Romanian recovery rubs up against banks' prudence

By bne IntelliNews February 14, 2012

Andrew MacDowall in Belgrade -

Romania's new government has a substantial in-tray to deal with, not least breathing more life into the sluggish economy. And the politicians know much will depend on whether the banking sector, whose business has stabilised recently, agrees to play ball.

Romania's growth rate is expected to be around 2-3% this year - a far cry from the boom years of 6.5% between 2003 and 2008, but acceptable given the circumstances, while unemployment has fallen and inflation hit a record low in January of 2.7%. However, the new government under Mihai-Razvan Ungureanu, which was approved by parliament on February 9, knows that it needs the banks' help to keep the economy from falling back into the recession it only emerged from in 2011.

Thus the comments from the governor of the National Bank of Romania, Mugur Isarescu, following the release of the quarterly inflation report on February 7, who called on the banks to stop raising interest rates on savings in order to increase their liquidity, as this was hurting consumption. "The prospect of consumption acting as a growth engine depends on the attitude of Romanians and banks who are competing to gain customers, which can be a double-edged sword," Isarescu told a press conference.

This approach by the banks is a direct result of the difficult years they have endured since the first wave of financial crisis brought to an abrupt end a banking boom that had seen credit growth soar to about 60% annually in early 2008.

The problem was that much of the lending was concentrated in non-productive sectors, particularly real estate, which was inflated by speculation. And when the bust came, Romania's banks were hit hard, first by exposure to the domestic crisis and the bursting of the real estate bubble, and then by the policy of mother banks overseas of drawing back liquidity to shore up their business at home. Foreign-owned institutions account for around 85% of Romanian banking assets (the precise amount has fluctuated slightly during the crisis), and the country's deep economic funk has been of concern to major European lenders including Erste Bank Group and Volksbank (both Austrian), France's Societe Generale, Italy's Unicredit Group, Hungary's OTP Group, and National Bank of Greece.

It's been a hard landing. Asset growth stalled in 2009 and 2010, while non-performing loans (NPLs) rose from 6.46% in September 2009 to 14.18% in the same month of last year. But a series of defensive measures by banks, combined with the Romanian economy's recovery last year, appears to have put the sector back on a more even keel - for the time being.

Towards the end of last year, the NPL ratio started to fall for the first time in years, to 14.1% in December. This is undoubtedly a high level by most standards - the EU average was just under 5.0% in 2011, according to a report by Ernst & Young - and the drop was a small one. But Vlad Muscalu, an economist at ING Romania, tells bne that the falling ratio is a symptom of recovery and he expects the decline to continue. Capital adequacy ratios average a respectable 14.5%, suggesting that banks are in a position to absorb some further shocks, if not a full-blown crisis.

Standing on their own two feet

So bankers are cautiously optimistic about the outlook, with some caveats: 2012 will be a slow year, downside risks exist and banks' approach will be more guarded than before. "The very modest growth outlook is likely to bring the banking market under pressure in 2012 both in terms of the demand for new loans and the saving potential of the economy, which is already one of the lowest in the region," Lucian Anghel, chief economist at Erste-owned Banca Comerciala Romana (BCR), Romania's biggest bank, tells bne. "Since the onset of the crisis, all the players strategically focused on a prudent business and a more diversified funding base with a view to increasing independence from parent banks."

Banks are vulnerable to the effects of the Eurozone crisis on the region's economies. Around 55% of Romania's exports go to the Eurozone, according to Anghel, and the 35% drop in foreign direct investment (FDI) last year can partly be attributed to the single currency's travails (as well as investor aversion to volatile Romania). A further worsening to the west will have repercussions for Romanian banks.

The issue of independence has been in the spotlight recently due to recommendations from the Austrian government that the country's banks limit their exposure to Emerging Europe. The proposals call on lenders to ensure that the loans they issue in the region do not exceed 110% of the financing they raise locally. While the plans have caused a stir, Vienna has issued assurances that it does not plan to make them enforceable regulations, something that Manfred Wimmer, CFO of Erste Group and a member of the supervisory board of BCR, insists must only be done with the agreement of the central banks of the countries affected by them.

Wimmer tells bne that he expects Erste's exposure to Romania (as elsewhere in CEE) to track recovering economic growth and consumer confidence, but that it would focus on local currency activities, taking a more conservative stance towards foreign-exchange lending.

BCR's Anghel, meanwhile, hopes that Romania's high reserve requirements (15% on leu and 20% on foreign currency loans) should provide a buffer for banks, while low interest rates could provide a leg-up for lending. Over the medium term, infrastructure projects that are just starting to feed through, improved absorption of EU funds (traditionally, pitifully low), as well as the potential for investment in sectors including energy and transport, bode well for much-needed domestic demand.

As ING's Muscalu points out, banks have good reason to be optimistic, given the scope for growth in an under-banked economy. "Foreign banks will stay here, as they know things will be different five years from now," he says. "The lending market is only worth around 40% of GDP, whereas it's 150% elsewhere in the region - that's quite some potential."

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