Romania: Strong competition, credit restrictions hurt profitability of banking sector, says NBG Research

According to NBG analyst Panagiotis Karandreas, in 2006, in an environment of robust growth and despite a tighter monetary policy stance (the 1-month deposit rate rose by 125 bps to 8.75 per cent) and the adoption of a series of restrictive credit measures aimed at reining in the current account, credit activity accelerated. Indeed, credit to the private sector surged by 59 per cent y-o-y in 2006 compared with 47 per cent in 2005. 

Retail lending activity, comprising mainly consumer loans, was the main driver of credit activity, increasing by 84 per cent y-o-y in 2006, a pace similar to that in 2005. Corporate lending increased by 43 per cent y-o-y against 32 per cent in 2005.

However, it should be noted that the above figures likely underestimate true credit demand, as the practice of transferring loans abroad was widely used by banks in order to circumvent central bank restrictions. Indeed, the credit restrictions imposed on foreign currency lending brought the share of foreign currency denominated loans in total loans down to 47.2 per cent in 2006 compared with 53.1 per cent in 2005.

Amid a tighter monetary environment, deposit growth remained broadly unchanged at 30 per cent y-o-y, despite the increase in the real deposit rate for RON-denominated deposits to 1.6 per cent at end-2006 from -3.4 per cent a year earlier.

Nevertheless, confidence in the RON continued to improve, with the ratio of RON deposits-to-total deposits rising to 67.4 per cent from 65.2 per cent in 2005.

Reflecting the persistently large growth in credit activity, the ratio of loans-to-deposits denominated in RON increased to 77 per cent at end-2006 from 57.9 per cent at end-2005. In fact, the ratio is significantly higher, if one takes into account the liquidity that is absorbed by the NBR through the high reserve requirements – it rises to an estimated 96.3 per cent.

On the other hand, the high ratio of foreign-currency denominated loans-todeposits (142 per cent at end-2006, excluding the impact of required reserves and 237 per cent including it) is less of a constraint for the foreign-owned banks, which dominate the Romanian banking sector, as they can draw funds from their parent companies.

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