What a difference five years can make. In 1999, Romania and its banking sector were in a shambles. While the country was in the throes of hyperinflation and flirting with default on its foreign debt, its largest bank, Bancorex, was being unceremoniously merged with the second largest, Banca Comerciala Romana (BCR), in an attempt to save it from bankruptcy.
At the time, banks were mainly concerned with investing their funds in the government’s own local currency bonds, as they sought to lock in very high real yields, to the detriment of traditional lending activities.
Nowadays, with inflation substantially reduced (14.1% in 2003), together with ensuing lower interest rates, and on the back of robust economic growth (between 4%-5% growth in the past three years) banks are aggressively jostling for position. Older entrants and new arrivals are digesting past acquisitions and planning new ones. A more favourable interest rate environment is creating the premises for retail-focused lending products, including mortgages and consumer finance. More than anything else, a focus on retail customers defines the present major trend in the Romanian banking sector.
In a country that has traditionally been starved of credit, this should not come as a surprise. With local currency deposit rates ranging between 16% and 18%, an effective 40% annual lending rate locked in for three years will wake up the sleepiest of bankers. As a result, in nominal local currency terms, retail loans in the 10 months to November 2003 grew three and half times to around E1.2bn, compared to the same period in 2002.
Taking the lead
Pioneers, such as Tiriac Bank, owned by the famed former tennis pro and manager, Ion Tiriac, took the lead earlier this decade in developing the consumer finance sector, by securing important distribution channels through strategic relationships with large white goods and electronics retailers. Mr Tiriac’s other business interests – the local operations of the German cash-and-carry chain Metro, together with his ownership of the Daimler-Chrysler-related automobile dealership – have positioned his bank for further gains in this area.
Not to be outdone, other banks, particularly BRD (owned by Société Générale), Raiffeisen and the state-owned BCR, have begun devoting important resources to the battle for the retail consumer. BRD, in particular, is trying to leverage its traditional relationships with other French investors in Romania, namely the hypermarket group Carrefour, and Renault, which enjoys a strong grasp on the market through its earlier acquisition of Dacia, Romania’s national automobile brand.
In the next phase of the market’s development, with current low default rates expected to rise as the market develops, a long-awaited Credit Bureau is due to go online towards the end of 2004 or early in 2005. Continuing downward trends in inflation and interest rates should soon make possible refinancing options through tradeable securitised debt products. Even credit cards cannot be far behind.
Already, the debit card market is booming as transaction costs are steadily dropping. While still an overwhelmingly cash-driven economy, the number of cards issued has increased significantly from a little over one
million cards in 2000, to around five million cards by early 2004. In 2003 alone, they registered an increase of nearly 50% over 2002. The same explosive growth is mirrored in the spread of automated teller machines and point-of-sale positions which are expanding on the back of very strong retail growth.
Privatisation
In terms of privatisations, around 38% of the banking sector is still in state hands. BCR, with approximately 31% of the market, stands out as the dominant player in the sector. BCR is very much an “awakening giant” which, by leveraging its broad deposit base, is beginning to pose a real threat to sectors traditionally dominated by foreign banks, such as consumer finance, mortgage lending and leasing.
While 2003 brought the European Bank for Reconstruction and Development and the World Bank’s International Finance Corporation in as 25% investors in BCR, it is hoped that the privatisation process will be completed sometime after the coming national elections, meaning in 2005.
In the meantime, the presence of these international financial institutions should bolster BCR’s operational efficiency, particularly its corporate governance and risk management procedures. As an immediate next step, the government intends to sell a further 8% of its shares to the Employees Association in the course of 2004.
The state-owned Savings Bank (Casa de Economii si Consemnatiuni, CEC), represents approximately 7% of the existing banking market. It is very much still a “sleeping giant”. Though having only a modest share of the market, it has a massive presence through its network of more than 1600 branches scattered across the country.
Once rationalised, and given a new coat of paint, the CEC could pose a real threat to existing market participants by creating a phenomenal distribution network.
It represents perhaps the best opportunity for a new market entrant, or for an existing player to expand its market share, and is slated for privatisation in the course of 2005-06. In the meantime, the CEC is busy redefining its service offerings and implementing a comprehensive IT system.
With its 22 million citizens, the Romanian economy has a banking intermediation (bank usage as a percentage of GDP) of approximately 33%, behind Bulgaria’s 45%, half of Hungary’s 68% and nearly a quarter of the Czech’s Republic’s 113%. Coupled with the recent buzz of activity, one can realistically point to some healthy upside in terms of the future growth of Romania’s banking sector. A recent study by the Austrian National Bank points out that, “if banking sector assets per inhabitant in Romania reached the same level as in Poland, this would imply a medium-term expansion potential of close to 400%”.
Pent-up demand
Strong economic growth together with declining economic and political risks has led to a lower cost of capital. Moreover, taking into consideration Romania’s path to EU integration and eventual EMU membership, as well as its large population that is fuelling a strong pent-up demand, Romania’s banking sector should at the top of every banker’s watch list.
As the banking sector continued to consolidate in 2003, the National Bank of Greece acquired Banca Romaneasca from the Romanian-American Enterprise Fund. RoBank and Tiriac Bank are up for sale and it is expected that the recently overhauled Transylvania Bank will be made available to potential suitors in the coming 12-18 months.
Buyers will not be lacking, as important European banking groups traditionally active in Eastern Europe, but without a presence in Romania, include Erste Bank, KBC, OTP, Banca Intesa and Crédit Lyonnais.
Challenges ahead
While it is clearly a dynamic sector with much potential, challenges and potential future obstacles nevertheless remain. While economic growth has been robust and inflation has been coming down, there has been an explosion in the current account deficit, which totalled e2.5bn in November 2003, representing an increase of 85% from the same period of 2002. This gap represents more than 6% of GDP and, if uncorrected, will in time put unwanted pressure on the localcurrency.
Recently, Romania’s National Bank has claimed that an explosion in bank loans, spearheaded by a tripling in consumer finance, is largely to blame for this widening gap. As a result, it has tightened controls on consumer and mortgage loans in an attempt to slow down the surge in imports. The government has pledged to narrow the gap by reducing the fiscal deficit and reining in imports at state companies. This year, being an election year, will make it all the more difficult for the government to keep to its targets.
Another potential challenge to Romania’s banking sector lies in the potential mismatch arising from traditionally short-term deposits and medium- to long-term credits.
Romanian depositors will have to be incentivised and educated to adopt a more forward looking perspective if the banking sector is to keep pace with its potential growth prospects.
Credit quality should be continuously monitored. In a booming economy, such as Romania’s, the challenge lies mainly in keeping pace with the market. Yet, at the first signs of an economic downturn, those credits could turn into real problems.
