at [acquiring] CEC. No newcomer will focus on rural areas, which is why it makes a lot of sense for an established player to buy [CEC],” says Mr van Groningen.
However, the privatisation of CEC could prove awkward. The government is asking for at least €1bn for the bank, roughly six to seven times its book value. Some analysts believe this is far too much for a bank that is barely profitable, and has seen its market share collapse from nearly 30% of the sector’s assets and 97% of retail deposits in 1990.
