Tuesday, September 29, 2009

Old skills needed in tougher times

By Thomas Escritt
Published: September 28 2009
The Financial Times

After three years of breakneck growth, Romania’s bankers are having to relearn old skills to cope with the more difficult environment.In the latter years of its post-millennium boom, Romania – with an economy growing at 8 per cent a year, low levels of banking penetration and a credit-hungry domestic market of 24m people – looked an irresistible target to western European banks. They wanted their share of the profit from Romania’s gradual convergence with the European Union.

Between 2005 and 2008, the banking system grew by about 1,000 branches each year, and the banks hired some 20,000 people each year to work in them. At the peak of the boom, Portugal’s Millennium Bank planned a €300m spending spree to enter the market from scratch with 100 new branches.That optimism may have vanished but many senior bankers are convinced that the bursting of the bubble was for the best.“It’s a good thing when you realise that you have to rationalise and cut costs. It was unhealthy growth and an unhealthy mentality,” says Dan Pascariu, chairman of Unicredit Tiriac, the Italian bank’s Romanian subsidiary. “The approach to risk management in the sector has changed. Sellers have had to turn themselves into restructurers, and they are starting to see the other side of the business. When they sell in future, they’ll know the other side of the coin.”The slowdown also put paid to wage inflation; at one point, competition for staff was so intense that some staff in head offices were earning more than their counterparts in Austria.

Retrenchment followed.Dominic Bruynseels, chief executive of BCR, the largest Romanian bank, owned by the Austrian bank Erste Group, says: “At the end of last year the workforce did announce a strike because of our offer to link Christmas and holiday bonuses to the bank’s performance.” Staff eventually accepted the offer.

This sober assessment stands in sharp contrast to the alarm with which many analysts regarded central and east Europe’s banking systems in the first quarter of this year, when collapsing exchange rates led many to expect borrowers to default in droves on loans made in foreign currencies. Some forecast that mother banks in western Europe would come under strain as they were forced to prop up their eastern subsidiaries as they experienced a sharp rise in non-performing loans.

In the event, only Israel’s Leumi Bank, one of Romania’s smaller banks, chose to withdraw from the market.“None of the established banks will withdraw,” says Mr Pascariu, “although we might see some mergers”.There is still room for consolidation. While the Royal Bank of Scotland was unable to find a buyer for its Romanian subsidiary, bankers privately agree that larger forces are likely to buy up some of the smaller banks when the price is right.Others, however, fear that banks have become too cautious.

Mugur Isarescu, governor of the National Bank of Romania, says: “Some foreign-owned subsidiaries moved in a direction they discovered to be unstable, relying on credit lines from the mother banks, so now they are more focused on extending their deposit bases than on extending credits. It was an over-reaction.“They were too generous before the crisis and today they are too pessimistic, and it will take some time to find a way of addressing the issues properly.”But Mr Pascariu dismisses suggestions banks have cut lending. “There is a myth about the banks not lending, but demand for lending has fallen by 90 per cent for retail and by 50 per cent for corporate customers,” he says.This is in part a reflection of the struggles of the customer base. With small and medium-sized enterprises suffering, few are looking to raise new finance.“The small and medium enterprise base in particular is suffering – there has been a big rise in non-performing loans,” says Mr Bruynseels.

The level of non-performing loans among SMEs has risen steadily this year, hitting 2.9 per cent as a share of lending to non-bank clients in July, according to the central bank, up from 1.4 per cent last December.Mr Pascariu expects this level to continue rising, topping out at 6 per cent.However, both he and Mr Bruynseels insist the sector has the liquidity to cover even that contingency. “We have no issues with liquidity,” says Mr Bruynseels. “Our credit line with Vienna has remained the same.”

A decision by the central bank to cut the minimum reserve requirements for lending in foreign currency from 40 per cent to 30 per cent has created further liquidity – although much of that has been absorbed by a club loan made by Romania’s commercial banks to the government.“The IMF loan restored central bank reserves to a pre-crisis level and allowed us to ease reserve requirements,” says Mr Isarescu. “Part of the money liberated by cutting the reserve requirements led to the club loan.”

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