As Romania bumps its way toward EU membership in 2007, its citizens can at least be assured of one thing: a banking market that is acquiring a new pitch of sophistication and breadth. For the man on the Bucharest omnibus, this means more ATMs and cheaper loans. But for banks, increasing average salaries, consumer expectations and business confidence also spells opportunity.
While the market is making room for one new player – HVB Bank, which acquired a 50.1% share in Banca Tiriac (founded and part-owned by former tennis coach supremo Ion Tiriac) – autumn 2005 will see the result of bidding for the two last major public sector stakes in Romanian banking. This will put more than 90% of banking assets into foreign private hands, and accelerate the consolidation process.
Six of Romania’s 38 banks own about 60% of its banking assets: Banca Comerciala Romana (BCR) owns 25%; then BRD GSG (owned by SocGen), Raiffeisen, and ABN AMRO weigh in with 14%, 8.5% and 6.4% respectively, with the savings bank CEC, HVB (which recently purchased the Tiriac Bank) and ING following close behind.
Competition hots up
There’s room for growth: banks estimate a financial intermediation ratio (assets to GDP) of about 38%, compared with figures of 70%, 80% or 100% elsewhere in the region. But it may not be a smooth ride; as one Raiffeisen banker says: “It’s getting tougher. Competition is definitely sharper.”
Quite what slant that competition will assume will be revealed in late November 2005, when the Romanian privatisation committee reveals who becomes owner of a chunk of the nation’s flagship finance group, BCR. At time of writing, Austrian Erste Bank and Portuguese Millennium BCP were remaining bidders for a 61.9 % share in the bank, 37% of which is owned by the Romanian government, 25% jointly owned by the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation, 8% by employees and the remainder in the hands of institutional investors.
BCR, a spokesman claims, possesses 25% of Romania’s total banking assets, 26% of loans, 28% of deposits, 31.3% of capital, a cost/income ratio of 50%, 370 branches by the end of the year and 35.5% of all profits in the industry. Shareholders’ equity is €1.1bn, and whichever bank “wins” will take charge of 5.5 million customers with around nine million accounts.
Industry players are divided as to who will or should come through. As an established central European player, Erste is an intuitive guess – the bank is also thought to be putting in the higher bid. But one foreign banker expresses surprise that it has fought so hard for BCR: “Erste is stronger on the commercial lending side; BCR has built up a major retail business.” Another competitor suggests: “If Erste picks up BCR, it will have a lot of restructuring to do. It really is quite a different operation [to existing Erste branches].”
Some industry observers were surprised that Millennium BCP still has its hat in the ring; but it fits in with the Portuguese bank’s recent acquisition pattern, which has seen it pick up outfits in Greece and Bulgaria.
According to Kurt Geiger, director of financial institutions at the EBRD, this vigorous competition is a “vindication” of its strategy in Romania, and “an excellent measure” of both the EBRD’s efforts to turn BCR into an attractive prospect, and Romania’s ongoing reform process as it moves toward EU membership.
The EBRD took a stake in BCR two years ago after the government’s privatisation attempts failed. One main reason for this, says Mr Geiger, was that the investor community had no faith in the goods or the seller.
In some respects the EBRD cut its teeth in Romania. But the sale of its stake in BCR will represent a real feather in the EBRD’s cap. Having bought into BCR in 2003, it recommended wholesale restructuring. “Of course, this isn’t finished – it would take more than 24 months to do so – whoever wins the bid will have to continue this work,” says Mr Geiger.
By sheer dint of its size, the BCR deal overshadows the privatisation of the Romanian savings bank CEC. But what CEC lacks in market share (it claims 5.6%) it arguably makes up elsewhere, boasting possession of more than 1400 branches across the country.
This might prove more a curse than a blessing; many players are putting more store by ATMs, telephone and internet banking than they are by on-the-ground presence in every village or town. But this has not deterred Monte dei Paschi di Siena Bank, Dexia Bank, EFG Eurobank, National Bank of Greece, OTP Bank and Raiffeisen, from trying their hands. Erste Bank has put in a bid, as back-up, in the event that they don’t win BCR.
Buying your way into the market is a tried-and-tested route. Austria’s Raiffeisen, for example, took Banca Agricola out of government hands in 2001, is now number three by assets and enjoys 9.2% market share. Its compatriate HVB did a similar thing, consolidating an existing presence through its summer 2004 acquisition of Banca Tiriac.
But it is not the only way. ING chose organic growth all the way, starting operations in 1994, and growing steadily since while eschewing the acquisition path. Dirk Serbruys, chairman of its Romania operation, says that after Poland, the country is the most important aspect of its CEE portfolio. “These are the two countries [in the region] where we have three active business lines: wholesale banking, life insurance and retail. From a region-wide perspective, if you take both countries together, that represents 55% of the population of central and eastern Europe.”
Service industry gains
Banking activity is also driving up income for the service industries. The relatively small number of international-calibre law firms in Bucharest will have had some difficulty avoiding conflicts in the privatisation bids. Others are advising government ministries on drafting regulation; a boom in financing of infrastructure projects all helps pay the rent on a Bucharest office.
Obie Moore, managing partner at the Bucharest office of international law firm Salans, has overseen a diversification of finance institution related activities, even in 2005: “We’re seeing more leasing, insurance, mortgage deals.” He says clients include ABN AMRO, a major Austrian bank, a French bank and one of the parties in the current privatisation round, BRD Sogelease, and the EBRD. But he adds that a volume of activity is no accident and praises the Romanian central bank: “Romania is different to other jurisdictions in the region in that the national bank has established itself as a credible and reliable regulatory body – it’s a real bright spot in the Romanian economy, and deserves full credit.”
If the banking community has any regulatory concerns, most relate to the national bank’s attempts to regulate credit. Last year, foreign currency loans outstripped their counterpart in domestic currency and the bank, fearing meltdown of the leu, intervened, applying a 30% reserve ratio on foreign currency-denominated loans and reducing the reserve ratio on leu-denominated loans from 18% to 16%.
Mr Moore thinks the policy could have done with “fine-tuning”. The partner of a local investment bank is more forthright: “The government is trying so hard to regulate credit that it is affecting who lends what to whom. I’ve never seen the successful application of a policy like that, and I expect that it will increase the market for unregulated consumer finance, and for corporates to look for offshore solutions.”
Stock in trade
In other respects, bankers express satisfaction that the quality of regulation, and conscientious application of EU – compatible legislation is encouraging the industry to come of age. The same holds for the Bucharest stock exchange (BSE), which yielded some serious returns in the past year, and continues to do so.
Bogdan Campianu, of the capital markets division of Raiffeisen’s Bucharest office, says while relative to other countries trading volumes are not spectacular, their growth certainly has been. In 2000, the value of trading volumes on the Bucharest Stock Exchange was some $100,000. That figure is now between €14m and €15m. “We’re seeing a lot more foreign interest. Unfortunately, lack of liquidity is deterring some institutional investors.”
But the very architecture of the Bucharest capital markets is due for re-engineering. Besides the BSE, Romania has an electronic trading platform, Rasdaq, and a derivatives market in the city of Sibiu. A series of proposed mergers, first between the BSE and Rasdaq, then between that entity and the Sibiu exchange, will rationalise transactions, creating one central exchange.
ING’s Mr Serbruys expects this process to result in more products and more transactions. He tells The Banker: “We think the national bank will take measures to ensure the right regulatory framework exists to support more derivative instruments, such as interest rate swaps, and FRAs – the kind of products that exist in other central European markets.”
Given the pace of change, that could happen soon.
