EIB report: Banking sector in CESEE likely to face one of its worst years due to the coronavirus pandemic. How’s Romania standing?

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A new EIB report published today, the CESEE Bank Lending Survey, provides insights into banking group activities and business expectations in Central, Eastern and Southeastern Europe (CESEE). The report analyses portfolios, demand and supply for financing and the development of non-performing loans. The new edition includes a special analysis on banking group expectations before and after the impact of the coronavirus pandemic.

According to the new survey, the banking sector in Central, Eastern and Southeastern Europe is likely to face one of its worst years since the global financial crisis in 2007-2008 due to the coronavirus pandemic. From a banking sector perspective, the region entered the crisis on a strong footing, with easing credit standards and robust demand for loans in the past six months. According to the new EIB survey, however, banking groups in the region are expecting the overall demand for financing to contract sharply, credit standards to tighten significantly and loan approval rates to decline. With decreasing loan application quality, non-performing loans are expected to increase for the first time since 2015.

Before COVID-19 affected the region, credit demand remained positive in Romania for households and corporates. Supply conditions eased, driven by developments for SME loans, while NPLs improved.

Group assessment of positioning and market potential: Seventy percent of the parent banks considered Romania a market with high potential. This was the second highest score among the CESEE countries. Assessment of market positioning remained divided with about 50 percent considering positioning satisfactory or optimal but also 40 percent describing a weak positioning. Still more than half of respondents found profitability higher or equal in Romania compared to group operations.

Credit demand has increased over the past six months surpassing prior expectations. This was driven by developments in the corporate and the household segment.

Credit supply eased in the past six months. Easing of credit standards was particularly pronounced for loans to SMEs. In contrast, supply conditions tightened in the household segment.

Access to funding has improved on balance over the last six months, in line with the regional trend. Both retail and corporate funding contributed to improvements.

NPL figures had improved further both in corporate and retail segments largely in line with the regional trend.

Views on the market potential and positioning in Romania remained very similar to the last wave of the survey. Exactly half of parent banks reported higher RoE on domestic operations compared to overall group results and 38 percent report higher RoA (both the same as in H2 2019). Similarly, the share of banks reporting lower returns remained constant, and a quarter of banks saw profitability as on par with the region. Views on market positioning continued to show divisions among competitors. While 40 percent of respondents reported satisfactory market positioning a similar share found it weak (unchanged to H2 2019). With 70 percent of banks considering Romania as a market with high potential, Romania ranked second among CESEE peers. Structural characteristics – country size and low levels of financial penetration (25 percent of GDP) – added to the market’s attractiveness.

Credit demand in Romania was reported to have increased over the last six months, continuing to grow and surpassing banks’ expectations stated in the last round. Credit demand recovery has been lagging behind the economic cycle. Romania registered robust growth in the last years, with a post-crisis high in 2017 (almost +7 percent GDP increase) growing demand for loans started to be visible only since end-2016. Credit growth for corporates started to increase in the second half of 2017, with accelerated annual dynamics in 2019 (about +7 percent). Credit to households continued to grow faster than for corporates. For the next six months, while not in a position to foresee the full impact of the Covid pandemic at an early stage, banks already expect weakening dynamics, both in Romania and across the region. Nevertheless, a higher demand for loans might come for emergency liquidity needs of companies, supported also by policy measures. These include a higher allotment and guarantees for working capital and investment SME loans (increased to RON 10bn) interest-free to borrowers.

Aggregated demand for loans in Romania has increased on balance in the last six months. Both the corporate and the household segment contributed to the positive move, the latter rebounding from weaker demand in H2 2019. Demand for short-term and long-term financing increased strongly, with increases again well above the regional average for both categories. Appetite for funds in local currency remained strong. In contrast, demand for credit in foreign currency dropped in Romania, while remaining positive on balance in the region.

The corporate segment has again contributed substantially to demand over the last six months. On the enterprise side, banks recorded the strongest demand for fixed investment and inventories and working capital. In contrast with the last wave, the contribution of debt restructuring turned negative. In the household segment, the contribution of housing turned positive and non-housing related expenditure further added to demand.

The quality of loan applications in Romania has continued to improve strongly, surpassing the general positive trend in the region. Credit to corporates, and particularly for SMEs, recorded stronger improvements than the household segment. Improvements for financing were similar across maturities and the quality of loan applications for credit in foreign currency exceed again regional averages. Banks report unchanged quality of applications for consumer credit and local currency loans.

Credit supply conditions eased in the past six months. Developments in Romania, for the first time since 2018, have started to surpass the regional trend. On average, banks in CESEE are keeping supply conditions unchanged. In Romania, credit standards have tightened on a cumulative basis since 2015 – having contrasted for a prolonged period with expectations. Banks had started to revise their outlook downward since 2017, also reflecting moves towards monetary tightening prior to 2020.

Credit supply conditions showed heterogeneous developments across segments. Easier credit standards were recorded in particular for the SME segment and for short-term loans. In contrast, supply conditions in the household segment tightened, continuing developments of the previous wave.

Overall approval rates continued to increase during the last six months, surpassing the regional average. In particular, getting loans got easier for corporates. Higher approval rates were similarly reported for lending at different maturities. In the household segment, however, banks again lowered approval for mortgages and conditions for foreign currency lending continued to tighten.

While most of the domestic and international factors played a facilitating role in easing credit standards, changes in local regulation contributed negatively. Also, domestic regulation was a negative contributor in Romania more so than across the region, likely reflecting the experience with ad-hoc regulatory changes (emergency ordinance 114) and related uncertainties in the sector. Internationally, all factors with the exception of EU regulation showed a positive contribution over the last six months.

NPL figures in Romania have been described as improving further both in the corporate and retail segments. The pace of improvement largely continued compared to the previous release of the survey, and in line with the regional average. The non-performing loan ratio in Romania reached 4.1 percent at the end of Q4 2019, a level below the EBA threshold of 8 percent, i.e. within the EBA-defined medium-risk bucket. NPL ratios in the past six months again recorded stronger decreases in the corporate segment. In the context of Covid-19 crisis, a nine-month loan payment deferral has been announced for those companies and households that have been affected by the crisis. The National Bank of Romania stated that it will use the flexibilities in the legislative framework in terms of reclassification and provisioning of deferred loans and not to count them as default for the given period.

On balance, access to funding has improved for banks in Romania over the past months. In particular, tapping retail and corporate funding became easier. Similarly, access to funding in local and foreign currency improved. In contrast, access to intra-group funding again worsened. In the context of Covid-19 crisis, the National Bank of Romania has signalled liquidity support. The central bank committed to provide liquidity to credit institutions through repo operations and by purchasing RON-denominated government bonds on the secondary market.

 

The coronavirus pandemic is an unprecedented crisis. But coordinated action and support at a European level has and will be unprecedented as well,” said EIB Vice-President Lilyana Pavlova. “In light of the grim expectations by the banking sector in the region and an increased likelihood of declining financing opportunities, we are particularly glad to have approved the pan-European Guarantee Fund. It is a timely and targeted response to alleviate the hardship endured, especially by entrepreneurs and smaller companies. We will work closely with national institutions to make sure that businesses in need can quickly access the support provided by the EIB.”

“The COVID-19 shock has changed the expectations of banking groups in the CESEE region significantly. Higher uncertainty will persist over the coming months. For the banking sector to return to pre-crisis activity levels and to ensure financing for smaller companies and corporates, providing support through instruments like the European Guarantee Fund and others will be essential. They can support a faster and forceful rebound,” said EIB Chief Economist Debora Revoltella.

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