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New government makes ambitious reform plan

Bank privatisations and stock market listings are on the new government’s financial reform programme as it strengthens its bid for EU accession. Matei Paun reports from Bucharest.
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Romania’s new, reform-minded government wasted little time in adopting an aggressive set of tax reforms in the run-up to the new year. In effect, the country has joined the flat-tax bandwagon at a competitive level of 16%. Previously, rates on personal income tax were up to 40%, while corporate profit tax was set at 25%.

Newly appointed prime minister Calin Popescu-Tariceanu promises that tax reform is just the first step in an ambitious programme that aims to make up for lost time in Romania’s bid for EU accession. Reforming the judiciary and fighting high-level corruption are two other important objectives.

Listing proposals

In an effort not only to generate much needed revenue, but also to stimulate Romania’s liquidity-starved capital markets, the government intends to list significant minority stakes on the Bucharest Stock Exchange (BSE). Last year, the BSE clocked up in an impressive performance of 93%, following on from a strong performance in 2003.

Ionut Popescu, Romania’s young finance minister, has already proposed such important listing candidates as Romtelecom, the Greek majority-owned national telecom operator, and Romanian oil giant Petrom, of which a majority stake was recently sold off to Austria’s OMV. Smaller listings are also contemplated in energy distribution, in the Bucharest airport and the largest seaport in Constanta, as well as in government issued T-bills.

Banca Comerciala Romana (BCR), Romania’s largest bank, has also been mooted as a potential listing candidate, after last year’s sale of a 25% stake to the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD). A minority stake is expected to be sold to BCR employees by the end of 2005, to coincide with the proposed listing. An eventual strategic sale is mooted but is not expected to take place before 2006.

Making history

This month, BCR will make history by taking out the largest foreign loan ever granted to a Romanian body, other than the state. The €400m loan will have a maturity of five years, a four-year grace period, and drawing rights will be permitted in US dollars. It is something of a coming of age for the bank, which has managed to obtain a margin of less than 1% above Euribor/Libor rates, particularly in the absence of a guarantee from the finance ministry.

These funds will be used to bolster the bank’s balance sheet and provide matching funds for longer-term liabilities, which have grown by 65% in the past year. These liabilities are difficult to cover from locally sourced deposits, which tend to be short term in nature. “[It will go to] the growth of the bank’s balance sheet and to cover the needs related to the new medium and long-term business opportunities, for which we have not found funding on the domestic market as yet,” says executive chairman Nicolae Danila.

The loan comes on the back of a $200m loan that BCR took out in the first half of 2004. In just over two quarters, the bank’s funding costs have fallen by half, helped by Romania’s recently obtained investment grade rating.

Preliminary data shows that the bank’s assets grew by about €1bn to €6bn at the end of 2004, while net profits rose to €151m, slightly higher than 2003’s performance.

BCR gathers strength

Since last year, BCR has undertaken a restructuring plan on the basis of a strategy that was agreed in conjunction with the EBRD and the IFC, whose aim is to strengthen the bank and prepare it for an eventual sale. The recently completed adoption of a European-style two-tiered board structure, composed of independent supervisory and executive boards, is considered an important step in implementing stronger corporate governance policies.

This year, BCR’s management intends to increase its branch network from 315 to 365. It is also deploying new automated teller machines (ATMs) and currency exchange machines nationwide in a bid to maintain its position as Romania’s largest bank. Looking forward, Mr Danila says: “We are already talking about destructuring instead of restructuring. We have found solutions whereby revenues can go up faster than costs, so heavy personnel cutting will not be needed.”

Long-awaited deal

Romania’s other long-awaited deal, the privatisation of its savings bank, the Casa de Economii si Consemnatiuni (CEC), is slated for completion by the end of this year. JPMorgan has been appointed as the government’s adviser and is expected to draft an initial valuation and a privatisation strategy for approval by the government no later than March.

CEC is estimated to have finished 2004 with profits at almost €20m and total assets at €1.2bn. The savings bank stands out due to its enormous branch network (more than 1300), which would give any acquirer an uncontested reach into the fast growing Romanian banking sector. In preparation for its sale, and on the back of last year’s IT investments, the CEC is due to launch debit cards and offer foreign currency operations to its clients in the near future.

Bank Austria Creditanstalt, Hungary’s OTP bank, Erste Bank, Eulia, KBC, Unicredito, Intesa and Raiffeisen (RZB) are all expected to show a keen interest in this hotly contested sale. Erste Bank, in particular, has been aggressive in setting the stage for a possible takeover, with its recently announced recruitment drive in anticipation of a successful acquisition.

Smaller banks are set to continue on their consolidation paths, as larger banks expand aggressively and newcomers scout for market-entry opportunities. It is rumoured, for example, that last year’s cancelled sale of the mid-sized Tiriac Bank will be relaunched.

Consumer finance

In the booming consumer finance arena, Credisson, the pioneering market leader, is seeking a strategic investor. According to market sources, OTP, AIG Consumer Finance, GE Capital and BNP Paribas have shown interest in concluding a transaction. A well-financed Credisson could prove to be an important threat to banks such as Raiffeisen, SocGen’s BRD and BCR, which have all launched consumer finance ventures in hopes of securing a stake in this profitable sector. A newly created credit bureau is expected to form the foundation for the continued growth of consumer finance in Romania.

With robust economic growth, which in 2004 reached 8.4%, and with subduing inflation (at 9.3% for 2004 and forecast to fall to 7.5% in 2005), Romania has a good foundation for the mix of privatisations and stock market listings that the new government has promised. This year could turn out to be the one in which the oft-cited Romanian “potential” is replaced by Romanian “results”.

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Read more about:  Central & Eastern Europe , Romania