Sunday, April 20, 2008

East European banks uses household savings to combat cash squeeze

Friday, April 18, 2008

BUCHAREST: Banks across Eastern Europe are seeking to plug liquidity shortages with cash from household savings in a trend that may help protect some of the region's red-hot economies, while trimming margins in the banking sector.

Global credit woes have thinned cash flows from some West European banks to their eastern units, and rising risk aversion in international markets has made funding too expensive for some local borrowers, say local bankers and analysts.

This, coupled with persistently high demand for credit in some cash-hungry former communist economies, has driven local banks to increase interest on saving accounts to attract customers in developing markets like Romania, Bulgaria or Poland.

"Banks are borrowing at increasingly higher yields and when these funds reach Romania you add the costs of bigger country risk and of minimum reserve requirement," said Ciprian Dascalu, analyst at Millennium Bank in Bucharest. "Basically, banks need to start drawing on their own funding sources.

"So for now, banks opt to lower their profit margins somewhat, their margins to finance lending to boost savings," Dascalu said.

In Romania, where consumer borrowing has been particularly rampant, some smaller banks have increased interest rates by 2 to 3 percentage points, often exceeding the central bank's benchmark rate of 9.5 percent.

Bigger banks, like Erste Bank's BCR, or the Romanian subsidiary of ING, have also jumped on board.

The rush has gathered speed in the past two months as bankers prepared for a heightened liquidity crunch in the tax payment quarter.

So far they were quite reluctant to raise interest rates on deposits to keep margins up, "but now it will have an adverse impact on the margins," said Marta Czajkowska, an equities analyst from KBC Securities in Poland, referring to Romanian banks.

Bulgaria is also struggling to contain voracious demand that threatens to overheat the economy. Average interest rates on three-month lev deposits have risen to 4.95 percent from 3.99 percent a year earlier.

While Bulgarian banks have consistenly increased rates on both lev and non-lev deposits, in Romania emphasis is placed on local currency savings, which some analysts say is because the central bank has a lower minimum reserve threshold for leu than hard currency.

Efforts to encourage savings are also evident in other parts of the region. Polish state-controlled PKO has raised returns on savings deposits, prompting more aggressive competitors to follow suit. Serb banks have taken similar steps to bolster the client base.

"A lot of people have become aware the most important thing for a bank is a solid funding base," Dascalu said.

The banking system in eastern Europe is dominated by foreign institutions which seized the opportunity for growth - in Romania over 90 percent of the banking system is foreign owned, in Bulgaria it is 80 percent.

Economists say higher savings rates could dampen household consumption and provide a cushion for some of the region's overheating economies.

Romania has one the lowest savings levels in the European Union and is struggling with resurgent inflation, which has risen to 8.6 percent on the year in March from last year's post-communist low of 3.7 percent, as well as a bloated current-account deficit. Both are driven by domestic demand.

Lending in Romania rose 60.4 percent last year to 148.18 billion lei, or $65.1 billion, while deposits were up 34 percent to 129.06 billion lei. In Bulgaria, loans grew 62.5 percent, while deposits 34.3 percent.

"Interest rates on savings have risen beyond the most positive expectations of the best economist from the central bank," the central bank governor of Romanian, Mugur Isarescu, said.

"It is very important for the fight against inflation and for the current-account deficit."

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