Since the start of the crisis, banks in Romania have grappled with constant growth in the volume of non-performing loans (NPLs), which have reached 18 percent on the backdrop of a weak economy. This saw lenders move to slash jobs and close branches, while restructuring their loan portfolios. But short-term cuts in expenses may lead to bigger challenges on the long term, warn specialists.
By Ovidiu Posirca
Radu Gratian Ghetea, president of the Romanian Banking Association (ARB), said in late 2012 that the restructuring process in the banking sector had just begun. “Let’s not forget the banking system, if we look at the overall result, is unprofitable or posting a slim profit. Solutions that spur efficiency must be found, both products and new services, and more marketing is needed for products that don’t require the involvement of a counter clerk,” said Ghetea, quoted by Mediafax newswire. He added that banks will continue to axe jobs and close branches, although no clear figures have been provided on the consequences of restructuring.
Losses in the banking sector tripled last year to RON 2.1 billion (EUR 480 million), according to calculations drawn up by daily Ziarul Financiar.
The overall profitability of the banking system remained positive, although only 25 of the 41 lenders present in Romania were in the black in the first half of 2012, said Ensight Management Consulting.
Restructuring for profit
The National Bank of Romania (NBR) says in a report on Romania’s financial stability that the major restructuring plans of large financial groups active in Romania have not harmed the general situation of subsidiaries and branches here.
Over 80 percent of the net banking assets, which have reached RON 365 billion (EUR 83 billion), are controlled by eight foreign lenders based in the Euro zone.
Professional services firm KPMG revealed in its banking executive survey that 82 percent of banks in Romania have either reduced their number of employees or are planning to do so.
Leading lender BCR, which is controlled by Austrian Erste Group, said it will slash 1,600 jobs by next summer and close 60 unprofitable branches.
“For every action you need to think about sustainability. Some things last for a short period and others work on the long term. If you act quickly without sustainability in mind, then you create speculative bubbles,” said Tomas Spurny, BCR president, whose main job is to restructure the lender. Around 7,500 people will be working for BCR following the restructuring.
BRD, controlled by French Groupe Societe Generale, axed 261 jobs last year and adjusted its remuneration policy as it aims to cut costs. The second largest lender in Romania had 7,681 employees last year.
“Banks have increasingly focused their attention on cost-cutting and many of them have managed to reduce their cost base to a certain degree,” said Serban Toader, senior partner at KPMG in Romania. However, he warned that banks have delayed long-term investments which may see them “start to experience the adverse effects of overlooking the future of the business.”
Toader added that Romanian banks have in the past few years acted to restructure key areas such as risk management and clean their portfolio of underperforming assets.
Cezar Furtuna, partner, Financial Services at KPMG Romania, stated banks had made progress in upgrading their risk management policies and procedures, but are now facing difficulties in finding growth.
“The banks were used to being able to grow at a very fast rate by granting loans and accepting segments of customers who would not be suitable for the current risk management standards,” said Furtuna.
The central bank governor warned that banks have failed to provide complex financing solutions for the corporate sector, which require expertise, and have continued to focus on an indebted retail sector.
“Many Romanian banks have remained anchored in consumer credit, which is granted more easily, and mortgages, and they haven’t developed their capacity to lend to the entrepreneurial sector,” said Isarescu.
More than a quarter of the banks surveyed by KMPG said they had a growing issue in raising capital and many cited long-term funding as one of their biggest future challenges.
Cleaning the loan book
In the last five years, banks have had to carefully manage their loan books, which contained ticking time bombs acquired during the consumption credit bubble. As companies started to cut jobs and reduce wages, people found it harder to pay their monthly installments. Corporates were also impacted, especially those active in sectors that thrived during the bubble of 2007-2008.
“The hardest hit Romanian corporate borrowers seem to be those in real estate, construction and some segments of retail,” said Elena Iacob, managing associate at law firm Zamfirescu Racoti Predoiu (ZRP).
“The rate of non-performing consumer loans has heavily increased during the past few years, while the rate of mortgage defaults, historically much lower than that of unperforming consumer loans, grew substantially in the context of the deteriorating RON-EUR exchange rate and decrease of collateral value,” said Iacob.
Iacob commented that banks have changed their approach to debt in the past five years and sold non-performing loans portfolios or transfers to specialized collection firms. Before the recession banks were more wiling to restructure distressed debt by postponing or rescheduling principal repayments or by extending maturity dates.
The central bank and the Ministries of Justice and Finance jointly launched in 2010 guidelines on out-of-court corporate loan and mortgage restructuring. Romanian authorities received technical assistance from the World Bank for this project, which banks can use as a tool in their workout efforts.
“The process is ongoing. The banks still appear open to discussing restructuring terms with borrowers experiencing temporary problems but with the will and potential ability to repay,” stated Iacob.