When Austria’s Erste Bank bought Banca Comerciala Romana, the country’s largest institution by assets, for €4.25bn ($6.5bn) two years ago, it not only paid a full price but it also committed itself to a dramatic shift in its centre of gravity.
Already the largest part of the parent group by headcount, even after slimming down the former Romanian state savings bank from 11,500 to 8,200 staff, Erste expects BCR to be the dominant contributor of its profit and revenues in the medium term – such is the optimism about growth in Romania’s banking market that.
“Unless something goes dramatically wrong, BCR will be the largest single unit within Erste in five years’ time,” says Manfred Wimmer, BCR’s chief executive.
“It already has implications for our share price, because the outside world has developed a negative perception of Romania, and they think we paid a lot for BCR,” says Mr Wimmer.
Even if the markets have reservations about Romania’s macroeconomic outlook, there is no shortage of contenders eager to tap an expanding market.
Forty-one banks already operate in the country. Portugal’s Millennium Bank, the most recent entrant, is sufficiently bullish to plan a €300m branch network – intended to reach 100 branches by 2009 – from scratch, rather than taking the more traditional route of buying out an existing market participant. GE Money, another recent entrant, has opted to buy three non-bank financial institutions and develop them into a full-service banking operation.
More may come. The banking regulation department at the National Bank of Romania, the central bank, has a backlog of 20 applications for banking licences from other EU institutions.
The expansion in retail banking is most evident: together, the country’s banks opened 1,100 branches last year, with a similar number expected to open this year.
The attractions of the market are not hard to identify. Beyond Romania’s well-known long-term growth story, its financial intermediation ratio – banking assets as a percentage of nominal GDP – remains low, even by regional standards. According to the International Monetary Fund, penetration stands at about 30 per cent in Romania, compared with 70 per cent in Poland, which itself pales beside the UK’s 120 per cent. Even a slow convergence towards EU levels presents enticing growth opportunities.
Still, with so many foreign companies anxious to maintain a toehold in a growing market, there is a risk of a profit squeeze at the bottom end of the market.
Dan Pascariu, chairman of the board at Unicredit Tiriac Bank, says that out of the 40 or so banks, the top 10 probably have 80 per cent of the market. “Some consolidation is necessary, though some of the smaller banks will look for niches,” he says.
“It can only happen in two ways: either there’s consolidation among the international players, or the remaining independent banks could be bought out.”
Cristian Popa, the long-serving deputy governor of the central bank, echoes this thought: “The five largest credit institutions together have about 60 per cent of the market while some of the smaller banks appear to be successfully exploiting niches. There is still a dearth of no-frills low-cost banking services,” he says.
That banking services still have a long way to develop in Romania is confirmed by loan growth. Valentin Lazea, chief economist at the central bank, said in January, that despite tightening global liquidity, loans were still growing compared with all previous months. “Credit volumes might expand for a while to come,” he said.
Much of the lending growth has been in mortgages, most denominated in euros, which has driven a real estate boom – although remittances have also contributed to surging property prices.
Liviu Voinea, executive director at the Group of Applied Economics, a consultancy, is less bullish, but argues that, with household debt having started at such low levels, there is still room for growth.
According to Mr Voinea, non-governmental credit has risen from 7 per cent to 25 per cent of GDP over the past four years. He expects loan growth to slow markedly in 2008. “One reason for this is the depreciation of the currency, which has made many aware of the foreign exchange risk,” he says.
The extent of foreign currency lending is causing some jitters. Patrick Gelin, president and chief executive of BRD, Société Générale’s subsidiary and the second-largest bank by assets, says that some irresponsible lending has taken place. “BRD represents 40 per cent of the market, and our foreign currency lending is at about the average level. But banks who have been making Swiss franc and yen loans are crazy.” The bank is cautious about foreign currency lending even to small and medium businesses, and will only lend in more exotic currencies to large corporates. Euro lending in itself is less risky, Mr Gelin argues, given the euro’s extensive penetration of the economy. “The mortgage market is completely denominated in euros,” he says.
