Moldova’s central bank has been encouraged by the "competitive interest" in significant stakes up for sale in two of the country’s top three banks, deputy central bank governor Cristina Harea said in an interview with bne IntelliNews. This could result in the entry of international banking groups to a market that has until now been mainly the target of corrupt and untransparent investors.
Beside the regulatory reforms currently underway, the right investors might completely change the face of Moldova’s banking market and improve access to finance for companies, households and the government. This in turn could radically improve the image of a sector that until 2014 had been involved in massive money laundering schemes (with some $22bn channelled through the country from Russia) as well as the now infamous $1bn frauds, which saw money siphoned off from three local banks that were later liquidated.
The impact of these scandals on the banking sector are revealed by indicators such as the fall in the stock of loans. Banks' claims versus non-government customers have decreased nominally since September 2015 and they were 10% down y/y in May 2017. Banks' claims versus the government, by contrast, increased from 1.4% of total claims at the end of May 2016 to 24% one year later, as banks have financed the government to a larger extent amid delayed disbursements from foreign partners and higher public debt service due to the need to cover the losses in the banking system.
The sector now seems to have turned a corner, however. Moldova’s central bank expects a recovery of financial intermediation, but no sooner than 2018, after the banks are streamlined and new banking regulations making possible better risk management are in place.
Among the steps taken by the central bank are the blocking of voting and other rights of certain shareholders in both Moldova Agroindbank (MAIB) and Moldindconbank (MICB) after they were found to have been operating as a coordinated group. The authorities are now forcing the blocked shareholders to sell their stakes in the two banks as part of a process aimed at enforcing shareholder transparency requirements.
Together, the two and Moldova’s third largest bank Victoriabank account for around 60% of the banking system’s assets, and the identity of the buyers of the stakes in MAIB and MICB is therefore of critical importance for the sector’s future. While the central bank has the power to temporarily bring banks that require remedial measures under special supervision, longer term development can be ensured only by solid owners.
“Moldova’s central bank is putting a lot of effort in attracting high standard foreign investors to the country’s banking sector. The investors that showed interest have a significant footprint in the region. We hope to actually witness a competition among the most reputable bidders,” Harea hinted. Despite the recent scandals, she points out that Moldova’s banking system is in fact relatively profitable.
More banks could follow. One significant Victoriabank shareholder has been fined for failure to comply with disclosure requirements and similar steps might be undertaken in future. However, the fined shareholder is reportedly in process of finding itself a buyer for its 39.2% stake.
The remaining Moldovan banks will also be screened for the ultimate beneficiary owners and credits extended to entities affiliated to shareholders. Stakes in other banks might thus be put up for sale in the coming months. The banks with the weakest transparency rating according to the methodology of Expert Grup think tank are Energbank and Victoriabank, according to latest Expert Grup rating update in April 2017. The two are rated three stars out of five, corresponding to banks where there is no information about certain shareholders, or where some of them are categorised as risky.
Off the international radar
Moldova’s experience with professional international investors in the sector has been limited but positive. Just a handful of Europe’s major banking groups — Societe Generale, Erste Bank (through Romania’s BCR-Erste Bank), ProCredit and Eximbank (recently taken over by Intesa Sanpaolo) — are already on the market.
Banks like Societe Generale's Mobiasbanca have performed very well because they screened and evaluated the projects that they financed, rather than just requiring collateral as many other banks do. The bulk of the non-performing loans (NPLs) in Moldova’s banking system are related to a few large companies exposed to adverse shocks, while consumer loans and the loans extended to small and medium sized enterprises have the lowest NPL ratios, the central bank official explained, commenting on the impairment losses, one of the typical post-crisis issues hindering banks’ profitability.
However, Mobiasbanca is one of the exceptions in Moldova. In general, the local market has failed to attract foreign banks’ interest because of the weak regulations allowing quasi-anonymous shareholders use financial institutions for fraud, resulting in reputational or more tangible risks.
Various media have reported that Hungary’s OTP Bank and Belgian KBC are interested in regional expansion. Yet given the hit that recent scandals have given to the reputation of Moldova — and in particular its banking sector — the arrival of strategic investors is can by no means be taken for granted.
“We do not take no for an answer,” emphasised Harea, when asked about the gloomy scenario of no investor showing up for the two largest banks in the sector, “and keep exploring all options”. Indeed, given that the central bank has deferred the deadline for the sale of the stakes in MAIB several times, while the stake in MICB has not yet been formally put up for sale, questions have emerged about whether there really are prospective bidders at all. Asked about what would happen if the shares were not sold to investors and have to be re-purchased by the banks themselves or cancelled, Harea said “We will act in a way that ensures the banks are not decapitalised”.
Banking sector overhaul
What may encourage potential investors to take a chance on the sector is the recent concerted effort by the new team in charge at the central bank to reform the scandal-plagued industry.
“What we are doing now is cleaning the market, establishing new rules and regulations, and attracting investors by securing transparency,” Harea said.
Moldova’s central bank has already made enormous progress in terms of drafting, passing and enforcing new regulations since the new management headed by governor Sergiu Cioclea was installed in April 2016, in the aftermath of the $1bn fraud crisis. The central bank itself gained tremendous credibility, after it was suspected of having at least closed its eyes (if not actually encouraged) some frauds that gradually accumulated into what surfaced in 2015 as “the theft of the billion”.
Most of the progress was achieved under the programme signed last autumn with the International Monetary Fund (IMF). A large number of pre-conditions were attached, mostly related to the banking system, and the programme itself is heavy on the banking system side.
“The programme [with Moldova] aims to tackle long-standing vulnerabilities rooted in a nontransparent shareholder structure of the banks and weak supervisory and regulatory framework of Moldova’s financial sector,” says the press release issued when the two sides reached a staff-level agreement in July 2016. The programme was signed with the IMF for a period of three years.
Harea also noted that banking sector reforms are part of financial assistance programmes currently being negotiated with the European Union and the World Bank. She also implied that the lack of interference from local politicians has facilitated the progress. Typically, the time lag until reforms in a banking market pay all their dividends is around ten years, but the Moldovan central bank hopes to see a transformed banking environment in three to five years.
A mess to tidy up
The emergency loans extended to the three banks later liquidated left a large amount of money on the market that still has to be sterilised, according to analysis by the German Economic Team (GET), the Moldovan division set up by independent economic policy consulting group Berlin Economics to provide advisory to the Moldovan government, presented at the regional business forum organised by the Black Sea Trade and Development Bank (BSTDB) on July 3 in Chisinau. Some MDL16.3bn (€800mn) should be absorbed by the central bank, entailing a cost of some MDL1bn (€50mn) per year according to GET estimates. The impact of this loss on the central bank’s financial results could curtail the monetary authority’s independence.
The GET recommended lower interest rates on required reserves and the sale of “historic” (long-term under special arrangements) bonds. The issue of certificates, which is the costly method used currently, should be used only for fine-tuning in liquidity management. The GET also suggested that the ministry of finance could coordinate with the central bank in absorbing the liquidity.
Harea confirmed that the monetary authority is currently analysing these options. The central bank is looking at how to deal in a more efficient way with the excess currency, but will announce specific policies only after evaluating alternative options.
However, the bank has to deal with the seasonal surplus on the foreign currency market (a result of the large inflows of remittances compared to the size of Moldova’s GDP) as well, she added, which complicates the problem. Solving the problem on one of the markets (money or forex) would shift the pressure to the other market.
Meanwhile, the draft bank law, drawn up in line with Basel III requirements in the context of the European acquis, is the core piece of legislation for setting in place a better prudential and supervisory frame in the banking system. The draft law has already been approved by the government, and the parliament is expected to pass it this autumn.
Technical technical assistance provided by the Romanian and Dutch central banks has already been an anchor for the Moldovan central bank’s transition to Basel III compliance, Harea explained. The new law will improve the supervisory function of the monetary authority and the risk management functions of commercial banks, she confirmed. This will in turn strengthen the banking system’s resilience to external shocks and make it attractive to foreign investors as well.
However, the regulatory framework needs further improvements in a long series of areas. The central bank law (law 548), should stipulate more independence for the members of the monetary authority’s management by allowing the parliament to dismiss them only if two-thirds of lawmakers vote in favour, according to the latest Financial Monitor from Expert Grup.
The same members should be required to abstain from working for regulated entities (such as banks) for a longer period of time before and after their term than the one year under current regulations, the think tank said. The central bank should also be better regulated when extending emergency support. Also among Expert Grup’s recommendations were safeguarding competition and preventing abuse of dominant position in line with Regulation 596/2014 of the European parliament, particularly given the high concentration on the market. Finally, membership of the boards of two or more banks should be explicitly forbidden by law, Expert Group argued.