Market scours the horizon for new banking entries

Despite the current downturn, Romania continues to be attractive to large financial players. Although last year lenders preferred to exercise caution and avoid making any significant moves, 2010 could be a gantry for launching operations next year.

Anda Dragan

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For the local banking market 2009

was a time when players took a cautious approach in their strategies for Romania. It was bereft of major moves, with lenders focusing more on products and services than on expansion. Extending branch networks nationwide was not a priority, be it through banks’ own forces or as a result of an acquisition. But the end of 2009 was notable for the transaction between Banca Transilvania and Bank of Cyprus. The latter bought 9.7 percent of the shares in local lender Banca Transilvania for some EUR 58 million, a hint that the market may be moving again.

But while many remain skeptical over 2010, likening it to 2009, the local banking market is not expected to freeze up again. Even if lending starts to grow slowly and gradually and banks remain cautious, mindful of the current downturn, the first green shoots of recovery should still sprout. In this context, could new players venture onto the market? And if so, how are they likely to do so – greenfield investment or through an existing financial institution? Cezar Furtuna, audit partner at consultancy and audit firm KPMG, says “New entries are of course possible, but we can’t say if they are probable. First, because no one really knows for the moment how 2010 will look for the banking sector.” If new entries had been planned, it is likely that they have been suspended until the waters become calmer again. “Some banking groups might see this as a chance to make direct acquisitions of existing credit institutions at good prices. We hear rumors on a daily basis,” says Furtuna. In his opinion, for institutions that envisage the recovery beginning now, making a greenfield investment or transformation that goes through the whole BNR authorization process might be opportune. “They could use the whole of 2010 to put together a well established business plan, proper systems and processes, hire skilled staff and start afresh in 2011,” says the audit partner.

As for the type of potential entries, there are four main ones: greenfield investments, the transformation of an existing financial institution (non banking financial institution), acquisition of a controlling stake in an existing bank and EU passport entry as a branch. But regardless of how entry is made, it is differentiation that is a crucial factor in determining future success. “A bank offering the same services as the other more than 40 existing credit institutions has little chance to grow and perform well if it doesn’t offer or do something differently – be it innovative products or services, competitive pricing, fit-for-purpose solutions or actively managing its risks,” says Furtuna. This is true even in good economic conditions, with the current parlous state of the banking sector making any kind of entry even more challenging.

Light at the end of the tunnel

According to Furtuna, who cites BNR data, the return on equity (ROE) of the entire Romanian banking sector was approximately 18 percent for the year ending 2008. “Based on our estimations, the boost resulting from the sale of Asiban in 2008 was around 7-8 percent of total. This gives the base performance of the overall banking system a ROE of 10-11 percent,” says the partner. He adds that 2009 will probably look worse, with many credit institutions posting losses, mostly due to the deterioration of their credit portfolio, irrespective of the reporting framework being considered. But despite this, “the Romanian banking sector is still attractive, not for its current state, but for its yet untapped potential that can be released in the next three-five years,” says Furtuna. Moreover, comparative studies of financial intermediation at EU levels show that Romania is still a long way from even approaching average EU levels.