Earlier this year, Romania’s largest bank, Banca Comerciala Romana (BCR), suffered a humiliating two-day run at the hands of its depositors following the collapse of the country’s largest investment fund, the Fondul National de Investitii (FNI).
| Candido: woes contained if not exactly cured | ||||||
Many executives and officials blamed the stampede on the irrational fear of retail depositors that BCR was liable for losses at the fund or that the bank was otherwise in trouble. But one seasoned local banker believes the panics were the result of disinformation.
“They used phone banks manned by gypsies,” the banker recalls, declining to attach a name to “they” but acknowledging with a wry smile his admiration for the conspirators. “They called around, saying ‘so-and-so bank isn’t safe.’ And the next morning, people were lined up.”
When this banker learned the calls were being made about his institution – the “they” in his case included troublesome borrowers, he says – he didn’t waste a minute.
The bank Flew in large reserves of hard currency and extended the opening hours of threatened branches. It also fought Fire with Fire, sending workers into branches to mingle with frightened depositors and showily make deposits. In the event, the bank, like BCR – which lost no more than 30,000 of its 1.5 million depositors – easily survived the episode. Like many others, the banker believes the banks may now be more secure than previously because those crying wolf were proved wrong.
Confidence high?
The banker’s tale, while perhaps overwrought, highlights the devilish ambiguities of the local banking sector and of the troubled country itself.
Some executives and analysts believe that the very visible problems of the industry obscure fundamentals that are better than many of the most advanced transitional countries, such as Hungary. Others warn that, beneath this better layer, there is yet more blackness awaiting illumination.
Most, however, agree that the worst has passed. “The system has been through hard times but confidence has been preserved,” says Salvatore Candido, director for Romania at the European Bank for Reconstruction and Development, which has provided loans to and made equity investments in a number of Romanian banks, including BCR.
Like many other investors and lenders, Candido believes most of the remaining barriers to normalcy have been passed. He adds that the privatization of BCR and the country’s second largest bank, Banca Agricola, is just the latest sign that the root cause of the sector’s woes – ruinously unprofitable lending to unrestructured but well-connected enterprises – is contained, if not cured. “Most of the loss-making companies were clients of banks that no longer exist,” he says.
One reason some of these banks no longer exist is the newly energetic supervision department of the National Bank of Romania (NBR). Some believe it’s even too tough.
Nicolae Cinteza, director of the NBR’s supervision department, clearly delights in his role as taskmaster to Romania’s banks. “If they try to lend imprudently then we won’t allow them to lend at all,” says Cinteza, sitting among stacks of compliance reports in his houseplant-choked office in the bank’s faded beaux-arts headquarters.
Using the relative quiet of a vacation day to catch up on some paperwork, he recounts how he intruded on the holiday of a bank president whose institution had Filed a liquidity report which did not add up. “I called him up and said: ‘We have a little problem here with your report.’ The banker replied that he was several hours from Bucharest, Fishing. I just said: ‘No problem, I will be here.’ And he came to see me that afternoon and we sorted out the problem.”
Other banks Flouting lending, deposit-taking or liquidity standards have not had it so easy. Most recently, the National Bank moved to have the eccentrically named International Bank of Religions declared bankrupt, despite last-minute promises by the troubled bank’s management that it was about to receive a capital injection from a foreign investor, a promise Cinteza says he knew was over- optimistic from the start.
While Cinteza and his team make it plain they will move against banks which fail to meet NBR guidelines – and do not challenge the notion that the NBR failed in the past to take such action – they just as strongly emphasize prevention. If nothing else, Cinteza says, prevention can help contain the burden on the Deposit Guarantee Fund, which is Financed by the banks themselves.
At the centre of the supervisors’ effort are new reserve ratios and an early- warning system modelled on the widely used Camel (capital adequacy, asset quality, management, earnings, and liquidity). Both will come into force in the autumn, along with a requirement that banks adopt international accounting standards (IAS).
While the new ratios will change the position of some banks, Cinteza says he does not expect the regime to lead to the closure of “more than one or two” marginal banks over the next year. As it is, he says, the most crucial data coming into the department – especially those on immediate liquidity and past-due and doubtful claims – have improved markedly over the past year for most of the three dozen banks supervised by the NBR. He says that past-due and doubtful claims dropped from 253.6% of equity capital at the end of 1998 to 23.8% in May of 2000.
“I can see that the quality of people supervising us has improved,” says Zdenek Turek, president of Citibank Romania, who came to Bucharest from the troubled Czech market two years ago. “They are very smart. Capacity is not an issue right now. There is much more focus and much more control.”
At the same time, some bankers complain about the formalism of the matrix-heavy early warning regime and of being called to the mat by Cinteza and his staff. Others still have not forgiven the NBR for its past negligence nor the government for not giving it authority over non-bank Financial institutions, especially the investment funds and the country’s sprawling credit co-operative industry.
The credit co-operatives – or “popular banks” – have been a special cause of concern, as they lure depositors with sky-high interest rates and have been allowed to use the word “bank” in their names. A local IMF official calls the co-ops “functionally illiquid”, a designation that a resident Big Five auditor translates as “a disaster waiting to happen”. But while some published reports put the amount of deposits at risk in the popular banks at upwards of $200 million, NBR officials and executives at several commercial banks say the true Figure could be as low as a tenth of that. They also downplay the notion that failures in the non-bank Financial industry could contaminate or lead to further runs on the banks. Meanwhile, legislation has been passed reining in the popular banks, forcing them either to drop “bank” from their names or apply for a banking licence – something few, if any, would be able to afford.
And in August, the police arrested the head of the Firm that managed Fondul National de Investitii and initiated extradition proceedings against his predecessor, indicating that suspected mismanagement or fraud at Financial institutions will not go unpursued. The nation’s largest savings bank, the Casa De Economi Si Consemnnatiuni, or CEC, was ordered by a court to cover the roughly $170 million lost by FNI’s investors. The ruling came despite the fact that FNI had not been making payments for the guarantee policy in question – and there is a strong feeling that the court decision may be reversed, lest it damage the prospects for privatizing CEC which is due to be transformed into a bank next year. Yet the court-inflicted blow has deepened the suspicions of some that CEC, which for now remains not a bank but a deposit-taking institution, will not be sold off for years.
Golden opportunities?
Building on last year’s sales of fourth-placed Banca Romana Pentru Dezvoltare, or Romanian Development Bank, and seventh-placed Banc Post, the government is pledged to sell the country’s two largest banks within the next year.
First on the block is Banca Agricola, at one time the second largest bank by assets and now a battered casualty of the country’s decade of economic decay. Following the sale of Agricola will be First-place BCR, which was cobbled together a decade ago from the former commercial banking operations of the National Bank and the better-performing assets of Bancorex, the former foreign trade bank which failed spectacularly last year.
Following numerous delays, the sale of Agricola is expected to be closed within months to a consortium made up of Rabo International Services, the Agricultural Bank of Greece, and the Romanian-American Enterprise Fund (RAEF).
“Unfortunately for Romania, our consortium offered the only qualified bid,” says Joel Hayes, vice-president and chief investment officer of the US government-backed RAEF. “There was a tender process but there just wasn’t great demand. We studied the opportunity a long time before we realized there was a way to make it attractive.”
According to Hayes and others, the bank will require a recapitalization of between $150 million and $200 million, following the removal of most of its assets to the government’s bad loan administrator, the AVAB.
(The AVAB is now sitting on assets with a nominal value of more than $2 billion, which are set to be disposed of via an arrangement with CA-IB Securities, which won a tender for the job in late summer.)
Despite the steep costs of restructuring the bank, and the fact that some counselled the government to shut it down, Hayes says Agricola has a future. “It has an expansive retail network and is in a lot of places that others aren’t,” he says. “But rather than pigeonhole it as a purely agricultural institution, we like to describe it as a rural development and retail bank. It could be effective as a distribution arm for all kinds of Financial products, including pension funds when they come on line, and insurance products, which are already here.”
But the bank won’t have a strong strategic owner, unlike the Romanian Bank for Development (RBD), now 51%-owned by Société Générale. While conceding that the record of dispersed ownership of banks in the region is not enviable – it “failed miserably” in the Czech Republic, he says – Hayes argues that Agricola can benefit from having several strong stakeholders.
“The objective is to have a balance between the Financial-sector partners – the strategic investors – as well as some purely Financial investors,” he says. “We don’t want to transplant a plan that worked in Greece or Holland but one that will work in Romania.”
One purely Financial investor Hayes hopes to land is the EBRD, which has yet to formally announce its interest in participating in the sale. While admitting that the EBRD Finds it “difficult” to take part in such privatizations without a strategic investor, Candido, the director for Romania, does not rule out involvement in a consortium buyout of Agricola. “A fragmented privatization is not necessarily a bad privatization,” he says.
Big, yes, but better?
Those sitting out the Agricola sale are nevertheless keeping an eye on the stop-and-start transaction, seeking clues about the coming privatization of BCR. With 275 branches and a client roster listing almost two-thirds of Romania’s industrial companies, BCR represents almost half of the total banking system’s equity and 30% of its deposits. “It is not just the largest bank in Romania but one of the biggest privatizations in the region,” says Candido.
It is also, at least superficially, one of the most successful banks in the region, almost tripling its net income in the First half of 2000 to almost $74 million, largely on increased trade-related business from commercial clients. “We are very well-capitalized and our ratios are extremely good, with a return on assets of 3.55%, profits-on-average capital at 20.25% and a capital ratio of 24.05%” says BCR chairman and CEO Nicolae Danila.
The bank’s total assets at the end of the period stood at roughly Lei50 trillion, or $2.6 billion. “We consider our customers our business partners and this is what has made us number one,” says Danila.
These “partners” include a corporate roster fattened by the cream skimmed from the failed Bancorex. BCR’s retail business also is showing strong growth. Its issuance of cards, for example, grew two-and-a-half times in 1999 to 230,000 users.
Coupled with the market aspirations of a number of foreign banks present and absent in Romania, BRC’s relative strengths suggest its sale could draw a raft of bidders.
“It’s a solid bank and I believe buyers can be found – despite rumours from abroad,” says Turek of Citibank, who declined to say whether his bank would be interested. “It is reasonably well managed. The 1999 internationally audited numbers do not show any disasters. There are definitely banks that could be interested in the retail part and some interested in the commercial part. The challenge for the adviser is to Find someone interested in both and willing to take the challenge of doing business in a place like this.”
Those believed to be willing to take the challenge include several major western banks currently under-represented in the market, especially the three leading Italian banks: UniCredito Italiano, Banca Intesa and San Paolo IMI.
The Italian banks, which like others have remained silent about their intentions, would be tapping a major trade and investment market for both sides – Italy is Romania’s largest trading partner. Several foreign banks in Romania have set up Italian desks to cater to the demand. Among the three largest Italian banks mentioned as potential suitors, UniCredito is the most logical bidder, says analysts and local bankers.
“It Fits in with their strategy,” says Richard Thomas, who covers UniCredito and other Italian banks at ABN Amro in London. But while UniCredito’s formula – buying banks with impressive market share and pricing power – may make BCR a good Fit with this strategy, he says the woefully underdeveloped Romanian market will make any major profits long-term. “Poland is one thing but Romania is another,” he says. “This market is not ready to be pushed through the asset-management hoop, where they are really going to clean up.”
Also mentioned is the supposedly soon-to-be-merged Hypoffereinsbank and Bank Austria Creditanstalt, represented in Bucharest by Bank Austria chairman and CEO Dan Pascariu, the sole Romanian to head the local operation of a western bank. Started in August 1998, just as the Russian Xu swept through the region, Pascariu’s bank was the First foreign institution to oVer retail services. More than half of its liabilities are in the form of deposits from individuals.
“Without this news, our intention would have been to grow organically over the next few years – to build another six or seven branches,” Pascariu says. “I don’t know what the acquisition appetite of the new group is but I would assume that because of the size of Romania – and depending on the economic and political outlook – that might be for the acquisition of a network. The existing state-owned bank for sale is BCR but there could be other private banks on the market. BCR is a good bank, remarkably clean.”
Julia Peach, who covers the parent banks for ABN Amro, thinks the new group may indeed be ready to take a gamble on BCR. “Clearly it will be a bank much more focused on emerging markets and Romania would be one market they will focus on,” she says. But BCR could be a gamble. As Pascariu notes: “Whatever foreign bank takes over BCR, it would mean going deeply into the local market.”
| Danila: “We consider our customers our business partners” – including Bancorex clients? | ||||||
And despite the strong belief on the part of some that it is largely free from hidden troubles, this view is not unanimous.
“I would look with scepticism at every state bank,” says one western executive consulting on the country’s industrial privatization programme. “Yes, they transferred Bancorex’s bad assets [to the AVAB]. But BCR got headcount and costs.”
Says another foreign banker of BCR: “It’s nice to say it’s been restructured but it hasn’t.”
Think global, buy local
And when it is sold, will it go to a strategic foreign investor? “We mustn’t forget about domestic capital, of which there is plenty,” says Cornel Cojocaru, BCR’s spokesman. “Possibly there could be a domestic and international Flotation.” Such a Flotation might follow, not replace, the sale of a major stake to a strategic buyer.
Anything but a straight strategic sale could be a damper on sentiment, warns a foreign banker. Others have suggested the bank will end up in the hands of one of the Greek or Turkish banks which have proved Fierce and dexterous competitors on the local market.
Przemek Gdanski, head of corporate banking at ABN Amro Bank (Romania), says BCR needs a global player as a partner: “Even if BCR was acquired by a strong but not major bank – and could improve its local operations – the global aspect wouldn’t be there.”
Whoever buys BCR will be buying into a market with enormous potential – especially on the retail side – and enormous risks. According to Victor Cionga, managing director of Raiffeisen Financial Advisers Romania, the commercial market can be divided into three main segments: the big multinationals; those he calls the “serious” local corporates, such as Petrom, the national oil company; and the growing number of small but sound local companies that need credit and are increasingly demanding better services from their banks (and who might be Finding that their local bank has disappeared or merged.)
Cionga says “everyone is Fighting” for the choice multinational clients, leaving the scrappier locals, who are more inclined to take risks, as well as a small group of upstart Greek and Turkish banks – what he calls “regional powerhouses” – to make inroads into the next generation of solid corporate credits. He adds that there are niches in the system. For example, a small but sound local bank, Banca Romaneasca, has successfully targeted local small and medium-size enterprises.
Hayes of the Romanian-American Enterprise Fund believes the large foreign banks have essentially dropped the ball. “The local market will be developed by local players and these aggressive Greeks and Turks,” he says. “When the western banks wake up in a few years, they will discover they have a real tough battle to make up the market share they have lost.”
But while foreign banks are Fiercely competing for the business of the multinationals, the market is not nearly so crowded as others in the region – or their home markets. “I don’t think it’s over-banked at all,” says Franco Lagro, who until recently was the partner in charge of the Financial practice at the Bucharest operation of PricewaterhouseCoopers. “If you look at the profitability of banks in Romania, it is higher than in Hungary. Yes, there is competition but not like in Budapest.”
This does not mean there have not been casualties among the foreign names. Earlier this year BNP-Dresdner decided to withdraw after what some called a half-hearted stab at the local market, in one rival foreign banker’s opinion a sign of tremendous indecision. “It was like buying a car, putting it in the garage and not budgeting for fuel,” he says.
In addition, a 30% reserve requirement imposed by the government largely as a monetary measure has caused pain. But according to supervision chief Cinteza, the NBR is trying to take the sting out of the requirements by giving banks access to higher-yielding assets for the reserves in question. And in any case, he says, the reserves are a source of strength. “In this situation – with the rumours and so on – high levels of reserves are good,” he says.
Above all, the market is subject to the vagaries of a political and economic climate that only the most hearty emerging market banker would Find comfortable.
The presidential and parliamentary election due for November could return either a government working hard to enhance the business environment, or one representing a throwback to the party and president of the early 1990s. Serving president Emil Constantinescu stunned the nation in mid-summer by announcing he would not seek re-election but use the remainder of his term to work on economic reform and Fight corruption.
Most are hopeful, pointing out that the opposition socialists have pledged to continue the current government’s macroeconomic and structural reforms.
The World Bank in July reaffirmed its commitment to the government’s efforts, pledging as much as $700 million, roughly $400 million of it for a structural adjustment programme headlined by the sale of industrial assets and banks. Meanwhile, the International Monetary Fund, which earlier re-started a stalled lending programme for the country, predicts growth of 4% next year.
“I have met very few people who have come to Romania and said that it is worse than they expected,” says Turek of Citibank. “But I have met a lot of businessmen who have come to Romania and said: ‘It is not so bad – you can do business here’. At the end of the day, this is an economy in Europe that cannot be overlooked.” But neither can its problems nor its spectacular ambiguities.
Kimmo Rama, an analyst at Thomson Financial Bankwatch, says he was stunned to Find out that a recent report he wrote about the Romanian banking sector seemed to be wilfully misinterpreted by the local press, turning his questions into an answer.
“In the stories, my report was called: ‘Romania: The Worst is Over,'” he recounts, laughing nervously. “But it was actually called: ‘Is the worst over?'”
“I was raising a question.”
