The Austrian interim CEO of Banca Comerciala Romania (BCR) has enjoyed his stay in south-east Europe. Manfred Wimmer extols the virtues of the Carpathian mountains and the Transylvanian plateau, and concludes: “When I retire from banking, I’ll invest in the Romanian tourism sector.” In his enthusiasm, it seems he is not alone among the members of Austria’s Erste Bank who moved to Bucharest to manage the takeover of BCR in December 2005. Many have apparently opted to stay on and become permanent members of the bank’s staff. “This has certainly not been the case with all the banks Erste has bought in the region,” said Mr Wimmer, speaking to The Banker shortly before Dominic Bruynseels was confirmed as CEO in April 2008.
It was not just the scenery that attracted them. Mr Wimmer has been impressed with the way in which the bank’s existing personnel have handled the sometimes painful process of integrating BCR with Erste’s overall operations, which has proceeded apace since July 2007. “In the Romanian context, BCR is an elite organisation. Intellectually, it understands what needs to be done,” although nobody likes taking difficult measures such as staff reductions.
Even that element has been made easier, he says, by the degree of loyalty at the bank – what he calls a “family concept” – that has been evident in a willingness to move between job functions. As a result, many of the staff who were made redundant when the back-office functions were centralised to Bucharest subsequently transferred to newly created front-office roles.
Experienced hand
Mr Wimmer himself is relatively new to his current role, appointed in December last year, but his experience of BCR stretches back to Erste Bank’s first involvement, as head of the takeover bid team. He expects the transformation plan for BCR, comprised of 42 project components, to be completed by the end of June this year. This includes rationalising and expanding the distribution network that was based on 41 separate county jurisdictions, and splitting front and back-office activities to bring compliance procedures into line with Erste’s operations elsewhere. Specialist roles such as security and building maintenance have also been outsourced.
Prior to the takeover, there was no clear division between retail and corporate banking, which were sometimes used to subsidise each other in each county. Mr Wimmer now presides over 570 retail branches nationwide, together with 52 commercial centres for small and medium-sized enterprises (SMEs), with large corporates handled from head office in Bucharest. He is aiming at 700 retail branches by the end of 2009.
Well-established model
Speed is essential because Erste’s strategy calls for the turnaround to take place in three years from its initial investment. It is now a well-established model, reproduced several times since the groundbreaking purchase of Ceska Sporitelna in the Czech Republic in 2000. As Mr Wimmer says, by contrast with Sporitelna, BCR was “already a well-functioning bank, extremely strong across all segments”, which was unique among Erste’s acquisitions.
The bank reported a record preliminary net profit of €277m in 2007, up more than 22% year-on-year, with net interest income about 40% higher than its nearest competitor in Romania. This can make some changes harder to justify to staff and, more importantly, put pressure on management to try to maintain market-leading positions in so many different segments.
“The bank had a slight market share loss in 2007, which is not surprising in a situation where you are having a complete overhaul of the organisation, with resources allocated to things other than the client’s business,” Mr Wimmer notes. With the front office now dedicated to sales functions unencumbered by back-office activities, he has already seen signs of improvement in the second half of 2007. “So my assumption is that we will be able to keep or even slightly increase our market share in 2008.”
Mr Wimmer also believes that the creation of focused retail and corporate divisions will help to foster clearer cross-selling strategies, such as offering retail products to the staff of corporate clients. “This also increases customer loyalty on the corporate side because it results in a tightly woven network of services and relations between the bank and the corporation.”
Eye-catching economy
Adding to the bank’s internal momentum is the dramatic performance of the Romanian economy. Gross domestic product (GDP) growth has averaged 6% in the past three years, and the process of the catch-up in living standards has been further fuelled by accession to the EU at the beginning of 2007, with structural funds from the organisation set to come on stream in the near future.
The residential and commercial real estate sectors are booming. Mr Wimmer observes that the route from the airport to central Bucharest has become unrecognisable compared with just two years ago. Coming from what he calls the “understated” business culture of Austria, BCR’s chief has had to make an adjustment to the flamboyant and fast-changing Romanian commercial environment.
Overheating worry
There are those who worry that the pace of economic activity risks overheating, as the country’s current account deficit soared 66% in 2007, to more than 14% of GDP, and inflation reached almost 8% in February 2008, which was well above the central bank’s 4.8% target. This cocktail prompted ratings agency Standard & Poor’s to place a negative outlook on Romania’s sovereign ratings in November 2007, followed by Fitch at the end of January 2008 (see interview below with finance minister Varujan Vosganian).
Although wage rises have been steep, says Mr Wimmer, there is still plenty of headroom for Romania to continue its economic performance. Productivity is low, at about 40% of the EU average, but wages are only 10% of the EU average. This leaves a substantial cushion before Romanian competitiveness is eroded – an argument confirmed by recent large foreign direct investment inflows from firms such as Renault, Ford and Nokia.
Mr Wimmer also believes that labour shortages in some semi-skilled sectors, such as construction, will drive productivity gains. He suggests the government could help by liberalising the labour market further, although Mr Vosganian argues that measures allowing longer temporary employment contracts and reduced employer social security contributions have gone far enough.
Mr Wimmer acknowledges that rising interest rates and a volatile exchange rate could dampen demand for short-term credit, such as for car loans (a high proportion of consumer borrowing is in euros). But he is hopeful that this will refocus attention on the housing market, which remains promising. “Our mortgage lending book is almost all first-time borrowers with previously unleveraged income and assets,” he says.
About 10,000 new residential units are being built per year but, with little development for more than a decade, annual demand for new property is as high as 200,000 units. BCR is also financing the refurbishment of older properties to push them up the value chain and meet the pent-up demand for improved housing.
The commercial real estate business is equally promising. The vacancy rate at present is a tiny 0.2% and, based on the current pipeline of projects, BCR believes that will rise in the next three years to 5%, still very tight by European standards.
Overarching the solid prospects for the market, the National Bank of Romania has kept tight control of lending conditions, typified by a cumulative 150-basis-point interest rate hike in February and March to combat inflation and a weakening exchange rate. The central bank set lending standards until mid-2007 and, although there has been some deregulation since then, banks need approval for procedural changes.
“I don’t see the regulatory burden as excessive. It’s restrictive but this is not unhealthy at a stage of development that is quite critical,” says Mr Wimmer.
The threat to Romanian growth could be external as much as internal. Most of the banking sector is in foreign hands and the country’s number two bank, BRD, is owned by France’s troubled Groupe Société Générale (SocGen). But Mr Wimmer is quick to rebuff fears that tighter conditions in global capital markets will rebound on BCR, emphasising that its parent company will continue to make capital available for new lending in euros.
Core business
Erste Bank derives much of its funding from deposits rather than wholesale borrowing, and a change to group structure in 2007 made its Austrian and eastern European operations two separate and equal units. “This is our core business. If there is a need, there are a lot of other things in the group that will be reduced first, before we limit the room for growth in our eastern European business,” says Mr Wimmer.
He even sees a possible opportunity for BCR to attract high-end retail clients who may have been unnerved by SocGen’s difficulties.
By contrast, the development of capital markets activity in Romania has not kept pace with economic activity. The most significant event on the Bucharest Stock Exchange in recent months was the listing of Erste Bank itself, in February, which now accounts for almost 40% of total market capitalisation. Mr Wimmer attributes the sluggish activity to the fragmented financing structure of Romania’s large, privately held conglomerates.
He says: “They need to finance themselves at the parent company level and then distribute to the rest of the group, rather than taking out many different loans. There is a lot of financial re-engineering to do before these companies become feasible for the capital markets.”
When they do, BCR will be waiting to play its part.
FIGHTING ON ALL FRONTS
| In recent months, Romania’s ebullient finance minister, Varujan Vosganian, has needed to combine tenacity with ingenuity to battle the sharp deterioration in worldwide economic conditions that has hit just as the domestic political situation heats up. |
The EU’s commissioner for economic and monetary affairs, Joaquín Almunia, and ratings agencies Standard & Poor’s and Fitch have warned that the financing of Romania’s large current account deficit leaves it vulnerable to the global liquidity squeeze. They also accused Mr Vosganian of reacting too slowly to rein in government spending as a way to curb overheating risks and keep the country on track for eurozone entry in 2012-2014.
Mr Vosganian has no patience with the negative sovereign ratings actions, pointing out that economic growth in Romania is among the strongest in Europe. “We have 6% GDP growth; they should be upgrading us. I understand if the upgrade waits until the current account deficit is reduced, but they should keep the rating stable until then,” he argues.
However, he is more conciliatory toward Mr Almunia, and recognises the sensitivity of Romania’s status as the EU’s newest member (alongside Bulgaria). The finance ministry agreed to postpone a proposed €500m Eurobond issue until after the European Commission announced its conclusions on the country’s Maastricht convergence plan in March 2008. “It is not adequate to issue a Eurobond at the same time as a bad evaluation from the commission,” says Mr Vosganian.
In response to the commission’s concerns, Mr Vosganian also unveiled proposals to cut the 2008 budget deficit to 2.3% of GDP by national definitions (which are a little more generous than the EU’s own methods of measurement), from an original target of 2.7%.
Given the strength of government revenues as the economy booms, this is not such an ambitious target, says Rozalia Pal, senior economist at UniCredit Tiriac Bank in Bucharest. Even so, it will put Mr Vosganian’s authority to the test. The government narrowly averted a threatened no-confidence motion in late 2007, and Mr Vosganian’s National Liberal Party is trailing in the polls leading up to parliamentary elections in November 2008.
“The new target has not been passed yet. Even if it is, there are a lot of risks in an election year,” says Ms Pal, including popular pressure for higher current spending and public sector wages. Poor planning by central and especially local governments has led to frequent overspends in the past two years, she adds.
Mr Vosganian is insistent that he will not loosen the purse strings in the face of political pressure. “Despite the fact that it is an election year, we managed to secure agreement with the trade unions to link the general increase of wages at a similar level to inflation,” he argues. “I presented with the governor of the central bank a common programme for controlling inflation, and I have respected my engagements, which were to control the fiscal deficit and public sector wages, and reduce public expenditures.”
He also believes that the government has made progress toward achieving greater “efficiency, prudence and predictability” on public spending at all levels. “Before, every ministry had different procedures for procurement of goods and different bonus payments to staff; now we have more mature central allocations and a monthly schedule of expenditures.”
However, Mr Vosganian acknowledges that his ambitious proposal for a three-year budget planning cycle on infrastructure projects has fallen victim to the government’s weak position in parliament. “The political situation in Romania was not ready for this. Maybe after elections, when the government will have a stronger majority in parliament – let’s drink to that,” he concludes boldly.
