High risk, massive growth in domestic banking

Danske Bank officials monitored 10 Romanian market indicators, including economic growth, the leu’s exchange rate variations, financial intermediation, and real interest rates, and concluded that Romania is “a risky financial market,” together with Bulgaria, Latvia and Estonia.

“Romania is one of the Eastern European markets included in the danger zone due to poor performance of certain indicators,” Danske Bank Chief Economist, Carsten Valgreen, said during the “Retail Banking in Europe” debate in Vienna this week.

However, Commerzbank representatives said that, in spite of risk present on any emerging market, the “ring” of financial services is attractive for investors because of its major opportunities of growth. “The Romanian market is one of the most promising markets. It has excellent potential, with highest growth in 2006 recorded in the retail and corporate loan segments,” Commerzbank Senior Vice President, Per Fischer, said. “For the first time in Romania’s history, retail loans exceeded the value of deposits, by the end of last year,” he added.

The most profitable banks among EU Eastern European members are those in Latvia, with an average return on equity (ROE) amounting to 27.1 percent. Czech banks follow, with a 25.2 percent ROE, and Hungarian banks rank third, with a 25.1 percent ROE, according to World Bank statistics, published in the report entitled “Credit Expansion in Emerging Europe: A Cause for Concern?”.

Romanian banks have a 15.4 percent ROE, higher than those in Estonia (12.3 percent) and Slovenia (13.8 percent). The profitability of banks in most new EU member countries increased in the 2001-2005 period, according to the World Bank. Exceptions are Romania and Slovakia, where bank profitability dropped, the report said.

However, profitability in relation to return on assets (ROA) is average for Romanian banks, which rank fifth among 10 countries analyzed by the report. In 2005, Romanian banks had a 1.9 percent ROA, less than Latvian banks, with 2.1 percent ROA, and banks in Bulgaria, Hungary and Estonia, with 2 percent ROA.

At the beginning of 2006, Romania had the lowest ratio of banking assets to Gross Domestic Product (GDP), under 50 percent, as well as the lowest proportion of non-governmental loans/GDP, at 21.1 percent, among all the new EU members.

“The Romanian market is one of the most promising markets '' Per Fischer Senior Vice President, Commerzbank