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Romania Banking Report - Q1, 2015

Romania Banking Report - Q1, 2015

This report covers the market developments and statistics data released up to June 1.

Romania’s banking system reported in Q1 an aggregated net profit of €187mn -- the largest quarterly profit in more than six years. But this might be misleading, since the NPL ratio was still 13.85% at the end of March and only one third of the whole bundle of bad loans was removed from banks’ balance sheet in the past year. On the upside, the banks took firm steps to clean their balance sheet – strongly encouraged by the central bank. The cost is that the banks incurred losses of more than €1bn in 2014 – double the losses in 2013. Losses reported in 2014 measured 1.34% of the banking system’s average assets.

Lending has moderately and selectively increased – particularly the local currency mortgage loans. Such new mortgage loans denominated in local currency expanded by 45% y/y in January-April this year. New bank loans issued by Romanian banks to households and non-financial corporations increased by 5.3% y/y to RON15.4bn (€3.5bn) in January-April. The volume of new loans denominated in local currency increased by 13% y/y, while new loans denominated in euros contracted by 12% y/y (in euros).

Romania’s government endorsed the revised Fiscal Code, which includes significant tax rate cuts, in March. The VAT rate was cut in June to 9% for food and related services. Romania’s independent Fiscal Council has endorsed a government bill cutting the VAT rate on food, but warned that the move is risky. The European Commission has on May 13 recommended that Romania take all necessary measures to complete the 2013-2015 BoP programme and implement the comprehensive tax compliance strategy in order to return to the medium term fiscal deficit objective in 2016. The EC’s forecast that Romania’s headline deficit will deteriorate sharply to 3.5% of GDP in 2016 is based on the assumption that Romania’s draft fiscal code, which was adopted by the government in March.

Key points:
Banking system reports robust €187mn profits in Q1, after massive losses in 2014; however, full-year results might remain in the negative area considering the still large volume of NPL
New bank loans issued in Romania up 5.7% y/y, to €3.45bn in Jan-Apr
Bank loans in Romania 3.8% down y/y at end-April, currency substitution loses ground
Bad loans remain constant in Romania during Q1; The NPL ratio decreased by one third on year, to 13.85% at the end of March from 20.39% one year earlier
Romania’s largest bank BCR reports Q1 profits, NPLs still a problem; the bank plans to sell €2bn NPL bundle within weeks – sources
Romania’s government endorses new Fiscal Code, cuts foodstuff VAT rate in June
EC asks Romania to take measures against expected fiscal slippage
Fiscal Council endorses VAT cut on food, but says is risky
Romania’s government posts 0.7% of GDP surplus in Q1
Romania’s EU funds absorption rate up only 1.1pp up to 54.22% at end-April
Public debt up 6.9% y/y at €59.75bn, or 39.8% of GDP at end-Feb
Romania posts €406mn, 0.3% of GDP C/A surplus in Q1


Contents
Executive summary 5
Macro Outlook 7
S&P affirms Romania’s rating, projects robust 3% p.a. growth in medium term – in April. 7
State forecasting body revises 2015 GDP growth up 0.5pp to 3.3% at end-May. 8
Romania’s growth remains robust but fiscal reforms to push up deficit - EC Spring Forecast. 9
EBRD revises up Romania’s 2015 growth projection to 3%, in May. 9
GDP up 4.3% y/y in Q1, under flash estimate… 10
… after 2.8% y/y expansion in 2014. 10
B. Relationship with IFIs 13
IMF to return in late June in Romania for more talks on SBA. 13
C. Monetary Policy 14
Romania's central bank governor calls for euro adoption calendar to be reconsidered 14
Romania’s central bank cuts interest rate by 25bp in early May to 1.75% in unexpected move. 14
Banking 16
BIS-reporting banks’ gross exposure to Romania down 6.7% y/y to €31.07bn at end-2014 16
Net borrowing remains negative in Romania in Q4. 17
A. Top Stories 20
Banking system reports robust €187mn profits in Q1. 20
Central bank instructs Greek-owned local banks to prevent rapid outflows 20
B. Loans & Deposits 21
Bank loans in Romania 3.8% down y/y at end-April, currency substitution loses ground. 21
Romania’s bank deposit base keeps expanding, by 6.3% y/y at end-April. 23
C. New Loans 25
New bank loans issued in Romania up 5.7% y/y, to €3.45bn in Jan-Apr. 25
D. Bank Loan Quality 25
Bad loans remain constant in Romania during Q1. 25
Overdue bank loans in Romania decrease by 17%, or €1bn ytd at end-April 26
E. Corporate News 29
Romania’s largest bank BCR reports Q1 profits, NPLs still a problem 29
BCR to sell €2bn NPL bundle within weeks – sources 29
Banca Transilvania acquires Volksbank Romania 30
UniCredit Bank Austria buys out Tiriac's 45% stake in Romanian unit. 31
Banca Transilvania, OTB Bank reportedly compete to buy Piraeus’ Romanian division. 31
Nextebank makes third merger offer to Romanian Banca Carpatica. 32
Prosecutors identify main author of €43mn frauds at Romanian bank BRD. 32
BCR joins IFC’s Global Trade Finance Programme. 33
Outgoing president of Romanian bank CEC advocates minority participation of IFIs. 33
INTERNAL STABILITY 34
Romania’s government endorses new Fiscal Code, plans VAT cut in June 34
EC asks Romania to take measures against expected fiscal slippage. 34
Inflation, Public Finance 35
Romania’s headline inflation eases to 0.65% y/y in April… 35
… and c-bank revises downward yearend inflation forecast to 0.2% y/y to reflect VAT rate cut in June. 36
Fiscal Council endorses VAT cut on food, but says is risky. 37
Romania’s government posts 0.7% of GDP surplus in Q1... 38
... and the surplus widens to 0.85% of GDP in Jan-Apr. 39
2014 budget deficit down 21% y/y to 1.85% of GDP. 39
Romania’s EU funds absorption rate up 1.1pp up to 54.22% at end-April. 41
Public debt up 6.9% y/y at €59.75bn, or 39.8% of GDP at end-Feb. 42
EXTERNAL STABILITY 44
BoP, External Debt 44
Romania posts €406mn, 0.3% of GDP C/A surplus in Q1… 44
… after narrowing by 40% y/y to €696mn, or 0.5% of GDP in 2014. 45
Romania’s gross external debt down 0.9% y/y to €92.9bn at end-Mar. 47
Appendix: Previous issue’s Content 49

Table 1: GDP in Jan-Sep, countribution of sectors and dynamics per sector 13
Table 2: BIS banks’ exposure to Romania, assets and liabilities 18
Table 3: Deleveraging and BIS-banks’ exposure to CESEE countries 19
Table 4: Selected performance indicators for Romanian banking system 21
Table 5: Bank loans [RON mn] 22
Table 6: Bank deposits [RON mn] 23
Table 7: Stock of bank* loans to private sector – detailed (end April 2015) 24
Table 8: Stock of bank* deposits from private sector – detailed (end April 2015) 24
Table 9: Bank loans by quality 26
Table 10: Overdue payments on bank loans [EUR mn, % of total loans] 27
Table 11: Credit quality indicators [RON mn, unless indicated] 28
Table 12: Budget execution 41
Table 13: Public Debt 43
Table 14: Public Debt [eop, EU methodology not including borrowing from own reserves funds] 44
Table 15: Current Account, ytd [EUR mn, BPM6] 46
Table 16: Gross External Debt [EUR mn, BPM6] 47

Figure 1: Seasonally adjusted GDP [plus y/y for non-adj. GDP] 11
Figure 2: Main drivers of GDP y/y growth – by elements [pps] 12
Figure 3: Main interest rates [%] 15
Figure 4: Net profit of banking system, quarterly [EUR mn] 20
Figure 5: Stock of credit, by debtor [EUR mn] 23
Figure 6: Dynamics of the corporate loans by currency – forex, local currency [EUR mn, RON mn] 23
Figure 7: Non government’s deposits [EUR bn] 24
Figure 8: Non government sector’s net balance with banks 24
Figure 9: Net balance with banks, by sector 24
Figure 10: Bad loans, off-balance sheet loans [RON mn] 26
Figure 11: NPL ratio [new, old methodology] 26
Figure 12: Overdue payments on bank loans [EUR mn] 27
Figure 13: CPI vs. HICP [y/y] 36
Figure 14: Gross External Debt [EUR mn] 48

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