Romania's elusive potential

From the number of foreign banks opening branches in Bucharest one could be forgiven for thinking that the Romanian market must finally be about to take-off. Don't be fooled. The banks may be there, but as yet the business isn't.

The attitude of bankers involved in Romania ranges from philosophical to lugubrious. "There is a sense of disappointment," says one foreign banker. "Romania was expected to be the next Poland." Mimicking Poland's 6% GDP growth remains a pipe dream for Romania. Indeed, any sort of GDP growth seems pretty far off. Predictions for 1998 see GDP declining by as much as 4.5%. At the start of the year, the finance minister Daniel Daianu was aiming for zero growth. A target that has been scuppered by industrial production which is down by around 20% on 1997.

It's a gloomy picture for those banks which, infected by the over-exuberance that followed the elections of November 1996, set in motion plans to open branches in Bucharest. It is those plans which are now coming to fruition, hence the number of new foreign branches at a time when there seems little real incentive for banks to set up operations. By the end of 1998 there should be new branches of Deutsche, Dresdner/BNP, Raiffeisen and Erste banks to name but a few. Observers say that many are already disillusioned with the market. "We see the smaller foreign banks complaining a lot," says one Bulgarian banker. "Especially the new banks."

One of the new banks which is not complaining, at least in public, is Raiffeisenbank. Its commercial-banking subsidiary has been open for business since June and its investment-banking operation should be up and running by the end of September. Despite the difficult conditions Rino Rainovich, general manager of the commercial bank, seems upbeat: "Yes we are sensitive to the current situation, but we don't feel particularly exposed," he says. "It is a big and important market. The long-term prospects are good and you have to get started sometime."

The bank is currently limited to a single office in Bucharest with 40 staff, but Rainovich says it will look to expand territorially as soon as possible: "In three or four years we should have a significant branch network and may have entered the retail market."

But most foreign banks are making only slow progress in building a branch network. So far only ABN Amro and ING Barings have succeeded in breaking out of Bucharest. Both have opened branches in Timisoara, and ING plans to have two more regional branches open by the end of October.

The model for ING's expansion in central and eastern Europe is fairly well established. First commercial banking, then insurance ­ which it began in Romania two years ago ­ and then retail-targeted financial services, perhaps through the acquisition of a local bank. That final step may prove problematic in Romania, suggests a member of the bank's Romanian management. "I don't think we can do that here. Romanian banks have invested far too much in bricks and mortar. That's not the future." The new commercial banking branches being opened by ING are all hi-tech operations, with information processed centrally in Bucharest and a staff limited to 12 per branch.

Although ING hasn't intentionally branched out into the retail banking, it has, almost by accident, picked up a few thousand customers. "We couldn't stop it," says a source at the bank. "We can't say no to the finance director of a corporate customer who also wants an account."

As the largest foreign bank in the country, with over 3,000 corporate clients, ING claims to be well insulated against the negative sentiment in the market. It opened a full branch office in 1994 and benefited from being one of the first banks into the country. "To a degree we've been lucky," admits a senior banker at ING. "We opened at the right time, with the right people and the right products."

Those banks that came later to the market are having to work harder to succeed. Citibank, which has only been fully operational for a little over a year, is still in the process of developing its strategy. With 100 staff based in Bucharest, the bank is still looking to obtain a wider distribution capability. Citibank's chairman in Romania, David Garner, says the bank is still weighing the viability of various options, including expansion through acquisition, through partnership with a local bank or by creating its own ATM network.

For its part, Raiffeisenbank hopes to be able to distinguish itself from competitors by working more closely with local borrowers. "We will probably be more aggressive in our lending than other banks," says Rainovich, "lending to local companies and not just multi-nationals." ING says that around 80% of its Romanian loan book is with multinationals, often with guarantees from parent companies. As a result, ING's managers believe, its exposure to country risk is reduced.

Tougher for the locals

But while foreign banks may be struggling in Romania, the domestic banks are suffering. "They had a very tough year in 1997," says one analyst. "It was a difficult operating environment with hyperinflation, interest rates sharply up, high volatility in interbank rates and deteriorating loan quality." Despite the fact that 1998 has seen some improvement in these conditions, in May Thomson Bankwatch downgraded its ratings of seven of Romania's leading banks. And Paul Jennings, vice president at Thomson Bankwatch, sees little reason to alter that negative outlook. "The problems of the Romanian banking system will continue until there is sustained economic restructuring and a hardening attitude towards problem banks," he says.