Banks in Romania could register an estimated loss in banking revenues after risk of around RON 58 billion by 2025, due to risk costs and decreased volumes, compared to the revenues that were expected before the pandemic – according to the latest research by McKinsey&Company Romania.
Banks are likely to face a two-stage challenge in the months and years to come. Credit losses are expected to peak in the short term, by the end of 2021, as reported in the McKinsey Global Banking Annual Review published last December After this, amid a muted global recovery in the medium term, Romanian banks could face a profound challenge to their ongoing operations due to increased pressure on revenues and margins. The most likely situation long term is one of slower growth.
Banking revenues after risk may decline by up to one-third in 2021 compared to 2019. Banks could stay below 10% in terms of return on equity after the pandemic, compared to an average of 12.6 percent in the period 2016-2019.
Demand for both consumer and corporate lending may remain anemic for a while.
“The current crisis poses fundamental challenges to the way banks work in Romania, so they need to learn from the crisis and adapt accordingly. There are at least two key areas that banks should prioritize in the next period: strengthening the risk-management capabilities and securing the foundations for further growth in order to limit the negative impact of the pandemics but also to be prepared to capture further growth via the right mix of product and channel, aligned with customer changing needs”, says Alexandru Filip, Coordinating Partner McKinsey & Company Romania.
Strengthening the risk-management muscle
Banks will need to focus clearly on improving their risk-management skills in the short term in order to keep risk costs under control. In the medium and long term, they will need to excel in digital risk practices, as the key differentiator for new business.
As payment moratoria come to an end, Romanian banks will be confronted with a wave of distressed borrowers. Rapid action will be needed in order to manage distressed borrowers with minimal impact on provisioning. Our estimates indicate that banks can expect 10 to 15% avoidance of risk costs by transforming collections.
Transforming end-to-end credit processes is also a must for banks. Banks should examine where they stand concerning future norms, such as machine-led instant decisions for retail and machine-assisted processes supporting conditional approval for new transactions on the corporate business side. Preapproved, convenient credit terms will be key differentiators for banks once volume challenges hit.
Securing the foundations for further growth
To strengthen the foundations for their further growth, Romanian banks will need to refocus their strategy. Prior to the pandemic, banks concentrated on safeguarding capital and pushing high-yield products (such as consumer loans), and providing financing for the public sector. At the same time, the banking system’s net income is dominated by interest, creating a high level of dependency on lending.
- Financial inclusion in the country remains low: According to industry experts, just six out of ten Romanians have a bank account. Even if the monthly incomes have increased by almost 10% a year over the last decade in local currency terms, the share of the banked population rose less than two percentage points in the same period, pointing to further room to grow remaining in both lending and savings that banks could capture. At the same time, those who do save, focus on cash or deposits alternative products being underpenetrated vs. CEE peers.
- Demand for banking products exists but is not clearly differentiated by product type. Banks should guide more their customers on choosing the right product for their needs, while they may shift their product portfolio from large-ticket, long-tenor consumer lending to short-term financing or refinancing products and accumulation products. This can be accompanied by non-financial offerings and value-added services, backed up with advisory services, to limit the dependency on interest income.
- Customers say they are likely to increase their use of digital and mobile bank services after the crisis ends, so it becomes relevant that banks follow the customers online. For example, to facilitate the transition towards a more digital customer journey for investment products, banks in Romania may want to think about stepping up their role in enhancing financial and investment education among customers.
To limit the negative impact of the COVID-19 crisis, Romanian banks need to improve the way they operate. This requires a new focus on the user experience, agile operations, and IT and digital technology:
User experience. Customers increasingly expect banks to anticipate not only which products and services they need, but also how and when they need them. Banks should constantly review the customer experience they offer, as true customer delight and loyalty will be fueled by user experience design.
Agility. Embedding agility will be crucial for banks. To embed the best of the new ways of working and banish the worst, banks can pursue targeted actions: institutionalize the new decision-making patterns, focus on customers or re-imagine work for agile, remote teams – as discussed in detail in the Global Banking Annual Review.
IT and digital technology. Having strong digital foundations will be critical to enable fast product iterations and personalized user experiences. Prioritizing investment in modern digital technology in the short term – the next three to six months – will allow banks to streamline their operations and meet customer expectations.
McKinsey & Company Romania published a detailed article about the pandemic’s effects on the Romanian banking system and the key areas banks should focus in order to recover.