By Doinita Dolapchieva
Banca Comerciala Romana (BCR), a member of Erste Group since 2006, is Romania’s largest financial group. Besides universal banking operations, including retail, corporate and investment banking, treasury and capital markets, the group also provides leasing and asset management services, among others. BCR’s network includes more than 560 retail units, over 2,100 ATMs and 13,500 POS terminals.
What are the main factors that influenced BCR’s financial results in 2013 and how do you think they will affect the bank’s performance in 2014?
BCR achieved a challenging task in 2013, returning to breakeven after one-off items. More importantly, we had to deal with bold decisions regarding costs, organisation and strategy, aimed at consolidating the fundamentals of BCR as the leading bank in Romania.
The bank’s operating income recorded a marginal decrease of about 1.0%, mainly driven by the still subdued credit demand and lower interest rate environment favoured by the monetary policy easing, with key rate cuts totalling 125bps in the second half of the year putting pressure on interest income and margins. On the other hand, the operating income was supported by a substantial increase in fee income of approximately 18%, as a result of continuous focus on growing transaction banking business.
Following comprehensive optimisation measures and strict cost discipline, in 2013 the bank achieved a reduction in operating expenses of more than 10%.
Furthermore, the risk charges significantly decreased by around 40% due to lower non-performing loan (NPL) inflows in both retail and corporate segments.
In the second half of last year, the first results of our turnaround efforts became visible, with large scale business restructuring completed, NPL stock declining for the first time since 2008 and rebalancing of the loan book towards local currency well underway.
What are the main goals the bank is pursuing in 2014?
We entered into the second half of 2014 with the strong commitment to clean up our balance sheet and enhance future capacity to deliver strong performance of the healthy, solid core of the bank which is currently showing consistent signs of improvement, as BCR succeeds in capturing new lending market share along with reinforcing the overall deposit base.
We are taking decisive measures aimed to accelerate reduction of the NPL balance already in 2014 – it is down about 25% compared to year-end 2013 – through write-offs, sales and recoveries, while at the same time planning to further improve our competitive capacity in both the retail and corporate franchises of the bank. On top of this, BCR will deliver this year the full cost benefit of the 2013 restructuring programme.
What are your expectations regarding your financial performance in 2014?
As mentioned before, we are executing our strategy according to the main pillars defined. Given the magnitude and accelerated implementation of the clean-up measures, we cannot achieve overall profitability this year, however we are convinced that we are on the right path and the financial performance of the bank will improve substantially from next year onwards.
How will the central bank’s recommendation to remove fully-provisioned NPLs from the balance sheet affect the bank’s 2014 results?
Strictly referring to the write-off of an NPL which is already fully-provisioned, such operation does not produce any profit and loss impact. However, for those NPLs that we need to bring close to 100% provisioning level before being able to write them off, there are one-off additional risk charges to be booked this year that will obviously hit our bottomline result in 2014. Another important fact to be mentioned is that, by moving an NPL off-balance sheet, we do not cease the claim against the respective client.
What NPLs ratio do you expect BCR to achieve at the end of the year?
As mentioned, given our current efforts to re-duce the NPL volume in an accelerated manner, by end-2014 the bank’s NPL ratio should decrease by about 5.0 percentage points as compared to the end of 2013; this is also a function of the commercial performance of the bank, i.e. our ability to maintain or somewhat grow the size of the healthy book.
What are the main challenges BCR is facing in the medium term?
Going forward, we clearly anticipate the bank’s ability to deliver positive results based on achieving sustainable growth of healthy business, maintaining strict cost discipline and stabilised revenue stream. Such targeted performance is well-anchored in conservative assumptions and a very strong capital base. Benefitting the decisive measures undertaken this year, 2015 should already be a normalized year to this extent. Thus, the main challenges ahead reside in our capacity to resolve the NPL stock and to achieve sustainable profitability and considerable improvement in the overall quality of BCR’s balance sheet, while facing significant headwinds coming from still fragile business conditions in the context of a low interest rate environment, margin pressure and the country’s economic growth still delaying to translate into more solid loan demand, and last but not least a tough regulatory framework.
What market share in terms of assets do you expect the bank to have at the end of the year?
BCR’s market share by total assets stands at 17% as of June 2014, slightly down from 17.5% as of end-2013. We see the total assets of the Romanian banking sector continuing to decrease in 2014 in line with the general clean-up efforts in the market and still subdued overall loan growth, therefore we do not expect a dramatic change in our related market share going forward, BCR maintaining its comfortable leading position in the market.
What are your projections regarding the pace of lending growth in Romania in 2014?
Based on the developments so far in the year and the current NPL resolution initiatives throughout the sector, we expect a slight low-single digit contraction of the overall lending in Romania versus the end of 2013, as the good growth we see so far in terms of new lending in local currency, especially in retail, still does not produce enough volumes to offset the impact of the banks’ balance sheets clean-up and natural repayments. According to our latest forecasts, mortgage lending is the segment showing good year-on-year growth in 2014 in terms of outstanding balances, somewhere in the range of mid-single digits.
What is your forecast for the Romanian banking sector’s overall NPL ratio at the end of 2014?
Following the central bank’s recommendations and based on the latest available data published by the regulator, as of the second half of 2014 the NPL ratio for the sector has already improved by three percentage points against end-2013, and the trend will obviously continue, however this depends on how the other players in the market will deal with their own NPL issues and at the same time on their ability to generate new business.