Developments in the banking sector
The local banking sector maintains its soundness with the solvency and liquidity ratios standing at confortable levels and with a quick ratio up by 2 percentage points, thus reaching 40%. The solvency ratio across the banking sector stood at 20.07% in June 2018, a level slightly higher compared to the similar period in 2017. The maintaining of the solvency ratio at more than the double the minimal threshold set in conformity with the European CRD IV/CRR regulatory framework, i.e. 8%, took place mainly due to shareholders’ additional capital contributions. The banking sector had a positive evolution generated primarily by extremely positive macroeconomic developments – and not only taking into account figures but rather contemplating the population’s trust in the economy in general, a level of trust which led to lending gaining momentum. Following the constant efforts of the banking sector, the NPL rate went down from the alert level to the signal level. The NPL rate went down to 5.71% in June 2018 (compared to 8.32% a year ago), the cut being a four-times cut compared to the year 2014.
At the end of 2017, the Romanian banking sector included 35 credit institutions: two banks with total or majority capital held by the Romanian state; four credit institutions with majority Romanian private capital; 22 banks with majority foreign capital and seven branches of foreign banks. In 2017, about 77% of the banking sector’s assets in Romania were held by institutions with foreign capital, a downward trend compared to the 91.3% at the end of 2016. At the end of 2017, the banks with Austrian capital had a market share of 25%, followed by the banks with French and Dutch capital (a 13.5% market share for each), those with Italian capital (10%) and the banks with Greek capital (9%). Banks adjusted their staff number in the sector to about 55,000 people, while the number of bank outlets went down to 4,500 at the end of 2017. Last year, very good results were obtained, and this positive trend makes us be optimistic about banks being able to focus their efforts and resources on their main business, namely to finance the economy and, implicitly, the Romanians’ welfare. The profitability ratio development was determined by the favourable macroeconomic context, by the significant reduction of the net expenditure with depreciation adjustments and by the low level of funding costs.
Thus, the banking sector’s profitability has continued to improve, with ROE standing at 15.71% in June 2018, compared to 12.91% in June 2017. ROA stood at 1.66% in June 2018. It is important to underline two aspects here: the need to analyse a ratio on a longer time horizon and the difference between accounting profit and fiscal result. Profitability should not be analysed only at a certain moment in time; we should rather contemplate longer periods of time.
When analysing longer periods of time – for instance the last ten years – the average yearly profitability of the Romanian banking sector stands at 0.3% as return on assets and at 3.2% as return on capital. Such an analysis reveals the fact that Romania does not rank among the front runners across European states as regards profitability. The second aspect is related to the clear distinction which should be made between accounting profit and fiscal result. Surveys conducted by well-known consultants mention the fact that most EU Member States allow the utilization of fiscal losses from previous years to offset future profits, except for Estonia which, because of the manner in which it applies tax on profit, cannot use past losses. There are 14 countries in the European Union which use unlimited-in-time recoverability (losses from future profits), namely: Austria, Belgium, Denmark, Germany, France, Italy, Ireland, Latvia, Lithuania, Malta, Slovenia, Spain, Sweden and the UK. In Luxemburg, they allow recoverability to last for 17 years, 10 years in Finland, 9 years in the Netherlands and 7 years in Romania. Thus, if a bank or a company incurs losses in previous years, future profits will cover these losses. This is the reason why, although they post accounting profit, this is not recorded in the fiscal result. During a crisis, the banking sector, at its turn, absorbed the losses from the economy. The financial results of the banking sector in recent years have been influenced by the effects of the economic crisis, by the measures imposed in order to strengthen the sector’s resilience, by the mitigation of credit risk via covering NPLs with provisions, by interest rate cuts and by the changing of the computation manner due to the conversion to IFRS starting with 2012. Many banks have already covered their fiscal losses and so we will see profit tax reporting. The positive performance when it comes to profitability was accompanied by the boosting of lending even though, in Romania, financial intermediation stands at the lowest level among European Union Member States (26.4%), down from 40% in 2011. Financial disintermediation was influenced, besides reimbursements, on the one hand, by the GDP’s fast advance and, on the other hand, by banks cleaning their balance sheets of NPLs. The weight of bank assets against the GDP stands at 50%. In comparison, across the EU, the weight of bank assets against the GDP stands at 255%, and in the euro area at 288%. The distribution of the financial sector’s assets in Romania shows that credit institutions hold a weight of 75.3%.
The forecast non-government credit annual growth is 6.4% for 2018, in conformity with banks’ strategies, taking into account the fact that, in 2017, the advance of non-government credit stood at 5.6%. The non-government credit balance returns to €50 billion, a level that we had at the beginning of the crisis, despite the fact that, meanwhile, we had full reimbursements, principal reimbursements, sales of fully provisioned NPLs etc. 2018 brought about changes in the structure of the loans granted to the private sector. Thus, at the end of March, the weight of lei-denominated loans represented 63.8% of total loans – the highest level post 1996. For 2018, there are signals that give birth to positive expectations. We expect that the Romanian banking sector maintains its soundness and carries out successfully its mandate of financier of the Romanian economy. From a legal/regulatory point of view, for the banking sector, the year 2018 has meant so far a number of challenges and here we could mention the implementation of IFRS9, the enforcement of law no. 258/2017 on payment accounts with basic features, the transposition of directive PSD2, the implementation of Regulation 679/2016 on the protection of natural persons regarding personal data processing (GDPR), the transposition of Directive 4 AML and some local legal initiatives related to consumers which are not in line with economic principles. As main risk to financial stability, the banking sector has been mentioning the legal changes that are not compliant with European law. The legal initiatives submitted – without any impact studies and without consulting the market players – could have unwanted effects, affecting on long-term lending and the population’s welfare. According to a KPMG survey drawn up upon RAB’s request, a potential reduction in household lending is estimated to have a significant impact on consumption, on output and on investments, as well as adverse effects on the state budget. Thus, a 5% reduction in lending has a negative impact on the GDP estimated to be of 1.8%.
The highest systemic risk identified by the National Bank of Romania (NBR) in its Stability Report published in June 2018, pertains to the deterioration of investors’ trust in emerging economies. The default risk on contracted loans granted to the non-government sector is a high systemic risk identified by the NBR in its latest report on financial stability. For the banking sector, the challenges which could materialise are related to the developments in interest rates – which until recently stood at historically low levels. Last year, the specific element was the reverse trend of the key rate, i.e. ROBOR going up, after a period of seven years of a downward trend. ROBOR’s current value is similar with the one we had four years ago, i.e. about 3%. Since ROBOR is a variable benchmark index, such movements are predictable, not forgetting the fact that it stood at historically low levels and therefore it was but natural to expect it to go up. Contemplating the fact that in 2017 we had a change of trend as regards interest rate developments, the Romanian Association of Banks has analysed the possibility of using on a wider scale fixed interest rates when lending to individuals. Hence, consumers could benefit from additional protection against the risk of variable interest rates; this supposes the setting up of some mechanisms that would foster fixed-interest rate loans. At the same time, we need to give momentum to the setting up of a secondary market for government securities with different maturities and we also need to have a yield curve, while encouraging the capital market to develop its corporate bonds segment. We had an increase in newly originated loans with fixed interest rates, i.e. 27% of mortgage loans and 79% of consumer loans granted during January – March 2018 are fixed-interest rate loans. By comparison, only 6% of the mortgage loans granted during the similar period in 2017 represented fixed-interest rate loans. The outlook continues to be an increase in interest rates, taking into account the fact that the NBR inflation forecast for 2018 is 3.6%, with effects on variable interest rates for the loans denominated in domestic currency, a situation which will implicitly influence the level of the instalments that must be reimbursed for the respective loans. We have already been witnessing increases in the monetary policy rate due to inflationary pressure up to 2.5%. Moreover, this trend of interest rate increases is an international trend and, in Romania, things cannot be different from other countries. In addition, the acceleration of the pace of interest rate increases can be generated also by circumstantial factors such as the withdrawal from the market of significant amounts of money like for example a better tax collection and the cashing in in advance of the dividends distributed by companies where the state is a shareholder. Similar to any other market where the supply goes down, less liquidity on the interbank market brings about higher prices, respectively ROBOR rate increases, in this case. RAB has issued recommendations regarding the risks associated to loan contracting in periods of time when the ROBOR index was at historical low levels and made public their opinion, in 2008 already, regarding the risks generated when using ROBOR as the benchmark rate for credit contracts, because of the index’s volatility. The banking industry from Romania can and intends to go on contributing to the sustainable development of Romania and of the Romanian society in general. Credit institutions have a significant contribution to economic growth and to the reduction of social and financial exclusion. This is a desideratum whose carrying out can be speeded up, in the presence of a balanced and predictable normative framework which would foster the enhancing of the local market’s amenity and the full turning to account of the industry’s potential, to the benefit of all Romanians, at long last. It is important that the banking sector’s stakeholders and the decision-makers be open for a constructive dialogue with the banking industry – taking into account this sector’s role in the economy – adopt measures to maintain the system’s stability and enhance financial intermediation so much needed for Romania’s economic development. Romania’s convergence speed can be improved by eliminating the national barriers generated by the law-making process.