Romanian private banking defies crisis with growth rates

Fearful of the falling yields in real estate investments, wealthy Romanians are turning to private banking to maximise their cash revenues. Report by Corina Ilie

Unlike many financial segments strongly hit by the economic crisis, Romania’s private banking segment has grown in customers and its volume of assets in the past 18 months.
The typical customers of the private investment division of banks are those with cash exceeding 50,000 Euro, an appetite for medium risk and a willingness to shift gradually to more complex and innovative banking products.
Concerned with the steep decline in yields on the market, especially in the case of real estate investments and investments in start-ups, cash-rich customers have refocused on more secure destinations for their money, such as state titles, Eurobonds and structured products.
“We opened the RBS Preferred Banking division at the end of 2007, when the yields on the real estate market were exceeding 300 per cent and no one was willing to think about savings or investment products,” says Marijana Vasilescu, director of RBS Royal Preferred Banking. “But the crisis helped us because people became more careful and focused on structured products, instead of random investments.”
RBS Royal Preferred Banking has two branches in Bucharest and another in Constanta and dedicated agents for Brasov, Timisoara and Cluj-Napoca, where the number of customers is not yet high enough to open branches.
The division increased its number of customers from 300 in 2008 to 2,000 in 2010, while the volume of managed assets rose by 120 per cent in 2009 on the previous year to 50 million Euro. “This year our growth target is 250 million Euro, but I think this target can be exceeded,” says Vasilescu.
In Romania there are between 100,000 and 150,000 people with high income who could qualify for private banking and around 15 banks from the 42 present in Romania that have dedicated divisions.
In the past three years most of these banks, including Dutch ING Bank, American Citibank, Great British RBS, Austrian Raiffeisen Bank and Hungarian OTP Bank, have expanded their private banking divisions in Bucharest and into large cities with financial potential, such as Timisoara, Arad, Cluj-Napoca and Constanta, where they have increased considerably the number of customers and managed assets.
“We estimate that the number of customers for private banking is increasing, although the active portfolios were affected by the financial fluctuations, especially in the real estate segment,” says Roxana Puianu, director of the top customers sales department, retail banking division at Raiffeisen Bank Romania. “A large part of the customers who used to look at the real estate sector redefined their options and now prefer to keep their liquidities in the bank in short and medium term deposits.”
Raiffeisen Bank increased by 25 per cent its number of private banking customers in 2009 on 2008 and by another 15 per cent in the first half of this year. The service branded “Friedrich Wilhelm Raiffeisen” counts now 2,000 customers in Romania.
“Premium Banking - the newest serviced launched by Raiffeisen Bank in March 2009 - targeted the customers who qualify for a service that requires less capital than private banking and had a more dynamic development,” says Puianu. “A customer can benefit from this service if he or she has at least 15,000 Euro for investments and withdraws a minimum of 1,000 Euro monthly through Raiffeisen Bank.”
Meanwhile OTP Bank has 200 customers in private banking and plans to reach 400 by the end of 2010. It manages assets worth in total between 20 and 30 million Euro, according to Gabriel Cretu, director of distribution channels and branch management at OTP Bank.
“In western Europe most individuals have a junior bank account by the time they are 18 years old and an insurance policy,” says Cretu. “In Romania people found out about banking products much later in life and a lot of information about many products came at the same time. Customers and even the sales agents did not have time to understand these products properly. This is why this year’s strategy for OTP private banking is to explain more to customers how this service works and what its benefits and risks are. Very often, customers who did not manage to get the expected yields on their investments because of the bad evolution of the market, have the feeling that banks did not explain to them everything they needed to know to invest in successful products.”
OTP Bank plans to expand its private banking department in large cities such as Timisoara, Cluj-Napoca and Iasi. “It is more difficult to develop private banking in the south of Romania than regions like Transylvania for instance,” adds Cretu.
Citibank Romania launched its full-fledged private banking offer in October 2009 and the Citigold department is now present in eight Romanian branches. “Our strategy is to target the affluent, high net worth individuals, with assets over 100,000 USD,” says Luis Tomassoni, director of the retail banking division at Citibank Romania. “We have a distribution network of five branches in Bucharest and one branch in each of the cities - Timisoara, Ploiesti and Constanta. With these distribution points I think we cover the majority of wealth in Romania. The clients can range from self employed people to the typical high level executive in a local company or an expat.”

Threshold drops for crisis

Most banks have become more flexible during the crisis and say that even if they target individuals with assets over 50,000 Euro, they do not exclude the customers who do not have this precise amount at the beginning of the contract, but can create it from investments in three to six months. This is much lower than the threshold for private banking in western Europe, but the aim of banks in an emerging market such as Romania is to target and hold on to dynamic entrepreneurs, who are on the road to greater affluence. “We have a 50,000 Euro threshold, but we are willing to accept customers that have potential and can reach this amount in three to six months,” says Vasilescu. “We prefer to invite them in to show them the products and let the customers test our offer.”
The “Friedrich Wilhelm Raiffeisen” account has a minimum threshold of 75,000 Euro, while OTP Bank’s figure also stood at 50,000 Euro, but has dropped since the financial crisis began.
“We realised that we should not reject anyone,” says Gabriel Cretu, OTP Bank. “There are people who can bring assets even over 70,000 Euro, which we would not want as customers, while there are other potential customers who are important for the local community, such as actors, which we want to atract as customers, even if they do not reach the threshold, because they improve our image.”
Meanwhile ING Bank only targets customers able to bring assets worth over 100,000 Euro. “The motivation for this threshold is related to the specifics of the market,” says Dana Lupu, director of the private banking department, ING Bank Romania. “While on the developed markets the amount of high net worth individuals and ultra-high net worth individuals is around one per cent of the entire population, in emerging countries, such as Romania, this indicator is significantly below 0.5 per cent. We are witnessing the creation and consolidation of the first generation of millionaires in Romania and this is why the access threshold for private banking keeps up with this reality.”
The average value of the assets managed by ING Bank is 400,000 Euro. “For the time being the revenues registered from private banking contracts are still low in Romania compared to other countries, where this service has been developing for years and the customers’ willingness to try new products is higher than here,” adds Lupu.

Bonus bonanza

Banks grant facilities to their private banking customers with an aim to reflect their clients’ social status. Each customer has a personal banker which assists him or her in any issue related to the bank, from opening an account and current banking operations, such as payments, to designing an investment portfolio. Some banks also try to offer luxury benefits related to lifestyle, such as free transport by limousine to and from the airport, invitations to art exhibition openings, concert and theatre tickets or access to special credit cards, such as VISA Infinite, which includes medical insurance worth up to ten million Euro.
RBS Private Banking has a deluxe lounge at the World Trade Center on Piata Montreal in Bucharest, where its customers have access to free Internet and complimentary meeting rooms. “This is something very important for those who travel to Bucharest from other cities for business,” says RBS Bank’s Marijana Vasilescu.

Risk averse

The crisis has tempered most Romanians’ appetite for risky investment products, including investing in real estate. More secure investments, such as Eurobonds or state titles, are more appealing than the Stock Exchange, which has attracted less people in the last two years, even if the yields are still high. The trend at the moment is for customers to diversify and spread their risk, and look to alternative products offered by each bank. To protect their investments, private banking customers choose to place their assets in a variety of products, each with different degrees of risk.
After talking to the customer, the private banker draws up his or her risk profile and tries to come up with structured products which correspond to this risk profile. Some banks, such as Citibank, advise their clients on which investment portfolios to chose, while banks such as RBS stick to consultancy, present the offer and allow the customer to decide alone on the best products.
“When we are talking about a niche like high net worth individuals, the customers are very complex and have different risk tolerance,” says Tomassoni. “Investment options range from Treasury-bills (T-bills) to structured products.”
Structured products can be transacted on the Bucharest Stock Exchange as of this year, after the Romanian National Securities Commission (CNVM) approved some modifications in the Code of the National Stock Exchange. They are complex products and can vary from Stock Exchange indexes, certificates and warrants. High net worth individuals, banks and investment funds use them to protect themselves from risks and taxes. The warrants and certificates are bought by owners of goods or properties with a high degree of risk and insure the owners in the case of an economic downturn. The warrant provides liquidity to the issuer and takes over its risk.
There are also investors who want to split the risks of some goods between other investors or investments. When the banks find out about these needs, they create bespoke structured products for their customers. These products can prove to be highly profitable.
“We have some structured products developed with the Treasury which are easy to understand for our customers and in high demand during the periods of volatility,” says Vasilescu, “and the Euro-RON volatility was very high at the beginning of 2009, which triggered high yields.”
During the times of economic boom Romanians were more focused on yields, but now their interest has shifted more towards sophisticated products, according to Tomassoni.
“Romanian customers are conservative but they are realising more and more that an investor has to look beyond the interest rate and start looking at diversification,” he says. “The traditional view was to hold on to cash, while now they want to diversify and have access to a wider set of products.”
ING Bank also sees a lack of appetite for high risk investments. “Most of our customers are moderately conservative and their most common placements remain deposits, the guaranteed bonds and the investment funds with low risk, prudent management and relevant history,” says ING Bank’s Dana Lupu. “A portfolio with medium risk that invested in mutual funds last year registered a maximum yield of 7.84 per cent in Euro and 20.03 per cent in RON. A high risk portfolio that invested in mutual funds derived in 2009 a maximum yield of 68.7 per cent in Euro and 60.12 per cent in RON.”
The banks feel now that informing and educating their clients about diversification and creating products with superior yields under the current economic situation are the most important challenges for the private banking segment this year. The growth potential for this segment remains high for now and in the near future, considering that many high income individuals do not benefit yet from specialised wealth management and keep their money in traditional banks.