ANNALS of the ORADEA UNIVERSITY.Fascicle of Management and Technological Engineering, Volume X (XX), 2011, NR2 FINANCIAL CRISIS EFFECTS ON ROMANIAN BANKING SYSTEM Anca Maria Roşu Academy of Economic Studies of Bucharest, Institute of Doctoral Studies,
[email protected] Keywords: financial crisis, effects, marketing strategy, banking services, Romania Abstract: The financial turmoil has prompted a reality check of the banking system. This paper builds on an overview of the global financial crisis effect in Romania, emphasis the reaction of the banks in the economic crisis context and how their behavior changed and extends with measures undertaken for mitigating the effect of the crisis to enable a better understanding of the changes and trends of bank marketing strategies during crises. The purpose of the paper is to give suggestions on possible policy responses to the changing consumer buying behavior and to address the effects of the crisis on banking sector strategies. 1 Introduction The National Bureau of Economic Research defines a crisis as a major reduction in economic activity for several months, reflected in the decrease of GDP, decline of individual’s income, reduction of the level of employment, decline of industrial production and consumption. The majority of banking crises follow a common pattern of causes and consequences [Klomp, 2010]. Banking crises are initiated by deregulatory measures, which lead to overly rapid credit expansion, and increases of asset prices. At some point, the bubble burst, with a dramatic fall in prices, disruption of the asset markets, widespread bankruptcies, increase in non-performing loans, credit losses, and acute liquidity problems within the banking system. Finally, governments have to bail out the weak banking system by large-scale recapitalization and nationalization operations. The buildup to the latest financial crisis has similar features to earlier episodes: rapidly increasing of asset prices, credit booms episodes, dramatic expansion of marginal loans and the fail of the regulation and supervision of financial institutions to keep up with developments. The crisis was different than previous ones in new aspects: widespread use of complex financial instruments, interconnectedness among financial markets, accelerated degree of leverage of financial institutions and the central role played by the household sector. The recent financial crisis caused a synchronized global recession episode as all advanced economies went into a recession and many emerging and developing economies followed suit, but the impact varied across regions and countries [Classens, Kose, 2010]. The cost of a recession is affected by: changes in credit and asset prices, prevailing economic conditions at the onset of a recession, countercyclical macroeconomic and financial sector policies. The repercussions of crisis in the global economy were: the loss of confidence in the financial system, severe loss of liquidity, increased interest rates, the rising cost of internal and external funding, landslide bankruptcies, restructuring of companies and financial institutions, mergers, takeovers, financial support with funding from governments. Although the global economy has started showing signs of growth, the recovery still appears to be fragile and the adverse effects of the crisis are likely to be felt for a long time period. 5.281 747 5.655 3.650 24.092 25. Uncertainties caused banks to rewrite budgets.730 48.179 14.900 23. by downsizing the number of units. were taken cost control measures. The central bank no longer absorbed excess cash from the system. the increased credit risk.014 24.366 23.Individuals .348 11.749 23. The crisis hit Romania with a delay of one year. and required branches of foreign banks in Romania to submit monthly financial reports.278 49. 2011 In 2010.952 41.579 16.204 2009 86.267 19.434 Source: Own calculations after National Bank of Romania’s Monthly Bulletins 2007-2011 In 2010.238 35. Table 1: Banking system evolution (mill. 2011 89.425 67. by reducing labor and by canceling or delaying investment plans. new subordinated loans granted by parent banks and the allocation of profit to the reserve fund.047 41.893 47.457 24.303 17.885 26. Euro) 2006 Total assets Total loans: . Despite the reduction in aggregate loans relative to bank deposits.622 3.788 38.048 15.412 48. Table 2: Bank branches. credit institutions were pressured to manage simultaneously the multiple adverse effects of the crisis: impaired quality of the loan portfolios. but instead financed banks.156 Jan.746 18. Volume X (XX). Concurrently.090 3.898 3.100 2008 85. To prevent banks from transferring higher costs of inter-bank funding to the customer.799 17.617 39.Companies Total deposits: .ANNALS of the ORADEA UNIVERSITY. banks’ profitability entered negative territory and.552 71. rising unemployment. the reduction of demand for credit and installing loan outstanding balances.002 23.814 65.058 16.807 3.045 19.736 28. 5.431 2007 71. tighter lending standards changed the dynamics and structure of assets. employees and bank medium salary evolution Bank branches Number of employees Bank medium salary (Ron) 2005 3.901 23.746 18. parent banks’ supported subsidiaries in their effort to attract local market deposits.Companies 51. NR2 2 The effects of the crisis on the Romanian banking system Financial crisis deteriorated worlds’ economy and its recovery is expected to be uneven.762 17.855 6. The contraction of economic activity.791 16.514 52.765 2010 6. as the inter-bank market didn’t provide the necessary liquidity.282 .170 66.479 13. Loans granted to the private sector posted a decelerating trend and all types of loans reported negative annual growth rates. The decrease of external resources caused the decrease of banks’ dependence on external financing. the narrowing of the interest rate margin due to the global liquidity crisis and to the higher costs of attracted savings. websites of central banks.920 25. the national bank issued new regulations to protect customers and stimulate lending in local currency.705 24.811 2006 4. changing the structure of banks’ balance sheets.401 58.366 2. adjust their growth forecasts and freeze expansion plans. Fascicle of Management and Technological Engineering.002 2007 5.758 Source: Newspapers.753 3.711 6.003 20. credit institutions’ own sources increased due to: capital increases performed by shareholders. 2011.917 5.028 2009 6.613 2.876 21.480 2008 6.691 2010 90.931 15.Individuals: housing loans consumer & personal loans .434 9.646 17. but the effects were very strong. significant increase of loan loss provisions.189 41. as a result. 13 0.70 85.09 -1.72 4.2 62.45 1.52 … 2009 330.3 926 40 35 10 92.8 60.67 7.32 0.80 15.Foreign banks branches 8 7 6 7 10 Assets of banks with majority private 62.5 85.1 94 94.02 155.29 1.4 857 Number of banks with majority 29 30 30 33 36 foreign capital.87 2.10 14. mainly deposits and short-term financial loans.53 112.03 6. Table 3: The evolution of main indicators for credit institutions Total net assets (mill.66 7. on short term.80 88.3 52.00 … 2008 314.846 92.29 7. Table 4: Structural indicators of the Romanian banking system Number of credit institutions Number of banks with majority private capital 2003 39 36 2004 40 38 2005 40 38 2006 39 37 2007 42 40 2008 2009 43 42 41 37 10 94.3 Herfindahl-Hirschmann Index 1.22 1.56 17.20 13.Return on assets (Annualized net profit / Total average assets) (%) ROE .55 1.49 -0. The tendencies in the structure of liabilities were: the prevalence of short-term maturities of deposits.17 … … … 108. the growth of own funds and the drop in foreign liabilities. 2011.9 59.01 0.22 0.2 54.1120 1.89 2010 341.ANNALS of the ORADEA UNIVERSITY. Volume X (XX). of which: .6 88 Total assets (%) Assets of top 5 banks / Total assets 63.04 179. Financial stability report 2010 5.171 1.70 13.85 Source: National Bank of Romania.283 .81 11.184 92.5 94.2 58.30 14.76 8. but credit risk intensified in the context of economic recession and increasing unemployment.1 62.25 2. NR2 The rise in interest rates margins.89 156.124 1.60 85.442 94.3 56.426 94.264 1.Return on equity (Annualized net profit / Average own capital) (%) Total operating income / Total operating expenses (%) Loans granted to clients / Deposits from clients Credit Risk Ratio (%) Non-performing Loans Ratio 2007 251.46 20. Aggregate indicators for credit institutions 2007-2010 Romanian banking sector was adequately capitalized.32 0.5 93. The trend of nonperforming loans called for a close monitoring and further provision efforts.60 87. Fascicle of Management and Technological Engineering.046 Source: National Bank of Romania. Ron) Total net assets of credit institutions with majority private capital / Total net assets (%) Total net assets of credit institutions with majority foreign capital / Total net assets (%) Capital Adequacy Ratio ( > 8% ) Leverage Ratio (%) Past due and doubtful loans / Total loans (%) Past due and doubtful claims / Total assets (%) ROA .56 122. the sale of fixed assets and the purchase of government securities were the most frequent strategies applied by banks in order to improve their financial performance.78 7.6 88.7 capital / Total assets (%) Assets of banks with foreign capital / 58.2 88.92 113. 457 115. Bank concentration was higher for deposits compared to the level calculated for assets.945 Source: National Bank of Romania. non-government customers (mill.860 63.839 24. high lending costs and higher propensity for saving of households caused the contraction for credit demand. domestic currency depreciation. Unfavorable domestic macroeconomic developments (especially those related to gross domestic product.556 Substandard 4.890 17.753 69. Volume X (XX). 2011. Loans falling under doubtful and loss also followed a rising trend.370 43. Greece was in the lead.268 101.585 8. the excessive growth of 5.863 192 46. calculated as share of bank assets to GDP is attributed to the impact of GDP drop.374 67. households benefit from higher interest rates on time deposits. Table 6: Banks’ loan classification (mill. The non-performing loan ratio (the loans overdue for more than 90 days). The increase of financial intermediation.075 3. The concentration of the Romanian banking system continued its downward trend.779 2. due to the growth of the rate of monetary policy and the increase of stock interchange.805 Loans in foreign exchange Current loans Overdue loans 32. by undertaking prompt and efficient measures in order to diminish the impact of the financial crisis upon customers and business.703 4. supporting the Romanian economy’s effort to surmount the crisis.692 Loss 1. The significant depreciation of the currency. rather than the larger asset volume.637 6. Loans and deposits by county 2006-2011 The analysis of developments in interest rates reveals that banks charged interest rates on loans to households higher than interest rates on loans to non-financial companies.798 Watch 35. enhancing risk management mechanisms to adjust to the challenges posed by the difficult economic environment and actively managing the costs.455 123.577 4. banks shifted their strategies towards: supporting clients affected by the hardships of the crisis.113 1.135 100 44.564 Source: National Bank of Romania.580 3. The average interest rate on retail and corporate deposits increased. by contrast.360 118.054 90 85.906 16.993 6. concluding strategic partnerships aimed at re-launching the economic activity.629 103.532 881 81. but in terms of the country of origin of the capital invested in Romanian credit institutions. Monthly Bulletins (Statistical selection) 2007-2010 An increasing vulnerability of the Romanian banking system is the worsening quality of the loan portfolio. In order to readjust to the new economic realities.607 47. but their pace slowed in 2010. Ron) January 2006 January 2007 January 2008 January 2009 January 2010 January 2011 Loans in Lei Current loans Overdue loans 28.395 8. unemployment and wages).284 .225 7. followed an uptrend.435 387 122. slightly above the average for the region.ANNALS of the ORADEA UNIVERSITY. Table 5: The structure of loans of non-bank. end of period) December 2006 December 2007 December 2008 December 2009 December 2010 Standard 46.069 75.315 13. Ron.279 Doubtful 938 2. NR2 In 2010. the rise in exchange rate volatility.581 22.735 8. banks with Austrian capital accounted for the largest market share. Fascicle of Management and Technological Engineering. Banks acted in a prudent and responsible manner.156 42.505 323 68. maintaining the stability and soundness. 557 40.132 33.584 38. At end December 2010.068 65. both domestic and foreign.312 9.565 1.061 Households 23. commercial banks reduced the financing of real estate needs and began to redirect towards short term loans.891 41. time deposits. several banks have introduced progressive interest rate deposits. helping preserve financial stability in the face of the global financial crisis.129 40. The National Bank of Romania introduced new requirements in order to moderate the surge in credits. fearing a decline in the quality of banks’ exposure and higher inflationary pressures. NR2 interest rates for credits.346 23.723 2.891 40. which hit the system at the end of 2008.419 37. Volume X (XX). Fascicle of Management and Technological Engineering.519 9.887 January 2007 January 2008 January 2009 January 2010 January 2011 Deposits in foreign exchange Corporate Households Other sector 13.527 1. higher than that of corporate deposits. supported the restricted monetary policy. Since the outbreak of the crisis. Ron) Loans in Lei Corporate sector 22.409 2. The financial crisis. and unemployment had an impact on population income and on its possibilities regarding repayment of loans and interests.ANNALS of the ORADEA UNIVERSITY.071 62.285 .189 42.795 17.522 58.141 Source: National Bank of Romania. non-government customers (mill.7% and all banks exceeded 11% (mandatory ratio is 8%).206 3.252 63. the banking system continued to weather the economic crisis well and banks remain well capitalized and liquid.227 10.652 53.289 17. Table 8: The structure of deposits. 2011. so the bad debts of population rose.956 40.304 23.606 65. deposits redeemable at notice and repurchase of non-bank. The number of individuals experiencing significant delays in reimbursement rates increased.850 Other 5.612 33.417 9.601 17.362 40.457 24.047 Households 29.593 1.810 6.324 2.672 1.260 28. while others combined mutual funds and 5.531 33.765 60.843 59. rose between 2007 and 2011. Loans and deposits by county 2007-2011 Total indebtedness of companies and households with banks.544 35. The savings market has been diversifying into new products. One explanation is banks’ competition for population deposits which has progressively intensified during this period.095 11. Retail deposits registered an increase between January 2010 and January 2011.145 Source: National Bank of Romania.777 57.210 42.434 Other 685 1. Loans and deposits by county 2007-2011 The analysis of liabilities illustrates the consolidation of the largest share of deposits taken from non-bank clients.727 1. Ron) Deposits in Lei Corporate sector 29. causing some losses.909 39.822 35. less risky in times of financial uncertainty. but the authorities’ monetary and financial sector policies have been appropriately prudent and proactive.505 6. inflation. Table 7: The structure of loans of non-bank. The new regulations issued by the central bank tightened the conditions of mortgage lending terms. the loan supply for companies and households tightened in terms of cost and volume.530 35.159 2.540 January 2007 January 2008 January 2009 January 2010 January 2011 Loans in foreign exchange Corporate Households Other sector 24. non-government customers (mill. Non performing loans increased. The capital adequacy ratio was 14.616 42. Volume X (XX). now offered by almost all banks and used especially for previously contracted long-term loans. -304 Source: Newspapers. Table 9: Assets and net profit evolution of Romanian banks during 2007 and 2010 BCR BRD Raiffeisen CEC Bank Banca Transilvania Alpha Bank UniCredit Volksbank Bancpost ING Bank Total banking sector 2007 59. The Romanian banking sector is one of the most competitive segments of the local economical landscape.14 259.ANNALS of the ORADEA UNIVERSITY.8 Assets 2008 2009 64. The importance of constant product innovation for banks’ survival and success is even more apparent in the crisis context.97 15.0 2010 67.6 21.08 10.4 19.7 21. offering special relationships and investment services.42 62. registering a market share of 19.0 13.87 12.5 342. increasingly targeting specific client segments or adapted to certain distribution channels.68 13. products (such as loans.3 20.5 .99 19. such as mortgage...5 21.. and 22 credit institutions have tested negative...53% last year due to the transactions and investments in securities.87 13..0 2007 532 991 339 76 368 117 285 89 105 60 . . The banks’ corporate portfolio was extended. . 396 42 431 62 153 43 387 329 126 43 109 -35 96 17 5....8% in December 2010.5 13. The accumulation of wealth has prompted the development of private banking services for high net worth individuals. given that 20 banks have registered profit..67 10.055 840 2010 465 501 311 . websites of central banks.7 21.51 20. 98 . the recovery of economic growth and the international developments..463 785 657 .25 8.58 20. Cross selling become one of banks’ key preoccupations: private pensions.7 14.48 20..7 47. Fascicle of Management and Technological Engineering. even in the context of the global financial crisis..41 330. BCR remains the leader by total assets.1 17.8 16.7 49.286 ..69 38. 21.9 339. with the option to use the funds with limited or no restriction. Net Profit 2008 2009 2. as the banks introduced risk coverage products. compared with a cumulative net gain of 815 million in 2009.. Another trend was towards deposits for specific client segments – new products have been developed to fit the needs of students or parents who want to put money aside for their children. At retail banking level. 2011.97 14. new retail bank products emerge.5 11.3 21.2 18. In 2010 banks ended with a net loss of 304 million lei. Net assets of the banking system advanced 3. Several banks saw an opportunity in introducing banking products adapted to the current financial situation.7 13. deposits or debit/credit cards) were developed to specific categories.09 21.. Over this period. The drop in interest rates in the course of a few years has opened up the opportunity of refinancing loans. distribution of mutual funds and insurance policies. NR2 classic deposits.84 12. 2011 The banks compete for a highly fragmented market with modest financial penetration. The evolution of Romanian banking system depends upon the restoration of confidence in the economy.153 871 1.88 12. banks tightened the lending standards. As consumers become more sophisticated and competition in the banking system intensifies. 66 . Banks’ developed savings accounts products combining interest rates not much lower than those for deposits.18 46. increased their 5. 3 Conclusions Amidst the global turmoil. Do banks have a future? A study on banking and finance as we move into the third millennium. banks should: innovate and develop all the aspects of banking activity. a policy to stimulate the savings process. redefine the acceptable risks policy. taking into account the conditions of competitiveness and globalization. debit cards. John. The crisis can stimulate the financial restructuring and reorganization. Role and contribution of the fund in the crisis. 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