Liquid refreshment needed
Romanian banks are set to race for deposits as speculator appetite for the country dries up due to world financial woes, by Alexandra Pehlivan
With institutions such as 150 year old investment bank Lehman Brothers collapsing and foreclosures infecting the US economy, the international financial crisis is undermining the fabric of western capitalism from the family threshold to the boardroom table: but precisely what ripples will be felt in Romania are unknown.
For an emerging market such as Romania, one of the noticeable effects is the disappearance of high-risk investors. Meanwhile stock exchanges such as Bucharest and Moscow have seen panic selling push share prices to new lows. In Moscow, stock exchanges have crashed in two consecutive trade sessions and on the Bucharest Stock Exchange, the ten top liquid shares, the BET index, fell to its lowest level since December 2004.
“The stability of the financial system in the US is again in jeopardy and the Romanian financial system, in the stock exchange and the forex market, is feeling the shocks,” says Ella Kallai, chief economist of Alpha Bank Romania. “Nobody knows the extent in which the Romanian banking system will be affected.”
Internationally, the regulation and supervision of the banking market will come under closer scrutiny. The appetite for financial derivatives, which preceded the crisis, will also lessen. But these sophisticated forms of transactions were never present in Romania.
Instead, because the vast majority of the Romanian banking system is owned by European banks from Austria, Italy and France, the crisis will spread to the country only through these affiliations, says Kallai.
This will mean an increase in the cost of lending for companies, especially those from the financial sector.
“The impact of the international crisis was felt mostly by the financial institutions and less by customers,” says Rasvan Radu, CEO of UniCredit Tiriac Bank. “In their internal battle for market share, banks have absorbed a large part of the increased costs of financing on account of the shortage of liquidity at an international level.”
But there is no reason to be complacent, as the crisis is having a massive psychological affect on global business, particularly investor appetite. “The Romanian business environment has a low perception of what is happening abroad and the common opinion is that the worst only happens somewhere else.” says Radu. “Denial is an attitude that can be very dangerous for all businessmen at the moment.”
Radu says the costs of financing in a foreign currency will further rise. This will affect the real-estate sector, where demand is high but the prices have been pushed up by the speculators from abroad who anticipate prices will surge. Due to the international environment and the difficulty of accessing loans at attractive rates, these investors have lost confidence and backed out. This leaves the market unbalanced because Romanians are not willing to pay artificially increased prices for property.
“I do not see a catastrophe, but there is a need for realism on the market, especially for developers who have invested in large residential projects,” adds Radu.
In retail and shopping malls, the CEO of UniCredit argues that many developments have lost their attraction for banks due to a glut of projects. Banks have only been willing to finance projects with a good chance of success.
Meanwhile CEO of Raiffeisen Bank Steven van Groningen does not believe the decline in prices on the real estate sector is a tragedy because there are many projects that lack quality. This slowdown might force banks and individuals to be “more selective” when they choose to invest in any such project, he says.
Due to the international turmoil from the financial sector many banks may need to cut back their branch expansion programme. “Several projects of opening new branches have been cancelled or reduced,” says Patrick Gelin, president of BRD Groupe Societe Generale. “The number of banks having ambitions in the retail sector is too high.”
Gelin believes it will be difficult in the long run for banks on the retail market to be profitable if they do not have at least a five per cent market share. “The Romanian market has grown very rapidly and we can expect stabilisation,” he says. “As a consequence and considering the global and the Romanian economic environment, it is possible that we see sort of consolidation on the market in the near future. “
To adapt to the new climate, van Groningen believes banks will reorientate their strategy towards attracting deposits from the population. “Costs of financing have increased, but the banks want to maintain competitive interest rates and do not want to transfer all those costs to their clients,” says van Groningen. “Nevertheless the banks need money to finance loans and the only alternative is to start an aggressive campaign to attract loans from the population.”
There is a large amount of cash in Romania which is not deposited in bank accounts. “There will be a fight between banks for this,” says van Groningen. “But it is difficult for a bank that until now only focused on loans to develop a successful strategy oriented towards deposits.”
In July 2008 the Romanian population’s savings were 2.3 billion Euro lower than the total value of credits. This difference stemmed from the Romanians appetite for taking out loans in foreign currencies which have more attractive interest rates than credits in RON. To encourage more deposits many players from the Romanian banking sector are now advertising interest rates for current accounts up to 20 per cent. “Unfortunately there are people falling for these tricks,” says Asmus Rotne, deputy general manager of ProCredit Bank. “But when people realise they will not get what they have been promised, they will become resentful to a specific bank and the banking system.”
Long-term saving in cash has never been popular in post-1989 Romania, while the appetite for taking out long-term credits has been huge. Unemployment is also low. “It’s not going to be like this forever,” says Rotne. “People will become affected by unemployment and the repayment of consumer credits will become difficult. Yet at the moment people are not willing to take this into consideration and neither are banks.”
Banks will remain cautious in financing for major infrastructure projects until the margins rise
Infrastructure is one of the key stumbling blocks to the development of Romania’s heavy industry, tourism and its status as one of the cheapest places in the EU to do business.
Its motorway infrastructure is barely above 300 kilometres, with only 14 km completed in 2007.
Although the Government has claimed that it targets to build 1,800 km of motorways by 2013, few believe any such a hope is possible.
Even in these difficult economic times, cash is available from a number of sources. The European Investment Bank and the European Bank for Reconstruction and Development are key partners in the development of infrastructure in general in Romania. Non-reimbursable funds in the billions from the European Union are also available until 2013.
Marius Bostan, senior partner at consultants in public finance VMB Partners, thinks that the money from the European funds will not be sufficient to bring Romania’s infrastructure to the level of its more developed EU neighbours. “These funds should be rounded off with private investments, public private partnerships, bonds and loans,” he says.
But what role can commercial banks play in this environment? Some local authorities have preferred to take loans out from banks to finance projects because the process is easier than all the paperwork necessary to apply for EU funds.
Rasvan Radu, CEO of UniCredit Tiriac Bank, says that banks have always been interested in financing infrastructure projects, but opportunities are not apparent.
“We have interest, we have available resources for these kinds of projects and it is obvious that there is a huge need in this sector but we do not have offers from the administration,” says Radu.
UniCredit Tiriac Bank has been involved in a few infrastructure projects, such as in the energy sector. Historically, one major issue has been the profit margins, which are often under one per cent. However, according to Gerald Schreiner, president of Volksbank Romania, the margins for infrastructure projects have risen lately to more than two per cent.
“When the margins were under one per cent it was more profitable for us to invest our liquidity in personal loans, but now I think that more banks will be attracted to this sector,” adds Schreiner.
When economic times are hard, Governments tend to turn to public works to keep unemployment low and industry in business. With EU cash and willing lenders from A-grade European financial institutions, such infrastructure works in Romania would be a stable source of income. But Romania is not in such dire straits yet.
“Infrastructure project in partnership with the state might present smaller risks, but smaller risks give small profits,” says Steven van Groningen, CEO of Raiffeisen Bank Romania.
This is not a get-rich-quick business for banks. Many of these projects’ payback time is spread over 20 to 25 years. “In this case investors are not very enthusiastic when it comes to infrastructure projects, since they can invest their money in land or on the stock exchange and get bigger profits over a much shorter period,” adds van Groningen.
EU state of finance
Meanwhile the EU has 19 billion Euro available to spend by 2013 in its cohesion policy. The development priorities include transport infrastructure, regional development, IT&C, social infrastructure, human resources, administration, energy and the environment. The majority of the cash should be going to road and water infrastructure development. Of large needs is flood prevention, as well as the modernisation of road and rail, stated Eugen Teodorovici, secretary of state in the Ministry of Finance at a recent meeting of the British-Romanian Chamber of Commerce.
No cash from the post-accession funds was spent in 2007, Romania’s first year in the EU. By 15 August this year, the Ministry of Economy and Finance had received 3,200 projects submitted, From this figure 206 projects have been approved and 65 have committed contracts. The value of these 206 projects is 1.48 billion Euro. One billion Euro of which comes from EU funds, the rest from the state budget.
These deals are in projects to protect and improve the environment, infrastructure and local public authorities. “The main beneficiaries should be public bodies, regional development and local transport infrastructure,” added Teodorovici.
Playing it cool
New rules from Romania’s central bank may help calm down the credit boom, but some bankers fear they may not help stimulate investment, reports Alexandra Pehlivan
Romania’s economy reached a new high in the first half of 2008 with a growth rate of 8.8 per cent, but this positive trend comes with consequences. In July the annual inflation also scaled the highest value in the last three years, 9.04 per cent. Although this dipped to 8.02 per cent in August due to oil price drops, a good harvest and the appreciation of the Romanian RON, the figure is almost double the EU average.
This also torpedoes the central bank’s inflation target of 3.8 per cent for 2008, which the institution has needed to revise upwards to 6.6 per cent.
Growth is further undermined by the international turmoil and warnings from the EU that the Romanian economy may overheat because of rising consumer credits and a massive trade and current account deficit.
This has prompted the central bank to take matters into its own hands, by forcing banks to make the evaluation process for taking out a loan harder on big ticket items such as cars, electronics and houses. This month’s package of changes should also restrict credits in foreign currency in an aim to bring down Romania’s indebtedness.
Banks have a mixed response to the decision, with some hoping the guidelines will cool an overheating market, while others fearing this meddling stops the banks from self-regulation.
Now customers applying for a credit will have to present a document from the tax authorities showing their declared revenues. Banks will no longer be allowed to consider any other revenues above 20 per cent of those declared to the tax authorities. If a customer wants to take out a loan in Euro from a bank in Romania, the bank has to take into consideration the highest level reached by the Euro in Romania in the last 18 months.
Meanwhile, despite some calls for more liquidity on the local market, the central bank will remain prudent in asking banks for the minimum reserves they must deposit. Banks will have to maintain the quantity they put aside in the central bank at 40 per cent for every deposit they attract in foreign currency and 20 per cent for every sum in RON.
Patrick Gelin, president of BRD Groupe Societe Generale, considers the new package a wise decision. He argues that this will mostly impact those banks whose strategy “relies exclusively” on the distribution of credits.
“These norms primarily favour the customers of banks,” says Rasvan Radu, CEO of UniCredit Tiriac Bank. “Many of them are taking risks they do not understand such as loans in an exotic currency, whose evolution customers cannot predict. They cannot see the real costs. Secondly, the financial sector will gain from these rules since the risk costs are reduced and the market becomes more uniform as everybody has the same set of rules. Many players from the banking sector do not really comprehend the risks they are taking and only pursue market share.”
However some banks argue that this may not have the desired affect that the central bank hopes.
“The new norms do not affect consumer credits,” says Gerald Schreiner, president of Volksbank Romania. “If a bank wants to discourage consumer credits in a foreign currency, it should establish a lower debt threshold for that specific currency, but not allow the same rule for domestic and foreign currency.”
But the effectiveness of the norms will depend upon their implementation. Rasvan Radu says some banks follow the letter of the law, but do not understand the spirit of that law and find new loopholes as no legislation can cover all possible scenarios. The central bank also needs to implement the conditions consistently, fear bankers, otherwise this could lead to a distorted market and unfair competition.
Some analysts argue that these new norms will create unfair competition between the banks which are obliged to follow the BNR’s norms and those functioning in Romania only as a subsidiary, such as ING Bank and Garanti Bank, which follow the rules of their host EU country.
The real estate market and mortgages may be hit by the new rules. “Those who are going to be most affected are individuals who will not have the same easy access to credits as they have now,” says Steven van Groningen, president and CEO of Raiffeisen Bank Romania. “This will be a direct blow to the real estate sector. Many projects may see delays and some developers will lose money.”
The BNR changes will have a “huge effect” on mortgage purchases, says Daniel Prieto, co-founder of property management firm Grupo FDP. “Demand will decrease and prices will need to go down,” he says.
One affect of this could be a migration of potential buyers to the rental market. If the owners of property cannot sell at a reasonable price, the alternative is renting.
In classic free market terms, the situation should see a boom in both the supply and demand for renting properties. At present the demand for renting is much higher than the offer, and prices for renting new apartments challenge even the priciest cities in the EU. “Prices are already huge for renting, so a significant increase would be crazy,” says Prieto.
But a panic among owners seeing the prices of their properties drop may force them to rent at a reasonable price in order to assure liquidity.
However Jose Manuel Sanchez, director of the real estate developer Pryconsa, thinks that the tough credit regulations enforced by Romania’s central bank will not affect substantially the demand for new apartments. Requirements to get a mortgage loan in Romania have been traditionally tough and people able to contract a loan a few months ago will still be able to take out a similar loan under the new rules, Sanchez argues.
Van Groningen says the changes are welcome because the risks are smaller for the bank, which should have a knock-on effect on the cost of credits for the consumer. “There are some banks which already have problems with their clients’ repayment of loans and the BNR is trying to protect both individuals and banks which often choose to disregard some risks in their battle for market share,” he says.
One possible result of this could be that individuals begin to make more deposits. However if they cannot gain credit for buying a house, they may not decide to put the cash in a savings account, but instead purchase a car. For now, the psychological effects on the consumer remain uncertain.
The main difference between Romania and other EU countries is that the minimum reserve is higher than in Germany, for example, where banks have to deposit only two per cent as opposed to 20 per cent.
Because so much money is blocked in the accounts of the central bank, this raises the costs of lending in Romania and reduces the profits for banks, according to Asmus Rotne, the deputy general manager of ProCredit Bank.
Meanwhile Gerald Schreiner, president of Volksbank Romania, does not think that these norms will be suitable for Romania. “With the new increase in financing costs, the decrease of the debt threshold and the [maintenance of the] costs with the minimum reserve, this advantages multinationals who can find refinancing from the mother company,” he says.
Such a large corporate may not be attracted to take out a loan in Romania because the terms the bank offers are not that favourable, owing to the high minimum reserves that this bank has to deposit. Meanwhile domestic-based small and medium enterprises (SMEs), who lack the leverage of an international presence, are faced with higher lending costs in Romania.
But the CEO of UniCredit Tiriac Bank thinks that the increase of financing costs will affect multinationals because they need more quantities of cash, which means the margins for the banks are smaller.
Nevertheless Schreiner believes SMEs need to be given more financial incentives to expand because their activity tends to be concentrated on Romania, which will help bring down the trade deficit and assist in realigning Romania’s imports and exports to a more balanced level.
According to him the central bank’s rules will make many customers solicit for loans outside of Romania. “50 per cent of the loans will be booked outside Romania because it makes no sense to take borrow here because of the high minimum reserve and extremely prudent provisions,” says Schreiner. “Romania is now a liberal market but with very high restrictions. In countries such as Austria and the Czech Republic, where salaries grow by only two per cent a year, the debt threshold is 100 per cent.”
He believes the central bank should restructure the minimum reserve to help stimulate investment.
“The central bank’s actions do not go against consumption, but against investment,” says Schreiner. “The minimum reserve is the best instrument to influence which product can be bought and which cannot. It can make consumer loans either very expensive or very cheap. I would increase the minimum reserve for the consumer loans and decrease it for the credits intended for investments in productivity and construction.”