DEVELOPMENTS IN THE BANKING SECTOR
The banking industry of Romania can and wants to contribute to the sustainable development of Romania and of the Romanian society in general. Credit institutions have a major contribution to economic growth and to mitigating social and fi nancial exclusion. This is a desideratum whose reaching can be accelerated, by contemplating a balanced and predictable normative framework which would allow for enhancing the amenity of the local market and the full turning to account of the industry’s potential, to the end benefi t of all the Romanians.
The national banking sector maintains its soundness, with the solvency and liquidity ratios standing at the highest levels compared to other European Union Member States. The solvency ratio stood at 20.71% in December 2018 (19.60% in June 2019) much over the average of 8% recommended and also well over the EU average. Liquidity stood at an adequate level at the end of March 2019, the main ratios standing above the minimal regulated statutory values.
The liquidity ratio stands at 256% (the liquidity coverage ratio). The quick ratio improved marginally at aggregated level (by about 0.5 percentage points), to around 37%, according to the NBR. As regards asset quality, the positive trend of specific ratios has consolidated. The NBR Report on fi nancial stability mentions that “the health of the banking sector has continued to be adequate compared to risks, but vulnerabilities are on an upward trend”. It is important that the stakeholders in the banking sector and decision-makers alike be open to a constructive dialogue with the banking sector – taking into account the role of this sector in the economy – and adopt measures to maintain the sector’s stability and to enhance fi nancial intermediation needed for Romania’s economic development. Romania’s convergence speed can be improved by eliminating the national barriers generated during the law-making process. In Romania, many of the legal initiatives targeting the banking industry have been accompanied – at discourse level – by messages related to the banking industry’s profitability.
Constantly, the idea that banks in Romania obtain high profits was fuelled, even the highest profits in Europe, some said. This information is false, leading to the creation of a false perception which “justifies” somewhat – as its initiators think – the sector’s taxation, the applying of interest caps etc. In addition, certain legal initiatives fuel the population’s unrealistic expectations and create hostility toward the industry. Such opinions generate for the industry artificial and unpredictable risks that, at the end of the day, translate, one way or another, into financial and image costs.
A brief profitability analysis across certain industries shows that our banking sector does not rank number one in this matter. Thus, in 2018, the return on bank equity was overtaken by the return of trading companies (23.6%), of services (21.6%) and of the DEVELOPMENTS IN THE BANKING SECTOR 31 manufacturing industry (18.2%). The top was the same in 2017 too. Last year, the return on bank equity stood at 14.9%, a level relatively similar to the one in agriculture (14.7%) and in the construction industry (14.2%).
But, let us analyse the profitability of the Romanian banking industry compared to the one in the European Union. If we take into account the last decade, in case of a complete image, Romania ranks number 11 in the European Union, with ROE, the return on equity, standing at 4.65% during 2008-2018. Bulgaria has a return on equity almost double compared to Romania (8.34% versus 4.65%), just like other countries in Central and Eastern Europe for that matter, such as Poland (9.15%) and Slovakia (9.50%), while the Czech Republic has a level almost three times higher (12.91%).
As regards the return on assets, here Romania ranks behind the countries in the region. So, with ROA standing at 0.51% during 2008-2018, Romania ranks number 8 in the European Union, lagging behind countries such as Slovakia (0.88%) or Poland (0.97%). Other countries had a double level compared to Romania, such as Bulgaria (1.05%), Estonia (1.08%) and the Czech Republic (1.15%). Moreover, in conformity with the conclusions of the latest NBR Report on financial stability, ”the capacity of the Romanian banking sector to support on long-term the profitability obtained recently in the existing structure is limited”, the challenges, starting with the year 2019, being associated, among others, with the asset taxation measures.
In conclusion, the statement that, in Romania, the banking sector is the most profi table one across the entire European Union is not true. In Romania, the legal framework relevant to banking has undergone numerous transformations, some necessary for the harmonization of the Romanian legislation with the one of European countries, while others generating volatility. In the last 5 years, the unpredictability of the legal framework on banking has accelerated by the recurrent increase in the number of the laws and regulations adopted (about 50 new laws during 2014-2018).
Five of them were declared by the Constitutional Court fully unconstitutional or, in one case, partially unconstitutional. They have culminated with the introduction of a tax on banks’ financial assets. Although the impact of introducing a tax on financial assets seems to be only on banking institutions, the final cost will be paid by society in general, due to the shrinking of lending with a strong negative impact upon consumption, output and investments and, implicitly, upon the state budget, in the future.
There is high risk that the tax on banks’ financial assets produces negative chain effects across the economy, with a direct impact pertaining to the shrinking of economic growth. Moreover, Romania – the European state with the lowest level of fi nancial intermediation in the European Union, i.e. about 26.6% – has the highest tax on financial assets in the European Union, 0.4%.
It is a counterproductive approach, the solution being to give up this tax. Giving up the additional taxing of the banking sector will enhance its capitalisation capacity based on the profit earned and will create the incentive needed to reach the targets related to enhancing financial intermediation. During 2008- 2016, banks increased their own funds by about €3.5 billion, of which 23% was the reinvested profit.
The profit cumulated during the same period amounted to €1.3 billion, which means that the reinvested profit represented about 60%, according to a survey on enhancing financial intermediation in Romania drawn up by PricewaterhouseCoopers. This situation led to more own funds available and implicitly to enhancing the capacity of supporting lending. In order to enhance financial intermediation, banks need capital, liquidity, legal predictability and bankable customers. With this imposed tax, in its initial form at least, Romania was in danger to be downgraded by rating agencies, the risk incurred being Romania’s inclusion again in the “junk category”, i.e. country not recommended for investing. This danger was not fully removed yet, contemplating the fact that the monitoring of the effects of the ordinance on introducing a tax on financial assets next to other legal initiatives has not been completed yet.
Due to the effects of this ordinance, a rating agency downgraded the rating outlook for several commercial banks of Romania, changing it from “stable” to “negative”. The banking community regrets the fact that the introduction of a new reference index calculated exclusively based on interbank transactions – for the computation of variable interest rates for consumer loans, did not happen fast enough.
During the discussions, we departed from the introduction of a new reference index without a previous, complex analysis and for a longer period of time. We are of the opinion that the consulting process should have been more inclusive and much longer, in order to provide an adequate assessment of its impact. The new reference index refl ects mostly short-term transactions and, as such, could mean a transfer of risk and volatility to customers.
Financial intermediation (weight of assets against the GDP) reached 51.7%, a lower threshold compared with last year when it stood at 53.7%. Financial intermediation is half compared to Bulgaria (99%), Hungary (93.53%) and Poland (90%).
The assets of the Romanian banking sector amount to 451.2 billion lei. At the end of last year, the Romanian banking system included 34 credit institutions composed of: two banks with fully or majority Romanian state-owned capital, four credit institutions with majority Romanian private capital, 21 banks with majority foreign capital and seven branches of foreign banks.
In Romania, about 75% of the banking sector’s assets were held by institutions with foreign capital in 2018, a downward trend compared to 91.3%, the level at the end of 2016.
The premises for a more intense process of consolidation across the banking sector via mergers and acquisitions still exist, in the context of more encroaching competition, the need to cover operational costs – including via increasing the market share held – and the decisions taken at group level to give up certain markets. There are positive developments as regards the NPL rate.
It shrank to 4.74% in June 2019, contemplating the continuation of cleaning banks’ balance sheets. The NPL rate went down 4 times in four years. The NPLs provision coverage across the banking sector improved and kept standing at an adequate level, i.e. 58.7%, at the end of March 2019.
This indicator shows low risk at aggregate level. Banks have continued to adjust their staff number, compared to the about 55,000 employees at the end of 2017. The positive performance as regards profitability was accompanied by the acceleration of lending, even if financial intermediation in Romania is the lowest one among the states of the European Union (26.6%), down from 40% in 2011.
Lending is one of the few instruments via which Romania can catch up as regards the gaps against the European Union when it comes to using banking products and services, financial intermediation or the level of financial literacy.
And this is precisely why regulating is so important, next to finding viable solutions that would foster sound lending and not hinder it, as we saw things happening lately, following some legal initiatives relevant to banking. Non-government credit advanced by 7.9% in 2018, at a growth pace for the lei-denominated loans of 13.4%.
Currently, the lei-component has a weight of 66% against non-government credit. Lately, banks’ business model targeted mainly the population segment, corporate lending growing at a slower pace. But, for the next three years, the lending and funding strategies of the main banks in the sector contemplate more corporate lending and less lending to households.
Thus, in the next 3 years, corporate lending is to have the highest annual growth pace, i.e. 10.9% (with an almost 13% growth in 2019). In the case of SMEs, lending is to grow at an annual pace of 6.9%, while household lending is to grow at an annual pace of 3.4%. More focus on companies – by raising their sustainable indebtedness potential – continues to be a real challenge for domestic banks. Equally important besides capital and liquidity, enhancing companies’ usage of bank services and products and developing solutions to guarantee loans for SMEs are both badly needed. In Romania, companies’ capability to access loans is like the leopard-print.
When it comes to access funding, surveys show that companies have been facing problems such as not enough eligible guarantees, the lack of know-how for structuring projects viable from a financial point of view, the undercapitalisation of companies (in Romania, 40% of companies have negative capital), bureaucracy, excessive procedures to obtain EU funds and a low level of financial literacy. If we analyse the economic and fi nancial performance of non-financial companies, we notice that in the case of ROE, the advance was 0.5%, i.e. to 17.1%, while ROA reached 6.9% (compared to 6.5% in June 2017).
The ratio between commercial credit and financial credit is about 3:1, a situation which increases the risk of fi nancial blockage, namely of insolvency. On the overall, the outlook for the banking sector’s development is optimistic, but we have to underline the importance of an on-going dialogue with the authorities. The authorities must accept the fact that economic experts have a major role in this partnership, in this dialogue.
Agreement for partnership is essential, essential for dialogue and for predictability, so that we can carry out successfully our role of financier of Romania’s economy.