During this crisis generated by the pandemic, the Romanian banking sector has been a fulcrum for the population, for companies and for Romania’s economy in general. When it entered this crisis, the Romanian banking sector was prepared, its solvency and liquidity ratios standing at levels higher than the European averages. Quick liquidity stood at 43.8% at the end of 2019. In December 2019, total own funds reached 20%, while tier one capital stood at 18%, these levels being slightly higher than the European averages. At the end of the first six months of 2020, the sector’s solvency was on the rise i.e. up to 22.76% – which was more than double compared to what was required. The NBR data shows that the NPL provision coverage rate went up to 60.6% at the end of 2019, which is a rate significantly higher than the European average (44.6%), while the NPL rate has had the tendency to be in line with the European average.
The impact of the pandemics is a negative one while a potential positive impact that we could witness at the end of the crisis pertains to stimulating digital access to banking services and also, paradoxically actually, an increase in financial intermediation.
Lending to the private sector as weight against the GDP stood at 25% in March 2020, Romania having the lowest rate of financial intermediation across the EU. In the countries in the region, this rate is significantly higher: Hungary – 34.7%, Poland – 51.9 %, Bulgaria – 53.3 %, the Czech Republic – 53.4 %. As an effect of the crisis – contemplating the shrinking of the GDP and of lending to the economy, financial intermediation could go up.
Lately, credit institutions have invested significant amounts in order to develop digital solutions. Thus, due to the COVID-19 outbreak, actually, what went up has been the number of the people who discovered how easily they can perform banking operations remotely and how much digitalization was promoted by the industry. After this period ends, I am confident that we could remark a certain behavioural change – one on the long-term for that matter and, moreover, that we will be able to maintain a higher usage rate when it comes to the digital products and services provided by banks.
Furthermore, the value and the number of card payment transactions performed with cards issued by resident payment services providers went up by almost 10% since the beginning of the COVID 19 pandemics, at an annual rate, thus accelerating the digitalization process in the banking sector.
But, nevertheless, it is still difficult to estimate with clarity the magnitude of these effects generated by the crisis and implicitly banks’ contribution. And this is so because we have an atypical crisis. In other words, we do not know how deeply it will continue to affect different industries, the economy and the social environment in general. At the same time, a policy devised by policymakers to support as efficiently as possible the restauration of economic activity will help us contain these challenges.
Unfortunately, during this period of time, the legal risk specific to the banking industry has continued to be high. Needless to say that, in the COVID-19 context, it would be desirable to avoid the additional costs generated by legal measures, now more than ever.
We anticipate that the economy could recover in 2021. There are several opinions here. The European Commission forecast indicates a contraction of the real GDP by 6% in 2020, followed by a recovery of only 4% in 2021.
But this does not mean that there will be less pressure on the banking industry. To the contrary, we will reach the end of the legal and non-legal moratoria period this year and, as such, we could be witnessing an increase in NPLs. The data in the first semester already shows an increase in NPLs to 4.38%. And this happened despite the fact that banks have suspended the payment obligations of those affected by this pandemic-generated crisis. More than 22% of non-government credit on the household segment have been affected by the legal and non-legal moratoria, while for the corporate segment the percentage is 28%.
Taking into account this atypical year, the banking sector’s capacity to make profit could be negatively impacted by the outlook regarding a worsening of macroeconomic conditions. If we conduct a quick analysis related to profitability, we will see that the domestic banking sector ranked 11 in 2019 respectively 7 among European Union Member States as regards ROA (1.4%) and ROE (12.3%).
In this context dominated by uncertainty, I am launching three main topics which, in my opinion, should become priorities for triggering a fast recovery of Romania’s economy. The first topic targets the huge opportunity of modernizing the economy and the society with European money.
The banking sector is ready both as a whole – via the Romanian Association of Banks, as well as at individual level – via banks, to contribute to the acceleration of accessing European funds. A second very important topic is the actual digitalization of the economy. A fractured digitalization does not exist. And for this to happen, the public administration has to cooperate, even if this means making its footprint more efficient.
The banking sector is one of the most advanced sectors when it comes to digitalization. Public authorities have to give momentum to a widescale usage of digitalization (and not just to a marginal usage). As for the state, the advantage is the reduction of red tape, lower costs and less fiscal evasion.
The state could use the banking sector in order to accelerate digitalization just like planes make use of aircraft carriers.
And finally, a third topic and a concern as well refers to what we should invest in during the second half of this year so that the recovery in 2021 takes place as fast as possible. Romania’s economic recovery depends on the manner and swiftness with which we will be able to prioritize the solutions since challenges continue to occur, and even stronger ones actually.