Financial Services in Romania

An Expert's View about Banking in Romania

Posted on: 30 Sep 2010

Romania’s financial system is dominated by the banking sector. Opportunities exist in most sectors.

Financial Services ? Romania Sector Report Financial Services Romania Produced by: Ileana Buia, Senior Trade Development Adviser, Bucharest Last revised: October 2009 Whereas every effort has been made to ensure that the information given in this document is accurate, neither UK Trade & Investment nor its parent Departments (the Department for Business, Innovation and Skills, and the Foreign & Commonwealth Office), accept liability for any errors, omissions or misleading statements, and no warranty is given or responsibility accepted as to the standing of any individual, firm, company or other organisation mentioned. Published November 2009 by UK Trade & Investment. Crown Copyright © Financial Services ? Romania Table of Contents OVERVIEW 3  CHARACTERISTICS OF MARKET   OPPORTUNITIES 11  KEY METHODS OF DOING BUSINESS 11  MORE DETAILED SECTOR REPORTS 11  EVENTS 11  CONTACTS LIST 12 Page 2 of 15 Financial Services ? Romania OVERVIEW Romania?s financial system is dominated by the banking sector, which has seen much reform and restructuring since privatisation of the sector began in 1998. Romania joined the European Union in 2007, which has prompted additional reforms to bring the financial sector in line with EU standards. All subsectors have been affected to various degrees by the global economic crisis, but growth potential remains in all areas. Recent years have seen an increasing correlation between the international context and the local evolution of the economy but key to Romania?s recovery from recession remains the Government?s policies at macroeconomic level. Romania is currently undergoing a challenging period, experiencing fully the effects of the global financial crisis. The economy shrank by 8.5% during Q3, 2009 over Q3, 2008 and according to the National Prognosis Commission, the last months of 2009 will see a reduction of 7% over the same period in 2008 (still under the negotiated target with IMF). According to the same source, 2009 represents the peak of the recession in Romania, with the economy expected to slightly recover during 2010 by 0.5%, then by 2.4% in 2011 and 3.7% in 2012. In March 2009, Romania signed an agreement for an external financing package of 20 bn EUR with the IMF, European Commission, World Bank and EBRD. The funds will consolidate the Central Bank?s international reserves, will ease the budget deficit (funds disbursed to the account of the Ministry of Finance) and will contribute to private sector financing respectively, according to the source of the funds. The IMF loan will be delivered in quarterly instalments, subject to Romania meeting the negotiated targets for macro-economic indicators and Government?s commitment to reform spending, wages in the public sector and pensions. The nd Fund?s review in August resulted in the releasing of the 2 instalment, partly directed towards financing the trade deficit, with the third being on stand-by until the stabilising of the political situation. The external financing package has contributed to reducing the risk aversion of foreign investors (FDI is down over 70% compared to 2008) and stabilising the exchange rate. Furthermore, in March 2009, nine of the most important foreign owned local banks, accounting for 70% of total assets, announced their commitment to maintain their exposure in Romania and even to provide additional capital if needed. Given the heavy reliance on foreign funding, any withdrawal of funds would have impacted greatly on the economy and reduced drastically the positive effects of the loans negotiated. CHARACTERISTICS OF MARKET Banking Romania has a two-tier banking system, the National Bank of Romania (NBR) acting as a central bank, under Parliament?s control. In the process of surveillance Page 3 of 15 Financial Services ? Romania over the domestic financial markets the NBR collaborates with the Insurance Surveillance Commission, the National Securities Commission and the Private Pensions System Supervisory Commission. The banking market in Romania remains one of the most competitive sectors of the local economy even in the context of the global financial crisis. There are 43 banks registered in Romania, out of which 2 are government funded, 3 privately Romanian owned, 26 foreign owned and 11 subsidiaries of foreign banks (Citybank Romania changed its status in January 2009 into a subsidiary of Citibank Europe) and CreditCoop. There is only one British bank operating in Romania. Royal Bank of Scotland established its presence here by taking over the ABN AMRO network in 2008 as part of a global transaction. RBS remains in Romania despite the announcement in February that the Romanian branch was up for sale. The bank has reviewed its position with regard to its Romanian presence and for now at least it remains committed to its presence here. In terms of new developments in the market, two new banks are scheduled to start operating. Capa Finance, a microcredit financial institution is planned to be transformed into a regular bank, following its acquisition by RAIF (Romanian American Investment Fund). The Commercial Railway Bank has already received its license and will start operations in November 2009. The system is characterised by a relatively high concentration, the top 5 banks holding more than 50% of the banking assets, whereas the top 10 banks account for 77% of the banking assets up to the end of March 2009. Source: Bank Annual Reports The total bank assets have grown constantly both in value and in percentage of GDP, from 15 bn Euro in 2003 to 85.3 bn Euro in 2008 and 85 bn Euro in Q1, 2009 (14% increase over the same period in 2008 and representing 71% of GDP) Page 4 of 15 Financial Services ? Romania Despite the high growth rates, the banking penetration ratio stands at 71%, which is considerably lower not only than the EU level but also than the level recorded in countries such as Hungary, Czech Republic or even Bulgaria. Also, there is a huge gap in terms of value of bank assets/capita between Romania (3,955 EUR) and the EURO zone level (96,578 EUR) and significant as compared with Hungary (12,062 EUR) and Czech Republic (15,027 EUR). The volume of card transactions grew by more than 7 times between 2003 and 2009 and reached 7.2 bn EUR in Q1 2009, up from 6.1 bn EUR in the same period in 2008. According to NBR data, there were 13.3 million active cards (Q1, 2009), which gives a ratio of 620 bank cards/1000 inhabitants, significantly lower than the EU average even at the 2007 levels, which stood at 1,370. Similar trends have been registered in the number of internet-banking users, which reached 3 million users at the end of 2008 (from 440,000 in 2005), growth expected to continue. The dynamics in the number of POS also show growth in the electronic payments volume, from 11,000 in 2003 to 90,655 at the end of 2008 and 94,740 at the end of March 2009. All these statistics show the potential for further growth of the Romanian banking system. On the downside, 2009 saw a rise in credit default. Bad debt rose to 2.55% of total loans, while loans overdue by more than 90 days accounted for 11.5% of the total. This is a significant increase given that the credit default rate stood at 1% in May 2008. It is therefore not surprising that banks are increasingly requiring clients to acquire unemployment or bad debt insurance policies as a condition for a loan. As the banks? appetite for lending has expectedly decreased, the market saw intensive competition from banks for the customers? deposits, offering high interest rates for both EUR and RON denominated deposits. However, with predictions of decline of the inflation rate and the NBR?s lowering of the monetary policy interest rate to 8.0% (September 2009) in their attempt to encourage lending, the interest rates are well on a descending trend already. Current financial circumstances have put an abrupt end to the expansion in banks branches in their attempt to streamline activities. The network of bank branches expanded from almost 3,000 in 2004 to 6,553 in 2008. Only the ATM network continued to expand, given the previous extremely poor ratio of banking services penetration rate, especially in rural areas. The current climate also convinced banks to try to adapt their product offer, developing products aimed at expanding their clients? base or retaining customers both private and corporate. Some of these products include alternative savings methods (combining high interest rates of classic deposits with the non-restrictive current accounts), deposits with preferential interest rates of interest payments in advance, pre-paid debit cards, lending for SMEs associated with consultative services. The government has tried to bring its contribution to the relieving of the credit markets, in sectors such as real estate (the ?First Home? programme) and agriculture (the Farmer and the First Grain Silo programmes), all programmes raising banks? interest for collaboration. Page 5 of 15 Financial Services ? Romania Capital markets The Bucharest Stock Exchange (BSE) was formally re-opened in 1995 (after the first stock exchange was closed by the Communist regime in 1948). It started with one trading session per week and 6 companies. By June 2009, there were 69 companies listed that can be traded on a daily basis with the market capitalisation standing at 16.2 bn EUR. No new listings are announced for the near future. The corporate sector is organised into four tiers, ?blue chip? tier (21 stocks), ?base tier? (47 stocks), ?new technology tier? (one stock) and the International tier (one stock) and trading is carried out through an electronic order-driven system, allowing brokers to trade remotely through the ARENA IT platform. In addition to the main market, ?an unlisted market? was created in 1999, where stocks de-listed by BSE upon request can be traded on a daily basis. The BSE has its own official indices tracking the changes in the market capitalisation of the index components against a reference period: the BET index monitors the most liquid stocks while the BET - Composite monitors the general performance of the market. The BET-F1 index oversees the performance of the five Financial Investment companies. A new index, ROTX was introduced in co-operation with Vienna Stock Exchange, reflecting the evolution of the blue-chip tier companies. Finally, other two indices were introduced in 2008, BET ? XT (most liquid companies including Financial Investment Companies) and BET ? NG (sectorial index for energy and utilities companies). In August 2009, BSE eliminated the provisions regarding the monitoring of the BET index, according to which a 12% fall of BET would lead to a minimum 30 minutes suspension of trading, while a fall of 15% would have attracted suspension for the rest of the session. In 2005, BES incorporated the over-the-counter RASDAQ market (Romanian Association of Security Dealers Automated Quotation), which had been established in 1996 to enable shares trading of the 6,000 companies partially privatised under the Mass Privatisation Programme into the ownership of 16 million Romanians. All the RASDAQ-listed stocks operate under a 3-tier system and are traded on the BES?s Arena platform. The capital market saw a steep downturn in 2008, when the stock market fell by more than 70% as a consequence of the world economic climate and the investors? risk aversion towards emerging markets, deteriorating macro-economic indicators and the fall of the exchange rate. Mirroring the recovery of the international markets but also due to the financial package agreed with international institutions, the stock market started to recover in 2009 but it is still far from the peaks recorded in 2007 and beginning of 2008. The short term outlook for the capital market depends very much on the situation on the foreign markets but also, more importantly, on the domestic economic context. With private consumption diminishing and the infrastructure spending incapable of keeping the pace with the budgeted figures, Romania stands to recover at a slower pace than the Western countries or even the countries in the region. Page 6 of 15 Financial Services ? Romania Insurance The financial crisis has impacted on the insurance market as well, with the market slowing down in 2008 and stagnating in 2009. In 2008, gross written premiums increased by only 12%, reaching 2.4 bn EUR, compared to an average growth of 29% per year between 2002 and 2007. The insurance penetration rate (share of gross written premiums in GDP) remained at 1.8%, which coupled with the low premium/capita ratio of 112 EUR means that the insurance market in Romania has one of the highest development potentials in Europe and will most probably resume its growth at the end of the economic turmoil. In terms of players on the market, there has been an intense process of consolidation over recent years, which is expected to continue in the near future. The international companies are dominating the market, with ING, AIG and BCR Insurance leading both in the life and non-life insurance market. According to 2008 data, the top 10 players held more than 80% of the market with the top 4 accounting for over 50% on both segments. Aviva PLC is the only British company in the insurance market and had 6% of the market at the end of 2008. Non-life insurance accounted for more than 80% of total premiums in Romania in 2008 (1.9 bn EUR) but its growth slowed down significantly in 2008 to only 12% compared to 2007 due mainly to the collapse of the car market, which is the main driver of the segment. Motor insurance holds 76% of the non-life segment, followed by property insurance and credit insurance with 15% and 3% shares respectively. On the non-life segment, there are various products with considerable future potential, such as health insurance, property, employment, accidents and even legal protection. Agricultural insurance is another category that has yet to reach its potential, given the vulnerability of the agriculture sector to the climatic conditions and the co-financing requirements from banks for EU funded projects. Life-insurance market, despite its significant increase during previous years, is still hugely underdeveloped. As customers have become more risk aware, demand has shifted towards products which offer risk protection and a guaranteed savings component. The retail segment is currently the focus of the insurance companies and is expected to remain so for 2009. In 2008, corporate customers accounted for only 6% of the total life insurance segment. The insurance legislation is under ongoing reform. The market is regulated by the Insurance Supervisory Commission and there are several regulatory measures with considerable impact on the non-life market, which will be implemented starting with 2010. The Commission decided on the electronic issuance of Motor Third Party Liability (MTPL) policies, in an attempt to limit fraud. Also, as a reaction to soaring claims, the Commission foresees the introduction in 2010 of a mandatory bonus-malus premium system for MTPL. Another positive regulatory provision for the prospects of the market is the implementation of the mandatory property insurance policy, which commences in Page 7 of 15 Financial Services ? Romania January 2010. The potential is tremendous given that only 8% of the 8.4 million dwellings in Romania are insured. Pensions Romania is moving fast towards a modern pension system offering alternative solutions to the public pension system. Demographic and macroeconomic pressures are largely responsible for Romania?s growing pension deficit, and, consequently, the strain on the country?s general budget. Between 1995 and 2003, Romania?s pension expenditures averaged 7.2 percent of GDP and sources indicate that the country dependency ratio deteriorated to the value of 1:1. The reform of the pension system is trying to address this critical situation by setting up a structure effective in ensuring decent incomes for all the beneficiaries of the social insurance system and reducing the growing pressure coming from the pension sector on the state budget deficit. The new system follows the multi-pillar pattern recommended by the World Bank, aiming at diversifying the sources for financing the pensions by dividing the burden between public and private sector. It is based on three pillars: st - The 1 pillar represents the mandatory public pension component which is being administrated by the state and based on redistribution. nd - The 2 pillar is constituted by the private pension funds. The contribution will start with 2% of the insured income and will reach 6% over a period of 8 years. The managers of these funds will be companies, having as unique object of activity, the administration of the universal pension fund and the payment of the rights. The equity required for these companies will be of 5 millions Euros. Each fund manager will have to constitute a reserve fund as guarantee. At the same time, an overall guarantee fund will be constituted from the contributions of all fund managers. rd - The occupational pension schemes represent the 3 pillar. The participation in these schemes is optional, being the result of negotiation between employers and labour unions. A pension fund must have at least 100 participants. The system is based on capitalisation, and the contributions established according to this scheme are paid together with compulsory contributions. The second pillar was launched in 2008, had a total of 4.5 million contributors by the end of the year and resulted in a net value of assets of 209 mil EUR. The most important players in this market are ING and Allianz-Tiriac with market shares of 39% and 23% respectively. Other companies with a market share of over 5% are AIG, Generali and Aviva. The contribution to Pillar 2 was set to increase to 2.5% in 2009, but it was postponed by the Government due to budget deficit issues. However, the Government remains committed for the contribution to reach the scheduled 6% by the end of the 8 year period. Page 8 of 15 Financial Services ? Romania The emergence of the private pension funds should be able to provide long-term finance to the private sector and give a boost to asset-management businesses and contribute to the development of local capital market. However, as in the case of the other sectors, the development of this market remains dependent on the general economic situation. PPP The Romanian Government has expressed continuous and keen interest to implement PPP projects. This interest has increased as a result of the economic crisis, given the acute need for investment in infrastructure projects and the low level of financial resources available from the public budget. The PPP option is seen more and more as a solid alternative for developing local and national infrastructure, in transport, education, healthcare, justice, waste management to name some of the main areas targeted. Moreover, recent contacts with officials during a PPP Inward Mission to the UK indicates an increased focus and commitment to delivery. The increased interest also resulted in improvements to the relevant legislation, culminating with the issuance in July 2009 of an Implementation Guide for Concession projects for works and services (Concession contract is the Romanian equivalent for PPP projects), which will be revised periodically in line with other legislative developments. Romania currently lacks the necessary expertise to ensure the Government/Municipality can achieve a ?good deal? from PPP projects. There are several PPP projects in various stages of implementation but only one agreed deal, the development of Comarnic ? Brasov, 57 km of the A3 Highway (Bucharest - Brasov). The Management authority for PPP projects rests with the Central Unit for Co- ordination and Monitoring of Public Procurement, within the Ministry of Finance, which is supposed to act both as legislative body in charge with issuing policies and strategies for promoting and implementing PPP projects and also as a knowledge centre for Central and local Government interested in developing PPP projects. The Central Unit often lacks the necessary expertise and experience for successfully fulfilling its advisory role. Mostly international firms act as consultants for PPP projects as the experience required is rarely found locally. International firms are also the ones that give weight to bids under PPP projects launched, often in partnership with local companies. The Ministry of Finance website has a section dedicated to PPP where there are published ongoing, finished technical assistance and future projects. UK is rightly perceived as a very mature market, with extensive expertise in the field. UK companies are advised to closely monitor the developments of this subsector in Romania as there will be a range of opportunities both for technical assistance and financial consultancy. Page 9 of 15 Financial Services ? Romania CARBON MARKET Romania is one of the countries in Annex 1, which ratified the Kyoto Protocol and therefore committed to reduce the greenhouse gases emissions. Joining the EU in 2007 also meant that Romania became a player on the European emissions transaction market and was allocated 350 million CER for the period 2008-2012. At the recent transaction level on Bluenext of 14?/t, the value of the carbon market in Romania reaches 5 bn Euro. Sources from the Bucharest Stock Exchange estimate the liquidity of this market at 1 bn EURO annually. In preparation, the Government has developed a National Allocations Plan, approved by the European Commission and which establishes the allocations for the 229 Romanian operators participating in the scheme. The Allocations were based on historical emissions figures of the operators/installations and are free of charge for the period up to 2012. In 2008, Romania saw an emissions reduction of 9% or 6.1 Mt, decrease driven by a reduction in industrial activity across most sectors. 10% 5% 0% -5% -10% -15% -20% y/ y change Source: CITL, Barclays Capital According to sources in the market, approximately 20 million certificates remained unused in 2008. This goes to show that the opportunities raised by the Carbon Market remain hugely under-explored by Romanian companies, which stand to lose hundreds of millions of EURO in opportunity costs, due mainly to insufficient knowledge of how the market operates. The classification of the Certificates from a legislative point of view remains an issue in Romania. Initially, the Commission for Surveillance of the Securities Market ruled that the Carbon Emissions Certificates transactions fall under the legislation regulating the capital markets in Romania but the decision was subsequently suspended. The classification will determine the framework under which the transactions will take place. The National Operator of the Electricity Market (OPCOM) has announced that will start trading CO2 certificates before the end of 2009. Page 10 of 15 LU FI ES EE DK CZ RO PT IE GR LV DE PL IT FR SI AT HU LT GB SK NL BE SE Financial Services ? Romania OPPORTUNITIES Opportunities exist in most sectors and some of them have been outlined above. However, Romania is also a competitive market. Whilst UK firms would appear slow to scope or enter the market, foreign firms/competitors have committed heavily to this market and more will continue to do so. UKTI publishes international business opportunities gathered by our network of British Embassies, High Commissions and Consulates worldwide. These opportunities appear in the Opportunities portlet on the relevant sector and country pages on the UKTI website. By setting up a profile you can be alerted by email when relevant new opportunities are published. New or updated alert profiles can be set in My Account on the website. KEY METHODS OF DOING BUSINESS Romanian legislation allows for the establishment of a wide range of business entities, including wholly foreign owned subsidiaries and branches. We suggest the UK firms in the Financial Services Sector seeking to do business in Romania contact the British Embassy Bucharest in the first instance. Other background information on doing business in Romania can be found on UKTI?s website. Simply go to the Romania country page where you will find information on: ? Economic background and geography ? Customs & regulations ? Selling & communications ? Contacts & setting up ? Visiting and social hints and tips MORE DETAILED SECTOR REPORTS When considering doing business in Romania, it is essential to obtain legal, financial and taxation advice. A useful contact list of lawyers and other relevant professional bodies as well as further information on the financial services sector in the country is available on the Embassy site, . EVENTS PPP Workshop, February 2010 (TBC) Lord Mayor visit to Romania, 26-28 April 2010 Page 11 of 15 Financial Services ? Romania CONTACTS LIST Mr. Richard Beams, First Secretary (Trade) BRITISH EMBASSY BUCHAREST Address: Str. Jules Michelet nr.24, sector 1, Bucharest Tel: 0040 21 201 72 94 Fax: 0040 21 201 73 11 E-mail: Website: Ms. Ileana Buia, Senior Trade Development Adviser BRITISH EMBASSY BUCHAREST Address: Str. Jules Michelet nr.24, sector 1, Bucharest Tel: 0040 21 201 72 64 Fax: 0040 21 201 73 11 E-mail: Website: Ministry of Public Finance Central Unit for Co-ordination and Monitoring PPP Contact: Mr Bogdan Alexandru Dragoi, Secretary of State Mr Ciprian Gorita, Head of Department Mr Sorin Bolchis, Counsellor Address: Str. Apolodor 17, Sector 5, Bucharest Tel: +40 21 319 97 39 +40 21 319 97 59 ext. 1414 Fax: +40 21 312 20 11 Email: Website: Banks (National Bank and Top 10 Banks) BNR (Romanian National Bank) Address: Str. Lipscani nr. 25, Sector 3, 030031 Bucharest Tel: +40 21 307 05 70 Fax: +40 21 312 38 31 Email: Website: BCR (Romanian Commercial Bank, Erste Bank) Address: Bdul. Regina Elisabeta nr. 5, Sector 3, 030016, Bucharest Tel: +40 21 312 6185 Fax: +40 21 311 1819 Email: Website: Page 12 of 15 Financial Services ? Romania BRD ? Groupe Société Générale Address: Str. Ion Mihalache nr. 1-7, Sector 1, Bucuresti Tel: +40 21 301 6100 Fax: +40 21 301 6122 Website: Raiffeisen Bank Address: Piata Charles de Gaulle nr. 15, Sector 2, Bucharest Tel: +40 21 306 10 00 Fax: +40 21 230 07 00 Website: Bancpost Address: Calea Vitan 6-6A, Tronson B and C, 031296 Bucharest Tel: +40 80 110 200 +40 21 302 0789 Fax: +40 21 326 85 20 Website: Volksbank Romania SA Address: Sos Mihai Bravu Nr 171, Sector 2, Bucharest Tel: +40 21 209 4400 Fax: +40 21 209 4884 Website: Banca Transilvania Address: Str. G Baritiu no. 8, Cluj-Napoca, Cluj County Tel: +40 264 407 150 Fax: +40 264 407 179 Website: Unicredit Tiriac Bank SA Address: Str Ghetarilor Nr 23-25, Sector 1, Bucharest Tel: +40 21 200 20 00 Fax: +40 21 200 20 02 Website: Alpha Bank Address: Calea Dorobanti nr. 237B, Sector 1, Bucharest Tel: +40 21 209 21 00 Fax: +40 21 231 65 70 Website: CEC Bank Address: Calea Victoriei nr. 11-13, Sector 3, Bucharest Tel: +40 21 311 11 19 Fax: +40 21 312 5425 Website: Page 13 of 15 Financial Services ? Romania ING Bank Romania Address: Bdul. Kiseleff Nr. 11-13, Sector 1, Bucharest Tel: +40 21 222 16 00 Fax: +40 21 222 14 01 Website: Capital Markets Bucharest Stock Exchange Address: Blvd. Carol I, nr. 34 ? 36, Et. 14, 020922, Bucharest Tel: +40 21 307 95 00 Fax: +40 21 307 95 19 Website: National Securities Commission Address: Str. Foi?orului nr.2, Sector 3, Bucharest Tel: +4021 326 67 53 Fax: +4021 326 68 48 Website: Insurance Insurance Supervisory Commission Address: Str. Amiral C-tin Balescu nr. 18, Bucharest Tel: +40 21 316 78 80 Fax: +40 21 316 78 64 Email: Website: Pensions National Pensions House Address: Str. Latina nr. 8, Sector 2, 70234 Bucharest Tel: +40 21 316 28 30 Fax: +40 21 316 88 61 Website: UKTI?s International Trade Advisers can provide you with essential and impartial advice on all aspects of international trade. Every UK region also has dedicated sector specialists who can provide advice tailored to your industry. You can trace your nearest advisor by entering your postcode into the Local Office Database on the homepage of our website. Page 14 of 15 Financial Services ? Romania For new and inexperienced exporters, our Passport to Export process will take you through the mechanics of exporting. An International Trade Adviser will provide professional advice on a range of services, including financial subsidies, export documentation, contacts in overseas markets, overseas visits, translating marketing material, e-commerce, subsidised export training and market research. Page 15 of 15
Posted: 30 September 2010

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