Romania’s moribund non-banking sector has recently begun showing signs of life. Mortgages have exploded, leasing is picking up and the insurance sector is shaking off years of patchy performance and weak regulation. The boom seen recently in life insurance is reason to believe that the reform of the pension system might yield the benefits required for Romania’s financial markets to benefit, at long last, from a sustainable flow of liquidity.
Though starting from a very low base, decreasing interest rates and longer maturities have propelled the Romanian mortgage loan market in the past two years. Some banks, including the Greek Alpha Bank, the Austrian Volksbank and the Dutch ING Bank are even offering maturities as long as 20 to 25 years – an unthinkable proposition just a few years ago.
It is estimated that by end of 2003 the stock of mortgages amounted to E500m, just under 1% of GDP but double the figure of the previous year. The figure is expected to double again in 2004. Croatia, in comparison, presently has a mortgage sector which nearly tops E4bn, representing over 15% of GDP.
Much of the success of mortgages can be attributed to the European Bank for Reconstruction and Development (EBRD), which has continued its strategy to support Romania’s burgeoning mortgage sector, and has recently signed several more financing agreements.
The specialists
At the same time, the Romanian mortgage sector is set for further change as specialised mortgage loan companies are being set up, such as Domenia Credit and Imofinance. Germany’s largest mortgage bank, Schwabische Hall plans to enter the market by mid-year through a joint venture with the Raiffeisen Group (RZB). The CEC Savings Bank and a real estate development company have also recently indicated they will launch similar ventures in the coming year.
Domenia Credit, which is already functioning, has $29m in share capital, contributed by the Romanian American Enterprise Fund (RAEF) with 60% of the shares, and the EBRD and the German development bank Deutsche Investitions-und Entwicklungsgesellschaft (DEG), each with 20% of the firm’s shares. It has also managed to secure a $7m loan facility guaranteed by the US government. Since its inception, Domenia has managed to distribute $4m of mortgages. Domenia’s strategy is to focus on the retail mortgage market. RAEF’s chief investment officer, Horia Manda says: “As legislation develops, we want to refinance these lines through mortgage bond issues which could then be traded on the capital market.”
Refinancing challenges
A present lack of standardisation of mortgage contracts is an large obstacle on the road to securitisation, which is a requirement for the continued growth of the sector. Efforts are presently being made by the leading lenders, whose funds are being rapidly depleted by the strong market demand, to create the market conditions that would allow securitisation, and thus refinancing, to take place.
Furthermore, as most bank deposits are short-term, financing long-term mortgages presents its own potential risks in terms of mismatching maturities, interest rates and liquidity risk. This will create tension as banks wanting to keep up with demand for mortgage loans will have to increase maturities, in a context in which the National Bank has imposed regulations that stipulate that monthly installments cannot exceed 35% of a borrower’s income.
Another issue confronting the future growth of the mortgage market lies in the costs. If interest rates in Western countries vary between 2%-4% for euro-denominated loans, equivalent loans in Romania, also in euro terms, cost up to three times as much. The chairman of the Romanian Association of Banks, Radu Ghetea explains the difference: “In Romania, the bank’s compulsory minimal reserve with the Central Bank is 25% of hard currency and 18% for local currency, and the very large sums that Romanian banks have to keep in treasuries receive no interest. Moreover, the costs of Romanian red tape are very high and as such, a bank cannot afford to give a loan at lower interest rates.”
Leasing diversification
Romania’s leasing market is experiencing growth, though unless it begins to focus on new products, it may be eclipsed by the banking sector. Nevertheless, the total volume of leasing contracts in 2003 stood at E1.42bn, of which E647m was registered in that year. The forecast for 2004 is for growth at 30%. For example, BCR Leasing, associated with the large state-owned bank, registered a market share of approximately 10% in 2003, aiming to hit 30% of the market by the end of 2007.
After EU accession, it is believed Romania’s leasing market could reach E4bn-E5bn. Companies affiliated to banking institutions hold approximately 20% of the market, while another 15% are associated with producers. The remaining percentage is represented by independent leasing companies. As a result, strong consolidation is to be expected in the coming years
Most of the leasing contracts are for automobiles, representing around 93%. The difference is split between industrial equipment and real estate, the latter barely registering with slightly over 1%.
Out of the woods?
Total insurance revenues for 2003 are estimated at E600m, representing growth of slightly more than 40% over 2002, repeating the prior year’s performance. In spite of that, Romania’s insurance market is still small relative to its peers, amounting to a little more than 1% of its GDP. Yet, the growth potential is there, as a recent survey by German market research institute GfK points out: one in 10 Romanians has a life insurance policy, while one in four Romanians has a property insurance policy. Poland, Hungary and the Czech Republic, on the other hand, have a purchase rate of between 50%-75% for property insurance policies, and between 40%-70% for life insurance policies.
The recent 2003 Regular Report on Romania, drafted by the EU, points to some shortfalls in the sector. It claims that the relevant legislation suffers from a lack of precision, while the implementation of its stipulations and the decisions of the Insurance Supervision Commission (CSA) are often inconsistent. The report argues that there is much to do for Romania to harmonise its insurance legislation with the EU’s, in time for a 2006 deadline.
Pension panacea?
Romania’s “pay-as-you-go” pension system is by no means a long-term solution. For years, succeeding governments have been under pressure to make reforms. More importantly, the pension sector has not played its traditional role of supplier of liquidity to the financial system, thus resulting in a negligible contribution to Romania’s low financial intermediation rate.
As in many other countries, Romania’s reform of its pension system is based on a three-pillar system, comprising of a first pillar of the current public pension system, a second pillar of a privately managed compulsory pension system, and a third pillar of occupational private pensions, funded by both voluntary and supplementary contributions. The government has pledged to produce legislation by the end of this year, which will regulate the new second and third pillars .
In a further step towards completing the regulatory norms required for the launch of the second pillar private pension funds, the Romanian Labor Ministry has agreed to reduce the minimum capital requirement for fund managers to below E20m. At the same time, it has been agreed that the minimum capital requirement for fund managers of the third pillar is to be lowered from E10m to E2m. Andrew Allot of Aviva Romania explains that pension fund management companies investing in Romania would require yields of between 15%-16%, and that high capitalisation requirements would force them to levy higher administration fees.
Yet, in a clear indication of things to come, RAEF recently acquired a local stockbroker, which comes on the back of its acquisition of a small asset management company. Though both transactions were relatively small, it points to RAEF’s ambition of playing a prominent role in the pension fund industry, an ambition surely shared by many others.
Major players in insurance
In terms of general insurance, Asirom, the formerly state-owned insurance giant, announced total revenues of E147m in 2003 – a 20% gain on 2002. Revenues from general insurance were up by 76% in 2003.
Allianz’s local operation, a joint venture with Ion Tiriac, the infamous tennis magnate and businessman, is hot on Asirom’s tail, generating revenues of E134m in the same period. Of these, around E90m stemmed from automobile insurance policies – up by over one-third on 2002. Allianz Tiriac is the market leader in the growing non-mandatory automobile insurance sector, with a 35% share of the market.
Another important player in the sector is Omniasig, whose principal shareholder is an Israeli financial group. Its end-2003 results are expected to show $63m in gross collected premiums and $2m in net profits.
Pointing perhaps to a future diversification of the market, five insurance companies have been recently approved to begin marketing health insurance policies. Interamerican, a Greek insurance company already present in Romania intends to focus on this segment, while also developing its own network of private health care facilities. In Romania’s seriously troubled health sector, such ventures are likely to find high demand for their products and services.
Leading the life insurance segment is ING’s Nederlanden unit with 56% of the market. AIG Life has reported growth in premiums of over 40% in 2003 to nearly E15m, thus slightly increasing its market share to around 9%, behind Asirom’s 10.5% share.
