Clare Nuttall in Bucharest -

Romania’s banking sector is entering a new lending cycle with the focus firmly on local-currency lending. Banks are optimistic about a revival in lending in 2014, though high levels of bad loans remain a concern.

Figures from the first quarter of 2014 show that things are already improving. Romania’s largest bank by assets, Banca Comerciala Romania (BCR), which returned to profitability in 2013, reported net profits of RON1bn (€200,000) in the first quarter of 2014, compared with a net loss of RON10.2m in the same period of 2013. Romania’s other top three banks – BRD and Banca Transilvania – announced an increase in profits, as did many other smaller banks.

Bankers are also confident about the prospects for a revival in lending in 2014, according to the latest Romanian Banking Barometer released by the Romanian Banking Association (ARB) and Ernst & Young in April. More than 80% of banks surveyed said they expect lending to increase this year. Over 65% of banks expect an increase in demand for consumer loans, and 70% forecast higher corporate demand. This follows a contraction in lending in 2013.

Alongside the anticipated increase in demand for credit, banks expect a partial relaxation of lending policies in certain sectors, said Radu Gratian Ghetea, chairman of the board of the ARB, on the release of the barometer. These sectors include manufacturing, IT, agriculture, telecommunications and healthcare, as well as lending to small business.

BCR’s chief economist Radu Craciun considers that Romania is now at the beginning of a new post-crisis lending cycle. “I think we are entering a new stage and starting to see the light at the end of the tunnel,” he tells bne. This follows the deleveraging process that followed the crisis, as both banks and borrowers became more risk averse. At the same time, the mother banks of Romanian lenders withdrew funding lines for the local subsidiaries.

However, “the pattern is different” today, Crăciun adds. “Before the crisis, the booming credit market was strongly led by hard currency loans, with local currency loans - which at the time were pretty expensive - growing by a much lesser extend. Now the focus is on local currency lending rather than fx loans.”

Forex loans

While foreign currency lending never reached the excesses of, for example, the boom in Swiss franc lending in neighbouring Hungary, it was the main growth area pre-crisis. Recently, however, several banks have scrapped foreign currency lending to individuals, while new regulations requiring stress testing for companies planning to take out foreign currency loans has filtered out many potential borrowers. Local currency loans are now being “pretty aggressively pushed” by Romanian banks, Crăciun says.

“The trend has been towards a larger takeup of local currency loans,” Jim Turnbull, senior adviser on local currency and capital markets, to the European Bank for Reconstruction and Development (EBRD) said at the Emerging Funding for the Real Economy conference in Bucharest on May 13. “This is to a large extent because of regulatory restrictions on borrowing in foreign currencies. There is a regulatory preference for greater use of the RON, especially for lending to borrowers who can’t hedge themselves against currency fluctuations.”

Lei deposits are also building up, especially on the corporate side, as many companies that have been rendered risk averse by the crisis put investment projects on hold. This, however, is expected to change after the Romanian economy raced ahead of others in the region, growing by 3.5% in 2013; a slightly more modest 2.5% growth is expected this year, according to the European Commission’s 2014 Spring Forecast.

Fears of a contagion effect on the Romanian economy from the conflict in neighbouring Ukraine have not yet been realised. Indeed, the Romanian government took advantage of record low borrowing cost to raise €1.25bn though an April 15 Eurobond issue.

A bigger issue for Romania’s banks is dealing with bad loans; at over 22% the problem loan ratio is among highest in Europe. The European Commission warns that credit growth is expected to “remain constrained by the ongoing deleveraging of households and banks. 

The Romanian Banking Barometer also reveals concerns about the regulatory environment concerning dealing with problem loans - 85% of respondents said that both Romania’s legislation on insolvency and the way it is applied discouraged lending.

The scale of the problem did not become fully apparent until December 2013, when the central bank launched an investigation into the way banks reported their problem loans. However, Crăciun believes the sector is over the worst. “I think the adjustment process will take some time, but I don’t think there is any more downside potential - things will start improving,” he says.