Lenders focus on existing customers while awaiting economic recovery

With the banking scene looking almost the same as it did in 2009,lenders are still waiting for a recovery in the economic conditions on the local market this year. A revival among private sector players could give impetus to lending sometime in the second half of 2010.But expert opinion is split on the likelihood of this.

By Anda Dragan

2009 was a very difficult year for many players on all sectors of the market, as well as for lenders on both the local and international banking scene. The first full year of crisis significantly hit banks’ activity. While they posted positive results last year, lenders adapted their activities to suit the downturn: they put on hold or canceled their investment plans and embraced a very cautious approach to the local market. Currently, specialists’ predictions for 2010 are split. Some are optimistic and think that the local economy will recover a little this year. Others are pessimistic and believe that 2010 will look much like the last year in terms of the economic conditions. What is going to happen on the Romanian banking market this year? Which segments will bounce back? What strategies will lenders follow in order to post positive results? These are just some of the many questions that are key to the health of the local banking system in 2010.

Opening new branches

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Almost all lenders adopted a guarded approach to opening new branches and supplementing their nationwide coverage last year. They halted or postponed their development plans, trying to focus more on customers than on establishing new units. Only a few opened new branches, with products and customers getting more of the attention. And 2010 will differ little in this respect, say specialists. “Lenders are still being very careful about their investments,” emphasizes Laszlo Diosi, CEO of OTP Bank Romania. According to National Bank of Romania (BNR) data, there were 6,464 banking units belonging to credit institutions in September last year, compared with 6,552 in December 2008. Furthermore, the number of employees in the system dropped from 71,622 in December 2008 to 68,462 in September 2009. According to Dragos Cabat, managing partner at consultancy company Financial View, it is possible that the sums banks allocate to launching new branches this year will level off. “In my opinion, in 2010 lenders will consolidate their financial position. Just a few financial institutions will open new branches this year,” predicts Cabat.

Profitability

Certainly the evolution of the economy as a whole will also determine the profit margins for lenders in Romania. But after the sharp fall in the sector in 2009, it is very difficult to forecast anything. “Profitability will depend highly on the general status of the economy. If the economic upturn is swifter, we could see fewer non-performing loans, hence higher profits. The real recovery will come in 2011,” says Diosi. But Cabat believes that there is a high chance that lenders’ profitability will continue to slump this year, while short-term lending on the private sector remains in the doldrums. He adds that this downward trend was also visible last year compared with 2008. One thing is agreed: lenders need to rebuild in 2010 what that they have lost in a year and a half of economic misery.

Interest rates for deposits and credits

The level of interest rates for deposits is determined by the liquidity from the market – which, as Cabat says, is abundant for now – and by the monetary policy adopted by the BNR. In this context, “interest rates for RON deposits will drop significantly in the months to come, probably to 5-6 percent. Then they will relatively remain constant until the end of the year,” says the Financial View representative. Moreover, Diosi of OTP thinks that in parallel with loan rates and international trends, interest rates for deposits will continue to fall. As for credit, the CEO believes that RON rates could decrease by a further 2 percent, and EUR rates by 0.5-1 percent. “The interest rates for credits will shrink for the whole year, in line with the drop in the monetary policy interest rate – which I see at about 6 percent at the end of 2010,” says Cabat.

The revival of lending

According to Diosi, the recovery of lending has already started, slowly but surely. He is optimistic, predicting that from the third quarter there will be significant lending activity. But some expect there to be a gap between the resurgence of corporate and retail lending. “I hope the recovery of lending for corporate and SMEs will take place in the months to come, and for retail to rebound – of course at smaller volumes and with a more cautious approach to risk – in the second or third quarter of this year,” says Cabat. In his opinion, lending must resume in order to help companies continue their natural manufacturing and investment cycle. “If the threads are picked up in the coming months, the sales and profitability of companies will bounce back at the end of this year,” says the Financial View representative. According to him, arrears in retail credits outnumbered, as a percentage of the total, credits offered to this type of customer. They mainly came from non-real estate guarantee credits, and thus, the arrears were small, at an average of a few hundred euros per customer.