Banks brace themselves for bruising 2010

Despite 2009 being the first full year of crisis on the Romanian market, local lenders managed to post mostly positive results. But specialists expect 2010 to be less auspicious for them, making the banking system unlikely to post a profitability rate over the level registered in 2009.

Anda Dragan

Many players from all commercial fields use the first few months of the year to announce their financial performances, and the banking system is no exception.

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Many lenders active in Romania have already posted both their financial results for last year and announced their strategy or provisions for 2010.

Against the odds, a good number of local banks registered positive results last year, even though 2009 was the first full year of crisis for the domestic market.

According to Nicolae Cinteza, manager of the supervisory department at the National Bank of

Romania (BNR), quoted by Mediafax, more than half of the 42 credit institutions in Romania – 22 in total – finished 2009 without losses.

Data available on the market indicates that the banking system posted a RON 772.3 million profit in 2009, 5.7 times lower than the RON 4.4 billion record figure registered in 2008, while  the value of provisions almost doubled.

In these conditions, profitable lenders posted cumulated net earnings of over RON 2 billion, with the losses in the banking system surpassing RON 1 billion. Lenders posted an overall loss of RON 69.23 million in December alone, while provisions increased by almost RON 500 million, to RON 14.96 billion.

According to Cezar Furtuna, audit partner in financial services at KPMG, the banking system posted a ROE of 2.73 percent in 2009, 84 percent lower than the 17.04 registered in 2008.

“Our analysis has found that the decreasing trend in lenders’ basic profitability – without taking into account one-off transactions such as the sale of Asiban in 2008 or similar moves – has been visible since 2008. According to a KPMG study which will be published in the near future, the ROE was a little over 11 percent in 2008 – compared to 11.44 percent in 2007 – if we don’t include the transactions mentioned above,” says Furtuna.

In his opinion, the effects of the current turmoil became visible in 2009 through the exponential increase in the provisions volume (double or even higher in some cases) while interest margins remained the same or rose.

Moreover, lenders tried to reflect the higher risks of lending in the interest rates they offered their customers.

What’s next in 2010?

“It is unlikely that the banking system will post a profitability rate over the 2.73 percent registered in 2009, when we are not seeing any tempering of arrears and provisions, despite lenders’ efforts to restructure and re-negotiate with some significant creditors,” says Furtuna. According to BNR data, outstanding arrears reached a record level of over 3.4 times higher at the end of 2009 than the figure posted in 2008.

Nicola Calabro, CEO at Intesa Sanpaolo Bank, agrees that lenders’ profitability will be lower this year than in 2009, as banks will suffer the effects of 2009’s increase in provisions combined with a gradual recovery in lending activity.

Moreover, the fiercer competition for customers will drag down the margin of interest rates for

credit, which will dent lenders’ profits. “We think that the individual results of the credit institutions will continue to be diverse, with large lenders that have significant assets being in a better position to generate additional income from commission or financial operations. This will offset the losses generated by the stagnation of the increase in net income from interest and by the boost in provisions for book debt depreciation,” says Furtuna.

According to him, banks’ earning capacity this year will be influenced by many factors.

The first is the level of interest margins and the reference rate of the BNR, which has a direct impact on the yields that can be secured by lenders from financing granted to the state.

“This activity made a significant contribution to lenders’ incomes generated by interest in 2009. The impact was also increased by the release of liquidities as a result of the reduction in minimum mandatory reserves both for RON – from 18 to 15 percent – and foreign currency – from 40 to 25 percent,” says Furtuna.

Second comes the evolution of provisions for credit depreciation and administrative and operational cost control. In Furtuna’s view, the latter is an important component that can generate benefits for lenders without any significant short-term impact on their profitability in 2010. The final factor is “the banks’ capacity to generate income adjacent to the fundamental lending activity, such as commission from operations and transaction activities with customers,” says the KPMG representative.

Specialists expect 2010 to be a year when lenders need to address and manage some issues they did not deem priorities in 2008. Furtuna flags up the identification of less efficient processes, rationalization of network branches, detection and axing of unprofitable products, services and relations, managing a high volume of liquid assets in order to optimize yields, and severe restructuring of customers with underperforming credit.

Breaking it down by type of product, this year lenders will focus on mortgages (including the national First House program), co-financing and consultancy services for the attraction of European funds, corporate credit based on solid business plans and cash flow forecasts, credit for SMEs, treasury products such as forward contracts, financial swaps and options on the exchange rate.

Calabro of Intesa thinks that many lenders will focus especially on companies’ needs this year. “Banks that increased their market margins exclusively through household credit will need to make greater efforts to restructure their product range,” says the CEO.

As for the cautious approach taken by lenders, Furtuna says that the end of 2009 significantly changed the balance sheet structure of credit institutions, with the weight of cash and liquid assets increasing to the detriment of credit offered to customers.

In such a context, “lenders’ risk aversion will continue this year too, with banks being cautious over granting credit. We think that a possible recovery in lending might be visible at the end of the year,” he predicts.

Another interesting issue highlighted by Calabro is the concentration of the local banking system through acquisitions.

“We don’t think we will see such a process on the local market this year, because it hasn’t yet taken place in Western Europe. This might wait until the efforts to recover the European architecture of financial supervising and stability are completed. Then, we will see an increase in large lenders’ desire to make acquisitions in the European region,” concludes the CEO.