Sector Overview
There were 40 credit institutions operating in Romania in 2014. Most of them are privately owned and foreign funded. In 2014, banks operated in an environment, characterised by weak lending activity, with both supply and demand of credit being very risk averse, low and decreasing interest rates, easing of the monetary policy and cleaning of the balance sheets of bad and non-performing loans through writing-off provisioned loans and selling bad loan portfolios, cross-border deleveraging and increase of RON-denominated assets and liabilities. The solvency of the system is quite high and exceeds the Basel II requirements, partly due to the prudential filters, applied by the National Bank of Romania (NBR). The decline of profitability in 2014 is largely due to one-off factors and relates to the healing of the loan portfolio.
Portfolio Quality
In 2014, the NBR sped up the cleaning up process of the balance sheets of banks. NBR recommended that banks increase the provisions for loans that are likely to become non-performing and to write off fully provisioned loans. At the same time, some banks were already selling their bad loans. These developments resulted in a sharp deterioration of the financial results of the banks, mainly over H2 2014. At the same time, the NPL ratio of the system improved significantly from 21.9% in end-2013 to 13.9% in 2014 and the loans-to-deposit ratio declined from 104.6% to 91.3% over the same period. The solvency of the banking system remained at a high level, despite the significant loss in 2014.
Outlook
The growth prospects for the Romanian banking sector are very optimistic. The financial deepening in the country is quite low when compared to peer countries in CEE and there is large room for development. The economy is expected to grow in the short and medium term at rates exceeding the EU average. The cleaning of the balance sheets of NPLs is expected to continue in 2016 although at a slower rate than in 2014. This will hold profits' growth. The corporate loans segment is expected to grow at an average 4% annually over 2016-2019, while household loans will rise at an average 3% y/y over the period.