The banking sector of Romania
The Romanian banking sector maintained its structural stability during 2016, the level of the solvency and liquidity ratios standing at adequate levels with the quick ratio being 40%. The solvency ratio across the banking sector stood at 19.83% at the end of June 2017. Maintaining the solvency ratio over the double of the minimum threshold of 8% established in conformity with the European regulatory framework CRD IV/ CRR was made mainly via the shareholders’ additional capital contributions.
During the economic and financial crisis, Romania did not need to bail out the banking sector with tax payers’ money while bank shareholders contributed with additional capital. During 2008-2016, banks increased their equity capital by €3.5 billion.
For the banking market, 2016 was the first year of the real operational profitability that banks had not had for a couple of years now, contemplating the going down of risk costs. ROA reached 1.10% and ROE stood at 10.42%. The banking sector had an adequate performance last year, taking into account that the process of optimizing the asset portfolio quality continued.The NPL rate went down by 2.3 times compared to its maximum registered in 2014.
The NPL rate, according to the EBA definition, shrank to 9.46% at the end of December 2016 and to 8.32% in June 2017. For 2017, we could continue to witness the reduction of the NPL rate i.e. to the middle of the interval, both due to the banking sector’s cleaning their balance sheets and due to the pickup of the secondary market for selling the property pledged as collateral and which is in diverse execution stages.
After almost a decade since the start of the global financial crisis, capital requirements were increased and new rules for liquidity were introduced, with impact upon asset maturity while credit risk assessment is much tighter. Credit institutions have had a substantial contribution to economic growth and to the reduction of social and financial exclusion.
We must enhance financial intermediation from the lowest level in the European Union (29 %) to a level closer to the countries we are compared with, or at least to the level registered in 2008, i.e. 40% nongovernment credit as percentage of the GDP. Even if domestic saving went up by 60% during 2008-2016 to €61bn., capital transfer did not happen at the same intensity as before the crisis. The weight of the banking sector’s total assets against the GDP shrank in the last 5 years by 14.1% to 54.8 % at the end of 2016.
Actually, we have witnessed an orderly withdrawal generated mainly by the absence of opportunities for placement or by less favourable conditions for return. Thus, we could say that Romania is no longer under the danger of the disorderly withdrawals that have affected the funding of banks during the crisis years, but the trend of reducing exposure continues to be present. Under these circumstances, banks must provide funding from local sources and the fact that the banking sector from Romania is profitable again and we have even operational profitability again – is a very good indicator regarding these risks.
The situation can be partly explained by the legal initiatives with retroactive enforcement which tended to affect the financial sector’s stability and which affected predictability and investors’ perception. 2016 generated many complex approaches as regards the image of the Romanian Association of Banks and of the entire banking community. On the one hand, 2016 was the year of antagonistic communication, RAB and banks being forced to explain more, contemplating the laws promoted during the pre-election period. On the other hand, from 2011 to 2016, the high level of trust customers had in the banking sector went up from 33% to 40%, according to the GFK survey conducted for RAB.
The outlook for 2017 is more than ever linked to trust as the main characteristic of the financial market. Trust in the soundness of the European banking sector, investors’ trust in the development of emerging countries in the context of uncertainties regarding global growth – and here we are of the opinion that, maybe, we will witness the reviewing on the macro-prudential framework, thus rebuilding at the end of the day the trust needed between customers and banks.
The RAB has the mission to contribute to the rebuilding of the climate of trust between the banking sector and consumers, including via financial literacy programmes. As regards the vulnerabilities induced by external decisions we continue to have Brexit. The AQR test of 2018, interest rate developments, the two-digit advance of new loans, a better relationship with customers, preparing for the implementation of IFRS9 starting with 2018 are next to the challenges induced by external developments the main concerns of the banking sector for 2017. The Brexit impact is still being analysed by the industry and depends on the way in which the negotiations between the EU and the UK will be finalized and on the EU’s capacity to adopt policies that continue the integration process. Although the implications will not become visible in the near future, Romania will have to calibrate its policies on medium and long term starting from the major challenges confronting the European community.
Banks adopt new business models and strategies in line with the new European regulatory requirements and function of an increasing competition. We must take many steps so as to contribute to lending to the economy, to participate as much as possible to the GDP formation and to enhance financial inclusion. The banking sector can demonstrate but once again its capacity and availability to participate to economic growth.
About 91% of the banking sector’s assets (approx. €87 billion) are held by institutions with foreign capital according to the NBR data for June 2017. The banking sector is marked by a period when mergers and acquisitions lead to more concentration, the number of credit institutions in the Romanian banking sector being currently 36 compared to 43 banks before the crisis. The structure of the Romanian banking sector at the end of 2016 included 37 banks of which 2 banks with fully or majority state-owned capital, 3 credit institutions with majority private domestic capital, 24 banks with majority foreign capital and 8 branches of some foreign banks.
The group of banks owning assets of more than 5% of total assets of the sector had a weight of 73.3% at the end of 2016, up by 2% compared to December 2014, while the group of middle-sized banks (with assets between 1% and 5%) had 20.4% (down by 2% compared to December 2014) and the banks with assets under 1% had a weight of 6.3%, according to the National Bank of Romania report. The NBR data shows that the volume of the equity capital in the Romanian banking sector was on 31 December 2016 of 25.75 billion lei.
The banking sector totalled about 4,841 outlets, while the number of employees was about 55,400 at the end of December 2016. We are of the opinion that the mark of the branches will continue to go down – maybe not due to cost reduction but rather due to an enhanced importance of a distribution channel compared to another. And here we have in mind digitalization, the second trend that we will continue to see and which is banks’ response to customers’ needs – namely to dedicate a volume of time as short as possible when they have to manage their relationship with their bank.