The banks’ administrative costs, from employee salaries to rents for their offices through the country, are included in loan interests, which although lower, are still high compared with the monetary policy rate adjusted at 2.75%.
Banks have been unable to stomach the effect of the economic decline, so they mostly stayed in the red. One in five loans turned sour during the crisis, and the banking sector moved away from its role of insuring financial intermediation by granting loans, with the net banking asset share in the gross domestic product dropping to less than 60% for the first time since 2007.
The crisis in the banking sector was not without consequences on a top management level, either, as only four of the ten largest banks in country navigated the crisis with the same chief executive in charge, while most changed two or even three in the past years.
The banking industry infrastructure peaked in 2008, when territorial networks reached a record 6,552 branches and offices, employing more than 71,600 people who were earning an average net salary of about 3,000 lei (EUR677), according to Romania’s central bank (BNR) data.
Six years from the onset of the crisis, one fifth of the jobs and offices are gone, which means 13,637 employees left the system and 1,215 units were closed. The number of bank branches and offices stood at 5,337 at the end of September and the number of employees at 57,985.
The number of branches and offices dropped by 155 in the first nine months of the year, while 627 people left the system. The network restructuring pace slowed down last year and in 2014 after a more aggressive approach in 2012, when over 300 branches and offices had been closed.
The crisis years did not induce a significant cut of bank salaries, so the average net wage in December fluctuated between RON3,700 and RON4,000 in 2009-2013. Average net banking salary dropped towards RON3,500 in September 2014.
Non-performing loan rate was as high as over 20% at times during the crisis. Although the macroeconomic conditions improved, lending was not as responsive, staying in negative territory in the past year. The share of net banking assets in the GDP reverted to the pre EU accession levels.
Whereas domestic currency loans showed signs of rebound because of the decline in interests this year, foreign currency loans went down again, so total lending stayed in negative territory until the end of the summer. The loan stock fell towards EUR48 billion.
Bankers have frequently discussed their cost-cutting efforts over the last few years. Yet the question remains whether the banks’ networks were adjusted to match the business and if one can talk about efficiency or not. Even central bank officials said in 2011 that the restructuring process of the banking system had not been as extensive as they had hoped, so the central bank had to ask some banks to close the branches that generated major losses.
In an industry still looking for direction, bankers remain reluctant to take risks and grant loans, calling into question the very philosophy of this business.
The economic crisis and the high level of non-performing loans dealt a heavy blow to the banking system, which posted losses three years in a row, in 2010, 2011 and 2012. Last year, when the economy grew by 3.5%, the banking system stepped into the black again, though posting a really feeble profit of merely RON49 million. The 2010-2012 losses amounted to about RON3.6 billion, since one fifth the loans turned sour.
The effort to remove NPLs from balance sheets and the other provisioning steps that the overall banking system cleanup entailed in preparation of the next year’s asset quality review made 2014 a difficult year for banks.
The system is to record an over RON2 billion loss this year, Nicolae Cinteza, head of central bank’s supervisory department, estimates.
The system posted RON597 million profit in the first quarter, which shrank to RON209 million by midyear, only to slip into the red by September 30.
“The banking system posted RON1.6 billion loss on September 30. It was only natural. The massive provisions in the third quarter led to it. And there’s more to come,” Cinteza said.
Bank profitability suffered as a result of the surge in provisions made for troubled loans.
NPL ratio reached 15.3% at the end of September, down from the 22.3% peak in April. More than half of the NPL, 56.8%, are sour loans of insolvent companies.
The banking system cleanup is expected to be expensive, so banks with high NPL ratios should see losses and possibly need additional capital.
Bankers say there can be no talk of resuming lending before the balance sheet cleanup, which is why the central bank is pushing for a fast-paced cleanup now. Banks are also saying loan demand from companies is not that high.
Foreign shareholders fed capital into the local subsidiaries in the past few years to offset the losses caused by sour loan provisions; capital injections have slowed down lately.
The constant decline of lending in the past few years and the constant rise in deposits have led to bank customers’ savings fully covering the loan portfolios, unlike the boom days, when banks relied on lines of credit from parent banks for support.
(English version by Loredana Fratila-Cristescu)