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Banking: Reaching for the top again

After three consecutive years of financial loss, the Romanian banking system returned to profit in 2013 leaving room for some optimism with respect to its profitability in 2014. Lower provision costs amid the slower growth rate of non-performing loans (NPLs), corroborated by a drop in operating expenses subject to staff adjustments and territorial network resizing had a positive effect on the domestic banking sector.

Thus, the net aggregate profit of the 40 banks and financial institutions in Romania amounted to lei 48.6 million, following a major loss of lei 2.3 billion in the previous year, shows the annual report released by the National Bank of Romania.

The financial result, although positive, was impacted by a major reclassification of restructured loans which led to a supplementation of expenses with provisions for credit losses, hence reducing in the last quarter the combined profit of lei 1.5 billion reported in the first nine months.

Significant improvement in terms of profitability is rather uncertain, in spite of an overall favorable perception of the banking industry in the context of the economic progress recorded in 2013. This uncertainty has emerged since Erste Group, which incorporates Romania’s largest bank, BCR, announced an estimated loss of €1.6 billion for 2014 on account of higher provision costs in Romania and Hungary.

Even so, ramifications of the announcement made by the Austrian banking group, if any, will probably be observed in the second half of the year, as the financial results recorded in the previous months in 2014 were quite promising.

When it comes to identifying unchanging factors in the recent years’ evolution of the Romanian banking system, the answer is “NPLs”. The legacy of the economic boom, when lending activities reached their peak, is still one of the major issues challenging this vulnerable sector. “The main risk is the high stake of the nonperforming loans (NPLs) that rose to around 22 percent, up from around 14 percent at the end of 2011”, says Cristiana I. Stoica, Founding Partner of Stoica & Asociatii, whose view is shared by Mihai Dudoiu, Partner of Tuca Zbarcea & Asociatii who puts the volume of NPLs in the banks’ balance sheet as the main issue the banks are dealing with. He adds that the firm’s practice in this area has grown exponentially in the past 12-15 months. As revealed by media sources, Tuca Zbarcea & Asociatii had recently acted on the buyers’ side in two NPL deals worth €800 million.

The new provisioning requirements introduced by the NBR are not very helpful either, especially for certain banks already endeavoring to structure and optimize the NPLs portfolios, according to Daniela Nemoianu, Managing Partner of NTMO Attorneys at Law, who adds: “Risk compliance under the Capital Requirements Directive IV is also an important topic on the agenda of top bankers, also judging from our current numerous projects in this area”.

Having the shadow of the economic turmoil behind, the banking industry is redefining its directions, striving to bend to the current market needs and realities, efforts also focused on some reorganization within banking units, as Catalina Sucaciu, Partner at SCA Jinga & Asociatii observes. “Given the circumstances, banks will be forced to compromise as regards the costs of their products to attract or retain customers, which will eventually be reflected in their profitability, unless the operating costs are diminished”, she adds. 

Even so, the transition is not an easy process, at least for some banks which “are still not prepared to accept the real value of some of their assets and still go with the decision to not fully liquidate their portfolio of non-performing assets”, says Alexandru Reff, Partner of Reff & Associates SCA.

Nevertheless, banks are seeking to cover bad debts and clean off their balance sheet from NPLs, which requires higher provisions, threatening the fragile recovery in terms of profitability. As major improvement with respect to removing NPLs from their portfolios will not be visible in the near future, the fact that banks are increasingly determined to resolve this issue affects lending activities.

The good news is that expenditures with loan loss provisions are very likely to stagnate in 2014 and possibly even drop in some cases, as indicated by the “Romanian Banking Barometer” conducted by EY Romania and the Romanian Banking Association (ARB).

Additionally, financial institutions in the domestic market anticipate a growing demand for loans in both retail and corporate segments, most of them foreseeing an increase in lending activity this year.

“Financial institutions are interested in supporting the economy through loans. Banks expect a slight increase in credit demand in several industry sectors and customers segments and, at the same time, expect partial relaxation of lending policies in sectors such as manufacturing, information technology, agriculture, telecommunications, healthcare and the SME (Small and Medium Enterprises) segment”, according to Radu Gratian Ghetea, Chairman of the Board at ARB.

According to the aforementioned market research, based on a survey taken by banks with a total market share of 85 percent, in the retail area, over 65 percent of respondents estimate that demand for consumer loans will increase, whereas a larger proportion of 75 percent predicts a growing demand in terms of credit cards. Also, about 70 percent of banks expect a similar improving trend in loans for businesses.

However, the latest insolvency regulations have a negative impact on lending, 85 percent of banks believing that the relevant legislative framework and its enforcement is discouraging lending.

The NBR has gradually dropped the monetary policy rate which appears to have stabilized at the historic low of 3.5 percent reached in February 2014, leading to an excess of liquidity on the market aimed at encouraging consumption so as banks expand the loan base.

A much-expected measure, at first glance, still there is no certainty that by relaxing the low key interest rate, the NBR manages to convince banks to use the unlocked amounts on lending, believes Cristiana I. Stoica: “In my opinion, the main risk is that this money will be used by the banks to pay back their debts to their parent companies, or to cover losses generated by NPLs rather than to boost the lending activity on the local market".

Although these premises anticipate a change in financing, which has been put on hold over the past years, carrying reminiscences of the economic recession, banks are still very cautious when it comes to lending, somehow contradicting the general view.

The lack of bankable projects continues to be the main reason invoked by banks for their prudent approach and cautiousness, also noticed by Neil McGregor, Managing Partner of McGregor & Partners.

“My impression is that banks are still very cautious. It is important, when looking for financing, to be able to present a project which has been properly thought through and which identifies and manages the risks”, he says, explaining that banks are much happier to approve loans for projects partially financed, being more likely to come on board if somebody else is putting money in, ideally if the developers are putting their own equity in.

This prudence should not be mistaken, though, for a lack of availability for lending: “There is availability for financing, especially for corporate funding”, according to Catalina Sucaciu, Partner at SCA Jinga & Asociatii, who mentions, as well, the measures taken by the NBR as a basis for higher lending activity.

Daniela Nemoianu, Managing Partner of NTMO Attorneys at Law says that it is normal for banks to be prudent and selective considering the recovery efforts paid to overcome the economic crisis.“Appetite for financing and re-financing is raising and there is new business taking off”, she adds.

“Banks on the Romanian market are willing to release funds, there is money available, yet, there aren’t sufficient projects showing credibility and stability so as to be considered reliable by banks. When there is a solid business, banks are more than willing to provide financing”confirms Ioana Racoti, Senior Partner at Zamfirescu Racoti & Partners.

Without necessarily calling it a trend, some companies began to look towards foreign financing. This is not something new, companies having looked for alternative financing sources for many years now, especially multinational corporations or companies that are looking for large loans.

So, companies try to get loans from banks in different jurisdictions not because of difficulties in accessing funds from domestic banks, but rather because financing conditions are sometimes better. At least when the lender is the European Bank for reconstruction and Development or the International Finance Corporation, explains Ioana Racoti, also highlighting that beyond better terms of loan agreements, there is the status acquired which attests that the business is solid.

Advantages of cross-border financing are enumerated by Daniela Nemoianu: “EU passporting, less bureaucracy and more competitive offers are also good reasons for accessing foreign credit”, who also notices that “International Financial Institutions have also become more active and show diversified interests in Romania, which is a positive thing for the market”.

 

Capital market, in a relationship with state-owned companies

The capital market in Romania has had a very good year in 2014, as Lucian Anghel, president of the Bucharest Stock Exchange, emphasized during the Retail Investors Forum: “We have not seen such a great period of effervescence in the past ten years (...) if someone told me in early 2012 that someday, in 2014, we would record a traded value of half billion euro in a few weeks, I would have told him – What a nice dream! Well, we came to live that dream these days.”

Indeed, we have seen an increased level of activity lately, in the first quarter of 2014 the traded value rising by 22 percent year-on-year to over lei 2.3 billion, yet the Romanian capital market is still a frontier market.

The increased volume of transactions is mainly due to the privatizations of state-owned enterprises which were listed on the stock exchange, but, in fact, the capital market continues to be a forbidden ground to the private sector.

Nuclearelectrica kick-started the listings on the BSE last fall. It was the first initial public offering run in the past five years, bringing almost lei 282 million to Romania’s nuclear power producer for the 10 percent stake put up for sale. The next one was Romgaz, which attracted some lei 1.7 billion for 15 percent of its securities in the largest public offering of a Romanian company at that time. Moreover, it was a premiere by the fact that Romgaz was simultaneously listed on the Bucharest and London stock exchanges where its securities are traded in the form of Global Depository Receipts.

In 2014, Electrica has been in the spotlight with an IPO for a majority stake of 51.2 percent valued at nearly lei 2 billion, thus exceeding Romgaz’s offering. Having a similar strategy, its securities, in the form of GDRs, are available on the LSE, as well. A notable outcome is the entry of the EBRD in its shareholding, after it has acquired 8.6 percent of the total shares, the second largest stake after the one held by the Romanian state.

Presented as major successes on the market, their future evolution will determine to what extent these IPOs were timely and, therefore, how successful they were.

On the other hand, the stock market seems uninteresting among private companies. AdePlast’s attempt last year was actually an exception which did not prove the rule. Foreseen as a path-breaker for the private sector, after a five-year drought, the IPO of Romania’s most important manufacturer of building materials proved to be a failure as the minimum threshold of shares offered for subscription was not reached.

The future does not sound good either as concerns private IPOs. There is no listing underway, nor is there any news about such a move.

“Private companies are not necessarily less attractive than the state-owned ones, but in order to have a floating stake on a stock exchange, a private company mostly needs to reorganize its business. I have seen clients who hired consultants in view of their foreseen listings, but when the specialist came with a reorganization plan, they assessed it and then gave up”, says Ioana Racoti, Senior Partner Zamfirescu Racoti & Partners.

Reff & Associates SCA had similar experiences: “We, at Reff & Associates SCA, have a major interest in this area. We were involved in some listing tentatives, but unfortunately they did not go through”, says Alexandru Reff.

“The reason for this is the lack of appetite from the side of the institutional investors, as was already showed by AdePlast listing failure”, says Cristiana I. Stoica. “Moreover, in my opinion, the local banks are falling short of advising their clients, the ones capable to raise money from the capital market, to initiate an IPO”, she adds.

Bryan Jardine, Managing Partner of Wolf Theiss says: “Investors are looking to Warsaw, Vienna or even London. I think the perception is that there’s just not sufficient exposure, perhaps, for the Bucharest Stock Exchange. That maybe there’s no access to sufficient liquidity or mature investors”.

“When confronting the Bucharest and Warsaw stock exchanges, the latter wins, not only because it is labeled as an emerging market, but also since costs for listings and management services are smaller as compared with the BSE,” points out Gelu Maravela, Managing Partner at Maravela & Asociatii. Additionally, the intricate legislation, the lack of predictability and transparency on behalf of the supervisory financial authority, as well as the lack of financial education negatively influence the development of the stock market. 

The lack of interest comes from both sides, as companies have a wrong perception on what being listed means: “One reason is this general belief that the role of the capital market is to trade shares and not to raise capital, the latter being the almost exclusive attribute of the banks. Also, the size of the Romanian market is significantly smaller than that of its neighbouring countries”, explains Silvana Ivan, Partner of Tuca Zbarcea & Asociatii.

While in other countries being listed is treated as a privilege, the Romanian capital market has been seen as a means of selling existing shares, rather than raising new money, also observes Neil McGregor.

As in order to change this belief proper financial education is needed, significant improvement as concerns the BSE is little likely to be seen before Romania is upgraded to emerging market status.“Most of the conditions are met, so it is not an impossible endeavor. Otherwise, it would be difficult for the stock exchange to get traction and materiality, even if listings such as the ones of the utilities companies are relevant”, says Daniela Nemoianu.


This article appeared in the 2014 edition of Which Lawyer in Romania

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