Take the example of Societe Generale and its local envoy BRD-SocGen. Over in France, the parent bank reported USD 3 billion in subprime losses back in February, on top of the EUR 5 billion fraud allegedly caused by Jerome Kerviel at the beginning of January.
Societe Generale reported the second largest write-down as a percentage of total subprime exposure at a European bank, according to a Lehman Brothers report released in winter. At that time, Kerviel's lawyers even claimed that Societe Generale was using their client to deflect public attention from its enormous losses. A “distraction” that was nothing short of extreme.
This side of Europe, BRD-SocGen is very much alive and kicking, reporting “excelent” Q1 results and a 40 percent increase in net banking income year over year.
Bank president Patrick Gelin said, “the bank managed to perform in a difficult climate characterized by harsher market conditions. Once again, loans were the main driver for growth. Both markets – retail and corporate – made important progress as regards loan volumes.”
Indeed, BRD-SocGen grew its lending to retail customers by 47 percent against March 2007, while loans to corporates increased 41 percent year over year.
Low levels of financial intermediation, bread-and-butter products and a horde of other factors seem to have kept Romanian banks away from the subprime hazards out there.
“The Romanian market is quite limited in size and this is why the contraction of resources on hand and the trust crisis which affected big banks on the US and European markets could not hit us too hard. Additionally, the Romanian banking system benefits from the country's economic growth and the increase in public purchasing power,” said Dan Bucsa, head of research in the Global Markets division of Bancpost.
BRD-SocGen is far from being an exception on the local market. Citi's example is perhaps the most revealing of all. On the other side of the Pacific Ocean, Citigroup announced it was cutting 9,000 jobs due to a loss of USD 5.11 billion in the first quarter of the year, which added to the USD 9.8 billion loss reported in the final part of 2007.
Citigroup's revenues plunged 48 percent to USD 13.2 billion, while Citibank Romania reported that its net income from interest, fees and commissions grew by 54 percent to EUR 57 million for the fiscal year 2007, while the gross revenues increased by 40 percent, to EUR 553.8 million.
“Last year was the best year yet in Citibank's history in Romania. These results reconfirm our constant growth on the Romanian market and our client-first strategy. We see high growth potential in our consumer and corporate business, both by network expansion and the launch of new products,” said Shahmir Khaliq, Citi country officer.
Another example is UniCredit Tiriac Bank, which increased its net profits by 50 percent against the first quarter of 2007, while parent bank UniCredit SpA was busy denying market rumors of EUR 5 billion losses at the bank. Instead, bank reps said UniCredit's subprime exposure in the last semester of 2007 was roughly EUR 170 million, down from EUR 246 million in the third quarter.
Austria's Raiffeisen Zentralbank Group (RZB) reported EUR 312 million in write-offs for the 2007 financial year, but said losses were cushioned by the strong performance of its subsidiaries in the CEE region, including Romania's Raiffeisen Bank.
“Up until now the subprime crisis has had limited effects on Romanian commercial banks because products and services offered to clients are basic, unsophisticated and most parent banks had limited exposures on this segment. The increase in the interest rate for external financing is the main effect produced by the international financial crisis on the Romanian market,” said Lucian Anghel, chief economist with Banca Comerciala Romana.
If the subprime crisis has had or will have any effect on banks' financial performance this year, it can be described as reduced in size and indirect.
“Given the dominant position held by foreign banks in Romania, negative impact cannot be ruled out totally, but if there is any impact, it will be indirect. It will result from parent banks' involvement in subprime-related business fields. Still, considering that local banks are focused on the Romanian market and parent banks have large exposures on other CEE markets that were not affected by the crisis directly, any influence from this direction should be minimal,” said Rozalia Pal, head of macroeconomic research with UniCredit Tiriac.
“In my opinion local banks were indirectly affected by the subprime crisis, but the effects are not significant so far. Consequent to the subprime crisis, resources made available to local banks by parent banks abroad are no longer as abundant as they were in the first part of last year. The competition for local resources has become fiercer and thus interest rates on deposits grew by approximately two percent in the July 2007-March 2008 period. At the same time, the growth in lending has slowed down since December 2007, except in property loans to retail customers,” said Bucsa of Bancpost.
As strange as it may sound, it is the system's lack of development and complex products which acted as a safety net for local lenders.
“Some complex banking products like structured ones are offered by some banks in Romania, but the demand is limited and we cannot say that there is a critical mass on this market at this point in time. It is exactly this poor development of the banking system which has contributed to some sort of decoupling from the international financial crisis,” said Anghel of BCR.
Also, the 8.2 percent economic growth in the first semester is standing proof of the development of the local economy, which this year will depend more on internal factors – including the impact of the weather on agriculture – and less on international turbulence, added Anghel.
As it seems, investors' aversion to emerging economies and the overall reshuffling of banking systems around the world did not knock Romania off its path of constant growth, which took even the most positive analysts by surprise.
Does that mean that the danger is behind us?
“We anticipate that any potential disruptions in Romania's real economy will materialize indirectly, through a possible drop in internal and external demand. We have already noticed a plunge in the local capital market and depreciation of the RON, as well as an increase in the volatility of the stock exchange and the forex market,” said Pal of UniCredit Tiriac.
She added: “A slight deterioration in investor sentiment over emerging markets may have a negative impact on the real economy by diminishing investment activity. However, Romania has proven to be less vulnerable [than expected], remaining attractive to foreign investors in the first quarter of 2008 and showing no signs of internal or external demand deceleration.”
By Ana-Maria David