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Recovery eludes Romania’s banks

With private sector credit growth negligible and non-performing loans still high, foreign-owned banks may need to rethink their strategies in Romania.
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Recovery eludes Romania’s banks

The Romanian economy is recovering, at least in theory. After suffering the EU's deepest recession outside the Baltic states in 2009 and continued contraction in 2010, Romania's economy recorded an estimated 2.5% growth rate in 2011. But compared to boom-time gross domestic product (GDP) growth that frequently topped 6%, this is a very different environment for Romania’s banks.

“If there is a recovery, we have not felt it yet in the banking sector,” says Mihai Bogza, chairman of Greek-owned Bancpost and a former deputy governor of the National Bank of Romania.

Non-performing loans (NPLs) have risen continuously since 2009, peaking at 14.18% in the third quarter of 2011. They dipped in the fourth quarter for the first time since the crisis began, but only by 0.08 percentage points. Part of the reason why NPLs are obstinately high is that total loan portfolios are stagnant, with retail loans up just 2.2% since the start of 2011, and corporate loans up 9.4%. This compares with credit growth of more than 70% in 2007.

Meanwhile, the surge in government debt as the credit crisis kicked in means that bank holdings of bonds – almost all of them treasuries – have nearly quadrupled since the start of 2009. Together with bank loans to central and local governments, which have almost tripled, public sector exposure is about 25% of the banks’ total portfolios today, compared with only 5% at the start of 2009. However, Mr Bogza says that greater lending to the public sector has not automatically led to crowding out of the private sector.

“The government has begun to reduce payment arrears to staff and suppliers quite significantly, so the extra bank lending to the public sector may have translated indirectly into greater liquidity for companies and households. If the government had not begun to deal with those arrears, the squeeze for the private sector would have been much more severe,” he says.

Efficiency gains needed

While the real economy may be in better shape than the financial sector, the very slow pace of retail and corporate loan growth may not suit the branch networks and staffing levels that were built before the crisis. In some cases, foreign banks accumulated large local networks just a short time before the crisis began. Austria’s Erste Bank purchased a majority stake in former state-owned Banca Comerciala Romana (BCR) in 2006, while UniCredit completed the merger of three different banks – its organically built operations and two acquisitions – into UniCredit Tiriac Bank in 2008.

Progress in reshaping these operations has been slow. Doru Lionachescu, chairman of the country’s largest independent investment bank, Capital Partners, and a former deputy chief executive of Bancpost, estimates that the banking sector has cut staff by about 3% and branches by 6%. He says new car sales have fallen by at least 75% since the start of the crisis, taking the auto loans business down with them, while he calculates that the largest banks averaged one new mortgage origination for every three branches in 2011.

“This is clearly not a sustainable level of business for the size of the largest banks. The banks are saying that credit demand is weak, but the reality is that they have passed on their high cost base in the form of high lending rates, and demand for credit is price-elastic. To boost credit demand and economic recovery, the banks need to cut costs,” says Mr Lionachescu.

There are also several foreign banking groups looking to sell their business in the country altogether, including Greece’s ATE and Emporiki, and Austria’s Volksbank. Bankers agree that there are seven or more potential sellers, but no potential buyers at present. The decision by Russia’s Sberbank to exclude the Romanian subsidiary when it bought Volksbank’s central and eastern Europe (CEE) network in 2011 sent a particularly negative signal.

“It was very disappointing that the government allowed this to happen without passing comment. It would surely have been possible to urge Volksbank to drop the price, or to offer some sort of indemnity for Sberbank if impairments rose above a certain level. Either of those would have been a better outcome, just to get Romania included in the deal,” says Mr Lionachescu.

Complex consolidation

There are some signs that change is afoot. In particular, 2012 has brought with it a surge of management turnover at some of the leading banks. Dominic Bruynseels was replaced as chief executive of the country’s largest bank, BCR, while Guy Poupet is due to depart from the second largest, BRD-Groupe Société Générale, and Robert Rekkers resigned unexpectedly from Banca Transilvania, the largest locally owned bank. Interestingly, Mr Bruynseels’ replacement is Tomas Spurny, who was earlier in his career the head of ultra-lean CEE consumer lending operation Home Credit Group – a very different model from BCR.

However, Mr Poupet is not expecting radical change at BRD. He says the bank is maintaining its network in expectation of a restart in the Romanian economy, although it will of course be ready for fresh fine-tuning optimisation if that recovery proves elusive. His successor, Alexandre Maymat, says he regards the bank’s universal model and presence beyond the crowded Bucharest market as points of strength.

“We have a relatively economic model, with many branches that have between one and three staff. This is reflected in a cost-to-income ratio that is lower than for the sector as a whole. And 40% of the population is still unbanked – to reach them, the branch network is key,” says Mr Maymat.

The importance of branches for customer relationships is a point echoed by many bankers, partly because the uptake of remote banking has been relatively low to date. Stefan van Groningen, chief executive of Raiffeisen Bank Romania, which is the country’s third largest by capital, says that the bank has a suite of the most modern channel solutions, including internet and mobile banking. But most customers still prefer paper and cash.

“We try to encourage the shift and aim to eliminate the rubber stamp over time, because offering all physical and electronic solutions is not efficient. There are some sophisticated customers, mostly younger ones, but, for instance, direct debits are still only 0.5% of bill-paying transactions,” says Mr van Groningen.

Recovery eludes Romanias banks graph

Selling a specialisation

In an environment of high costs and low growth, the pressure for consolidation is clear enough. And while foreign banks own more than 80% of the assets in the sector, Romania also has a long tail of mostly locally owned banks beyond the top 10, with a total of 41 licensed institutions altogether. Sergiu Oprescu, executive president of Alpha Bank, believes that one of the more obvious routes for consolidation is for smaller regional banks to merge. But he says that business models may also need to change.

“What we may see is more specialisation as much as more consolidation. There are simply too many banks still trying to pursue a universal banking model,” says Mr Oprescu. He feels small business banking should hold good potential, with loans to this segment no more than 13% of GDP at present.

But corporate credit quality has deteriorated sharply since the crisis. Karim Kheirat, the Romania country manager for Balkan credit rating agency ICAP Group, says 34% of companies in the agency’s low-risk rating categories dropped into the high-risk bracket in 2011, whereas only 12% of high-risk companies migrated upward into the low-risk bracket. Commercial real estate is another profound challenge, with many banks now owning and seeking to auction significant portfolios acquired from defaulted borrowers.

“There is an opportunity in real estate, because there are few projects starting due to the lack of finance available, and demand is pushing rents up on offices especially. But we are having to spend a lot of our time trying to persuade banks to stop focusing on selling empty land on the edge of Bucharest, and start looking for new developers and equity partners with new ideas for saleable product,” says Razvan Iorgu, the managing director for Romania at real estate advisory firm CBRE.

In this uncertain context, Doros Ktorides, the chief executive of Cyprus-owned Marfin Bank Romania, says he does not expect many acquisitions or mergers to take place this year, because banks are frightened of what the balance sheets of the target may hide. Marfin was one of the few that still showed significant organic asset growth in Romania in 2011, of just under 20%. The European Banking Authority instructed Marfin's parent to raise almost €2bn in December 2011 to meet a 9% capital target, but prior to this the bank had considered growth through acquisition in Romania, which remains a key market for Marfin.

“Potential sellers were asking for about four times book value, even though their asset quality is not transparent and many European banks are currently trading below book value,” says Mr Ktorides.

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