Let me start with basic premise that banks cannot prosper out of misery, economic decline and social discontent. The banking business model directly depends on growth and prosperity to prosper itself. Therefore, we are the most natural champions of building prosperity. Historically speaking and perhaps true enough, one can say that banks grew too quickly, even recklessly and now they pay the price. With benefit of HINDSIGHT one can acknowledge now potentially wrong products, unaccountable sales people and inaccurate assessment of risk. I would also like to respectfully point out that we are directly accountable for the growth in the past; helping to create a middle class of entrepreneurs, building Romania’s exports, helping families to own new and better homes and the list goes on. Yes, today we also pay the price for some issues we have self-inflicted upon ourselves; however our pain is not limited to that.
Now we are facing the opposite arguments and criticism. We are charged with wish to choke off the economy through draconic measures. So, where do we actually stand and where do we go from here?
First of all, credit supply and “better” lending are consequence of many factors, of which I want to be honest about. So, let me start with supply variables that bankers calibrate. The first variable concerns our willingness to lend. Mind you, every credit committee in BCR we look to support Romanian infrastructure building and deployment of EU funds. We are willing to tackle public private partnerships to speed up build-up of the country. And we are also strongly dedicated and willing to stand behind small and medium clients. In one sentence, we wish to finance the REAL economy and we wish to achieve “good growth”. But how does the REAL economy align to that? And how does the legal framework align to that? We need to have an honest and fact based discussion how elected elites can turn on the engine of growth through clear contribution and solid conditions to expand credit supply and open the gates of growth.
Let’s start on micro level – one must look at position of firms and industries. If you look into that, unfortunately, today many firms look like banks; they have little equity and a lot of debt. Yet banks are in the cold business of providing leverage against assets secured by belief of future cash flow. Credit must be repaid for us to operate. And credit can only be extended against solid numbers, past and forward looking. Unfortunately, many firms are not in the shape to receive credit. The situation calls for more guarantees and strong support of shareholders. Inside of banks, this boils down to the “holy grail” of seeking quality of collateral, shareholder support and transparency towards the Bank. Yes, it is true that many companies tend to have restricted access to new funds, especially if the Bank cannot get “comfortable” conditions or confidence the owner of a particular business is ready to stand himself behind that business. And yes, in many cases shareholders whom have CAPACITY to support their firms are very reluctant to do so. And yes, we are afraid of further excessive losses and it is our job to avoid them. And the last yes, concerns the need to dramatically change the situation. However, pushing the responsibility to banks will not solve anything; it is not in our hands. We simply must work together – government, industry and banking sector.
Despite our decreasing volume of loans, BCR still supports roughly a fifth of the economy through credit. Unfortunately, about one quarter of this volume is either in insolvency or payment default. And I am sorry, we have not caused this situation – the crises went through the economy as wildfire, whether we had done a good job or not in the past. This is a situation is nearly identical across the banking sector. There is one good news in all of this, potential loss from non performing credit has been covered by fresh (I underline, fresh) capital and provisions the BCR has made during the past three years and prior to that. Let’s be concrete on this point, BCR has made cumulative profits of RON 4.54 billion since privatization in 2006. Shareholders of the Bank received RON 1.5 billion in dividends over that period. The same owners kept RON 3 billion in Romania as additional capital for growth, believing in potential and future prosperity of this country. Further to that, shareholders invested additional RON 3.25 billion of fresh capital and subordinated loans into the business of banking in Romania. Therefore any debate or doubts of commitment are entirely out of place. We, at BCR and Erste Group, trust in this country’s future and prove it with deeds. We are stable, robust and ready to support the economy. Now, is the country supporting us and cheering banks to have confidence and stable playing field?
Banks need predictability and stability. This is especially true for legal framework and its ability to protect (yes protect) creditors’ rights. We are nothing but factories producing thousands of IOU’s (I owe you) notes and are hoping that our ability to collect these will be swift and unimpeded. All legal uncertainty concerning contracts being forced open somewhere in the future will have huge cost to the capital distribution through banks. It is irrelevant whether such uncertainty concerns three banks or all of them. Let me use the example of renewable energy industry where hundreds of millions Euros have been lent only to later being obliged to face a volatile and unpredictable situation concerning future cash flows. Additionally, I must also refer to situation where banks are potentially faced with huge risks concerning past activity in the realm of retail lending. Stability first and foremost requires explicit government and institutional support to prevent change of rules in the middle of the given game. If we give capital of the banks to self-proclaimed champions of oppressed consumers, we all stand to lose. And let me underline that I stand for fairness, transparency and symmetry in contractual relationships. However, opening the past will simply make the situation even more difficult especially in view of many other uncertainties that these kinds of laws bring. And yes, I believe that banks need to change and protection of consumers must be sacred as opposed to making few smart people very rich in due course.
The other key outside of our control is a new regulatory framework, profoundly different, tighter and restrictive in terms of risks that Banks should undertake. As capital is limited, scarce and expensive, banks are prudent to lend where additional reserves are required. And please do not be mistaken, I really stand most of the time on the regulatory side and have no problem to admit that banks have to improve fundamentally to answer needs of the society. However, let’s be concrete. Today, the problem canters around the issue of how much capital we must carry to cover the risk we undertake. Much of the existing capitalization, which is actually double that of what banks have elsewhere, supports the NPL problem. And this capital is locked in the banks due to the inadequate insolvency framework and related processes. From past and recent experience we have “horror” cases, where assets securing our loans tend to melt away into nothingness and decades lasting lawsuits. If secured creditors are supported to control and dispose of assets, then such will be returned to productive use quickly and banks will be able to realize, absorb losses and get on with the job. Banks need reliable, transparent and creditor centered process to enable to absorb losses and move on. Our industry also needs ability to write off bad loans into off balance sheet accounts and ability to pursue relevant debtors from different accounting position. And finally, we all must be pragmatic as to what we want in the greater scheme. If banks always lose when things go wrong, there will be no growth. It is as simple. However unpopular it is to say “I support the banking industry” at political level may be, this is what needs to be done to instil confidence in the Banks and alleviate the fear of ours to take risks.
Given the fear of banks, I actually disagree that economic performance is purely a function of bank’s willingness to do lending. Let’s try to agree that CONFIDENCE AND STABILITY are the main drivers of growth translated into willingness of households or businesses to borrow. And if CONFIDENCE AND PREDICTABILTY are the drivers of our future, let TOGETHER work on concrete measures to achieve that. Today, I really believe we can do better on both. Many a successful businessmen I meet these days do not display confidence in the future due to internal and external uncertainty. People and businesses do not invest because of lack of confidence and we must change that together. However unpalatable bankers are due to past misdeeds, they also need confidence and lot more of it then entrepreneurs as we must be careful. The economic malaise we are living in originates from the previous excess debt and current lack of confidence. It is my view that the government, industry and regulator should agree 12 concrete measures to aim at confidence building and resolution of the divide between uncertainty, fear and confidence. Without creating concrete platform to work out CONFIDENCE PACT we risk that all turns into more disappointment.
And in such respect, I can’t stress enough that the only way BCR can actually recover from the recent “horror” of its credit portfolio losses is through credit growth. Here, in the bank, everybody understands this simple equation and the same holds for our senior management in Vienna. Given the size of capital deployed to support the Bank, we are in good position to grow. We want to grow, but need confidence and predictability to do so. Indeed, we do currently restructure, and we do that in order to prosper in the future. Our philosophy is to change the cost structure and shape up the Bank. I trust that in not so distant a future, this pain will help us to become more competitive and bring more value to both, shareholders and stakeholders. We are not unique in terms of our challenges, I just hope that we are standing apart in sincerity of how urgently we want to address them and succeed. And I hope that we shall become one of the pillars of growth, driver of prosperity and basis of stability. And yes, any restructuring turns the bank away from abilities to be commercially agile and aggressive. That is the price we pay for the sake of our future.
As we cannot change the past, we must change our future through building sustainable framework. Let’s start working on pragmatic solutions. We are open for business, yet we cannot repeat the past performance. And with that understanding, I invite you to come and call upon us. We will try our best to grow together. And I hope, it is my dream that strong political leader (or leaders) will have the courage to clearly say “For the sake of our country, our prosperity and our ability to unlock potential of Romania we must have robust and stable system of partnership. We will support our banks and also regulate that whatever excesses were done in the past never repeat. At the same time, we shall carefully consider how to build confidence and predictability through symmetry of rights between creditors and debtors, predictability of taxation and actions to support growth in private industry and public sector investments. The key mission of such partnership is to build prosperity, economic growth, eradicate poverty and reinforce our confidence in the future.”
I really believe we need such open and strong partnership to succeed together.