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Banks take part in catch up story

Romania is catching up with its neighbours as it prepares for EU membership. Politicians are keen to repeat 2004’s growth and investment levels – which means a busy time for banks.
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As Romania inches ever closer to membership of the EU, it faces increasing and rapid change. Bucharest is teeming with new cafes, restaurants and hotels, and the entire country seems to have been transformed into a giant construction site. A massive retail boom has led to hypermarkets and shopping malls mushrooming across the country.

No major city has been spared the development of thriving new neighbourhoods, dotted with hastily built villas. Bus loads of Romanian labourers fan out across western Europe, resulting in annual remittances that last year were estimated at between €2bn-€4bn. It is almost as if, unable to bring Mohammed to the mountain, Romania has decided to move the mountain to Mohammed.

Clearly, one way or another, Romania is catching up with its neighbours and has set its sights on the EU. The mountain has begun to move. Whether this means a new coalition government establishing one of the lowest flat-rate tax regimes in Europe or an aggressive privatisation and capital market boosting programme, Romania’s politicians seem determined to try every trick in the book in the hopes of maintaining last year’s record 8.3% economic growth rate and historic foreign direct investment (FDI) levels, which topped €4bn in 2004.

Retail expansion

Romania’s banking sector is determined to do its fair share. With about 40 different banks, the sector is diverse, though some traditional central and eastern European players are nowhere to be seen. In 2004, there was aggressive expansion into the retail sector, particularly by Citibank, HVB and ING, which in Romania have been traditionally corporate-centred. Dozens of branches and hundreds of automatic teller machines were rolled out across the country, while massive marketing campaigns battled away in the background.

The greatest growth was in the retail credit sector, not in local currency loans but in foreign currencies, which accounted for nearly three quarters of total outstanding loans. This is unsurprising, given that average interest rates on retail loans for 2004 hovered between 27% and 30% in the context of an appreciating national currency. As such, medium-term local currency retail loans grew by about 25%, while long-term growth was negligible and short-term loans declined slightly.

Loans growth

Foreign currency retail loans, on the other hand, posted stellar performances as short-term retail loans grew nearly tenfold, medium-term loans nearly tripled and long-term loans more than doubled, representing mostly home mortgages. Yet, even with such strong growth, average interest rates on new euro and US-dollar retail loans were between 9% and 10%.

The bulk of bank lending in 2004, however, still benefited the corporate sector. Local currency short-term loans grew by a respectable 25% while medium-term loans grew by 30%. Long-term loans more than doubled, but from a very low base. Foreign currency loans were once again the winners, registering growth rates of 25%, 60% and 45% on the short, medium and long-term sides. Industry, services and construction all enjoyed healthy growth rates of about 25%, 45% and 50% respectively. Most loans were granted for working capital and equipment purchase purposes, but real-estate loans grew by nearly 100%, reflecting Romania’s strong real-estate boom.

All this growth on the credit side has not yet filtered through into a detrimental effect on portfolio quality. Romania’s banking sector is still fundamentally overcapitalised with a solvency ratio that, although declining, was still at nearly 19% in December 2004. Total past-due and doubtful claims, as a percentage of total assets, were virtually unchanged and well under control, at 0.18% towards the end of last year.

However, if (or when) the Romanian leu faces renewed devaluation pressures, certain portfolio degradation should not come as a surprise, particularly to banks that have funded much of their foreign currency loans on the back of their home country balance sheets. This potential has prompted concern from the IMF and the National Bank. The bank has raised reserve requirements on foreign currency loans to 30%, nearly double the 18% currently charged on local currency credits.

Clearly, the banking sector’s bread and butter still consists of traditional corporate banking, though the future – in the form of better profit margins and growth – lies on the retail side. This goes a long way towards explaining why acquisitions in Romania’s banking sector are attractive to foreign players that have exhausted their already mature domestic markets.

Final sell-offs

2005 will be a watershed year for the sector, as it seems likely that the last two state-owned banks will be privatised. BCR, the Romanian commercial bank, and CEC, the savings bank, together account for a third of the banking sector, and each would be an important prize for foreign banks that are not yet active in Romania.

CEC, with a smaller size of 6% of the market, has nearly 1500 branches, two thirds of which are in rural areas. Although it requires much restructuring, CEC will nevertheless retain its key importance to the economy as the bank through which the government traditionally collects much of its tax revenue, and its unique market position as the only bank in many rural areas with little competition.

JP Morgan should have an easy time advising the government on the sale of CEC, as plenty of suitors have lined up, principally Erste Bank, HVB, Raiffeisen, Rabobank, OTP and Unicredito. A privatisation strategy is expected to be finalised and approved in the coming months, with an eye on identifying a winning bid some time in the third quarter and completing the deal by the end of 2005.

Rumours of strong interest in BCR from both Deutsche Bank and Unicredito have prompted prime minister Calin Tariceanu to make it known that an accelerated sale of BCR is an option, together with a stock market listing of up to 10%, to be conducted either prior to or in parallel with a strategic sale. While the government sorts out its strategy, it has made it clear that BCR will be sold no later than the first half of 2006. Sell-side adviser Daiwa, which has already shepherded the sale of 25% to the European Bank for Reconstruction and Development and the International Finance Corporation, will continue its advisory role.

Tiriac Bank, an important mid-sized bank owned by Romanian tycoon and former tennis star manager Ion Tiriac, looks set to be sold in the coming months – Société Générale (SocGen), BNP and HVB have shown interest. This potential acquisition could serve as a good platform on which to consolidate further and expand the operations of HVB or SocGen (which already owns one of the market leaders, BRD) or as a good base from which to introduce a new player, in the form of BNP.

Regardless of which institution comes out on top in these expected sales, Romania’s banking sector will continue to develop during 2005, mirroring the dynamic and often haphazard growth in other sectors. In any case, by the end of the year there is likely to be a redefined cast of players that are keen on competing for the Romanian retail client – who, ultimately, will be the real winner.

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Read more about:  Central & Eastern Europe , Romania