ING romania

Last year was the most profitable year on record for Romanian banks, but this year is set to be challenging amid macroeconomic uncertainty. Kit Gillet reports.

Despite initial concerns, the pandemic has had little visible impact on the Romanian banking sector, which has continued to post impressive numbers as it increasingly moves into the digital space.

“The Romanian banking sector is even more prepared and quite well equipped to deal with a new crisis, if a new crisis will come,” says Ionut Dumitru, chief economist at Raiffeisen Bank Romania, one of the largest banks in the country.

Last year was the best on record in terms of profitability in the banking sector’s history. “We have everything in place to expect higher lending growth going forward,” he says. “We have liquidity; we have a capital adequacy ratio over 22%, which is extremely high versus the minimum requirement. The non-performing loan (NPL) level is quite low, at 3.4%, which is a very low level for Romania.”

Strong growth figures

According to data from the National Bank of Romania, the aggregated net profits of Romanian banks hit €1.65bn in 2021, with total assets increasing by 14.2% year-on-year to €129.3bn. Return on assets for the banking sector also improved from 0.95% in 2020 to 1.38% in 2021, with return on equity up from 12.2% in 2019 and 8.7% in 2020 to 13.5% in 2021.

“The Romanian banking system is sound and resilient, and operates at normal parameters,” says François Bloch, chief executive of BRD Groupe Société Générale, which saw its net profit rise by an annual 34% in 2021.

Mr Bloch says that the banking sector recorded year-on-year increases in 2021 in all the key indicators: assets were up 14.2%, non-governmental lending up 14.8%, savings were up 13.9%, and NPLs continued their downward trajectory, reaching their lowest levels since 2014.

Meanwhile, the banking sector’s solvency ratio hit 22.26% at the end of 2021, almost three times the legal minimum, with the liquidity coverage ratio at 242% as of September 2021, compared to the European average of 172.4%.

Macroeconomic uncertainty

Despite this, more challenging times could be ahead. In March, inflation in Romania rose by 10.2% year-on-year, according to the country’s national statistics office, up from 8.53% in February — the fastest increase in 18 years. On April 5, Romania’s central bank raised its benchmark interest rate by half a point to 3%, its fifth raise in a row, with the lending rate also increased from 3.5% to 4%.

Romania’s economic growth for 2022 is now expected to come in at around 2–2.5%, depending on the forecaster — significantly lower than government targets and the earlier estimates of around 4%.

Going forward, BRD’s Mr Bloch says the main pressure on banks will come from the macroeconomic uncertainty, which could have a negative influence on confidence. “Combined with surging inflation, it might lead to lower demand for loans in the short term,” he says.

In early April, the leader of Romania’s ruling Social Democratic Party, Marcel Ciolacu, said that an agreement on postponing bank loan instalments for some categories of debtors had been agreed with banks, in relation to rising pressures on consumers and businesses, following a similar moratorium put in place during the pandemic. The central bank also reactivated its programme of government bond purchases in March, in order to improve liquidity and limit volatility in domestic bond yields.

Some are now cautioning that Romanian banks could see a drop in lending demand in the coming period, tied to economic challenges from the war in Ukraine and worsening economic indicators.

We have to face new challenges, starting with the inflationary pressures that are only exacerbated by the war in Ukraine

Mihaela Bitu

“We have to face new challenges, starting with the inflationary pressures that are only exacerbated by the war in Ukraine,” says Mihaela Bitu, chief executive of ING Bank Romania, adding that while the direct impact of the war on Romania is currently limited, there will be economic implications.

“This is unavoidable,” says Ms Bitu. “We already see the lending demand eroding. Time will tell if this is a transitory effect, as we witnessed in the beginning of the pandemic, or a more structural phenomenon.”

Lending volumes up

Coming out of 2021, lending to the private sector in Romania picked up considerably, with the value of outstanding loans to the private sector growing 15.8% year-on-year in February 2022, according to the country’s central bank.

Private lending in leu has increased strongly, by 20.1% year-on-year in February, while lending in foreign currencies grew by 5.9%, dropping slightly from a 5.2% rise in January. Leu-denominated credit accounted for more than 72% of overall non-government loans at the end of 2021, a far cry from the lending landscape a decade-and-a-half ago.

During the global financial crisis, NPLs in Romania ballooned to more than 20% of the total loan book, with many borrowers hit by added costs associated with borrowing in foreign currencies — particularly mortgages in Swiss francs. This time around there was little risk of that.

“At the onset of the [global] financial crisis, the banking sector was quite exposed in foreign currencies,” says Mr Dumitru. “Lending to companies and households was mainly in foreign currency — at the top it was 65% in total. Now we are in a much better position, just below 28% and still decreasing. There is no lending anymore in foreign currencies for households and only some lending to companies, but most companies are now hedged.

“We have all the prerequisites to expect higher lending,” he adds. “We saw significant growth in mortgage lending, which has been growing in double digits for a couple of years already, supported by state guarantee schemes. Corporate lending was also growing quite strongly in the last few years, and also small and medium-sized enterprise lending as well.”

Going forward, Mr Dumitru says that although there are a lot of challenges with a deterioration in the economic outlook, his team are still expecting double-digit growth in lending activity for 2022.

Rising liquidity

One key strength of the Romanian banking sector is the high levels of liquidity in the system. “The accelerated saving behaviour witnessed at the start of the pandemic has not reversed, and overall deposits have increased by 13.7% in 2021, not far from the 15.3% growth seen in 2020,” says ING Bank Romania’s Ms Bitu, who adds that the banking sector enjoys ample liquidity given the 68.8% loan-to-deposits ratio at the end of 2021.

“This provides a good basis for supporting the development of the country’s financial intermediation, which remains at a very low level of 26%, compared to European benchmarks of almost 100%,” she adds.

Financial intermediation in Romania peaked in 2011 at 39.3%, but has dropped considerably since then, hovering around 25% or 26% every year since 2017.

According to Florin Danescu, executive president of the Romanian Association of Banks (ARB), Romania witnessed a slight rise in financial intermediation over the course of the pandemic, reaching 26.8% after almost a decade in which the pace decelerated. Still, the country remains the EU member state with the lowest level of financial intermediation, as well as the country with the lowest levels of financial education and financial inclusion.

Financial inclusion in Romania reached 67% of the population in 2021, according to ARB data, spurred on by, among other things, mobility restrictions imposed during the pandemic. “The share of the Romanians who prefer an exclusively online interaction with banks went up to 47% and I believe that this trend will go on,” says Mr Danescu. “Our goal is to enhance financial intermediation and bring it as close as possible to the European average of 92%, just like financial inclusion from 67% toward the European average of 95%.

“Reaching this goal would allow us to increase Romanians’ economic welfare,” he adds, suggesting that this could lead to a doubling of the country’s gross domestic product (GDP) per capita on a national level, which is still far below the EU average.

Mergers and acquisitions

The coming years could see a significant change in the structure of the domestic banking sector, with a potential reduction from the 34 credit institutions currently operating in the country.

Romania’s banking sector is highly competitive, with the largest bank holding less than 20% of the country’s total banking assets, and the three largest banks holding just 40% of the total assets. This means that there are plenty of smaller, regional players.

At the same time, an estimated 70% of the banking sector’s assets are held by majority foreign-owned institutions, with foreign-owned banks having played a largely stabilising role in the domestic banking sector over the years.

“Looking at the banking sector, the landscape changed a lot during the financial crisis and the pandemic,” says Mr Dumitru. “A lot of small banks decided to sell or close down their activity.

“Having a tighter regulation and increasing costs, you need a certain scale in order to be efficient,” he adds. “I think we saw already a trend in terms of consolidation in the past few years. I would expect that trend to continue — we need to be more efficient and banks are spending a lot of effort in that direction. I would imagine that the smaller banks will continue to visit their strategies and even consider an exit, as their size is not an efficient one, and probably the consolidation will continue.”

Legislative stability

Another important change in the past few years has been a less interventionist and populist approach from Romanian politicians.

Between 2014 and 2018, 50 new laws and regulations related to the banking sector were enacted in Romania, five of which were later declared at least partly unconstitutional. The most troubling came in December 2018, when Romania’s then-government introduced a new tax on banking assets, which required banks to pay a quarterly tax of between 0% and 0.5% on all assets, depending on the Romanian interbank offered rate.

“Most of the laws that led to legislative insecurity were amended by the Constitutional Court of Romania,” says Mr Danescu, who adds that in 2021 the sector witnessed a drop in the pressure of legislative risk upon the banking industry. “The banking sector has demonstrated that it is part of the solution and not the problem,” he says. “We count on the Romanian authorities to continue collaborating with us as partners.”

Romanian banks will continue their digital transformation, will keep bringing new online products and services to their clients and, consequently, will improve their operational efficiency

François Bloch

“The political interference was quite strong,” adds Mr Dumitru. “We cannot exclude having … populist initiatives [over the next few years], but I think that we are now more experienced with those kinds of initiatives and we can deal with that.”

Meanwhile, ongoing discussions around Romania joining the eurozone in the near future continues to be just talk, with the Romanian leu yet to join the Exchange Rate Mechanism II (ERM II), unlike the Bulgarian lev and the Croatian kuna, which both joined in 2020. The Romanian government has previously targeted an entry date of 2024.

“I have always argued that unless we have very, very solid macroeconomic conditions, it is totally unrealistic,” says Daniel Dăianu, chairman of Romania’s Fiscal Council. “We need to bring down the budget deficit below 3% on a permanent, durable basis and reduce external imbalances. Then we could get into ERM II. If we achieve that, then 2028 is not a fantasy for Romania [joining the eurozone],” he adds.

Changing behaviours

Banking behaviours by customers in Romania, like in many places around the world, is also changing fast, with banks being forced to speed up the pace of innovation and improve their digital offerings and overall customer experience.

“Banks that invested heavily in digitalisation will soon see a higher return of investment,” says Sergiu Manea, chief executive of Banca Comerciala Romana. “Younger cohorts with enhanced digital skills will soon join the labour market, and they will be those who will associate digitalisation, interoperability and personalisation with mandatory banking experiences. Today’s banking customers are looking for a reliable bank that can provide secure, resilient and always-on services. This applies to both retail and corporate clients.”

Mr Bloch says that two key important trends will remain important for the banking sector going forward: digitalisation and sustainability. “Romanian banks will continue their digital transformation, will keep bringing new online products and services to their clients and, consequently, will improve their operational efficiency,” he says.

“On sustainability, Romanian banks will develop new environmental, social and governance-compliant products, especially in the framework of the National Resilience and Recovery Plan (NRRP),” he adds.

Banks in Romania are now hoping to be major beneficiaries of the billions of euros flowing into the country as part of the NRRP, itself part of EU-wide post-pandemic recovery efforts. Over the next five years, Romania is set to receive €14.2bn in grants and €14.9bn in loans — around 13.7% of Romania’s 2020 GDP, with half of that money earmarked for green transition initiatives. Much of that money could flow through the banks.

“One of the opportunities that banks in Romania have right now is the possibility of direct involvement in the rollout of the National Resilience and Recovery Plan,” says Mr Danescu. “The banking sector could play a major role in the successful deployment of some government initiatives that support the post-pandemic recovery of certain industries.”


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