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Romanian banks February 2012
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Romanian banks
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EQUITY RESEARCH
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Sector update28 February 2012
Stocks covered
Rating TP
Upside/
downside
potential
(RON) (%)
BRD GSG Hold 12.50 13.6
Banca
Transilvania
Sell 0.95 -7.0
Source: ING
Price-to-earnings ratio
PER (x)
11F 12F 13F
BRD GSG 7.8 7.7 6.3
Banca Transilvania 9.7 10.8 9.5
Peer group 11.3 10.7 9.5
Source: ING
Price-to-book ratio
PBR
11F 12F 13F
BRD GSG 1.2 1.0 0.9
Banca Transilvania 0.8 0.7 0.6
Peer group 1.6 1.5 1.5
Source: ING
Return on equity (%)
ROE
11F 12F 13F
BRD GSG 16.0 14.3 15.4
Banca Transilvania 8.7 6.8 6.8
Peer group 17.1 15.4 15.9
Source: ING
Metrics (%)
Yield
12F
Loan
to dep
ratio 11F
Risk
costs
11F
BRD GSG 1.6 108 2.3Banca Transilvania 0.0 76 3.8
Peer group 1.6 99 1.1
Source: ING
We expect no growth in Romanian banking in 2012. De-risking is costly, and
both top- and bottom-line growth are expected to be affected in 2012. At the
top-line, credit demand is in FX, but supply from banks is currently in RON.
Switching from lower-rate EUR loans to higher-rate RON lending will stifle the
fragile growth seen in 2011. At the bottom-line, banks are bidding up rates for
scarce local savings, in order to plug FX funding and duration gaps. We do not
expect the central banks excess short-term RON liquidity to stop, or address
the FX and duration mismatch. Net interest margins are likely to take a further
hit in 2012 after coming under pressure in 2H11.
Cost cutting is the only way to keep the bottom-line flat: management responds to
lower revenue by cutting internal costs, as this is the only expense under its control.
Exogenous costs (minimum reserves, market risk costs, under-developed financial
markets) cannot be avoided and are unlikely to decrease. As a result, we believe 2012
will be characterised by accelerated layoffs and network closures.
All fundamental upside is in the distant future: banks could achieve flat RoEs in 2012
vs 2011 through good cost efficiency and, arguably less likely, lower risk costs. However:
(a) profitability is on a par with, or below, peer group averages; (b) growth prospects for
2012 and 2013 appear below average; and (c) country risk is higher than the median. Our
fundamental valuations, even using conservative assumptions, suggest there is upside to
current share prices, but we believe there will only be value in the long term. We see no
apparent short-tem reasons for the market to factor this into current prices and reduce the
discounts at which Romanian banks trade to their CEE peer group average multiples.
If there is money and appetite in Romania, energy public offerings will steal the
show: we expect the Romanian government to seek public offerings for large energy
companies (OMV Petrom, Romgaz, Hidroelectrica) in the coming 12 months. Depending
on pricing, we believe these could fetch well in excess of 1bn. However, the Romanian
market sees only 10m a day of trading on average, hence we believe liquidity could
migrate away from banks and into energy.
Catalyst for BRD is lower FX funding gap; for Banca Transilvania, it is BRD: in our
view, BRD could trim its current 30% discount to CEE peers to 20% if it reduces its
funding dependence on Societe Generale by issuing an MTN (medium-term note) in
2Q12. For BT, market behaviour seems to favour a pattern whereby BRD share price
outperformance results in local flows partially recoiling into BT shares.
Share overhang is risk for BRD; risk for Banca Transilvania is under-provisioning:
up to 30% of BRD is held in large institutional stakes, some of which reported significant
unloading in 2011. Overhang risk is mitigated by the fact that large trading volumes in the
shares are executed as block trades. The trading behaviour of the shares explains why
BRD usually lags the wider market dynamics. We believe Banca Transilvania could be
haunted in 2012-13 by its low provision coverage ratio (estimated at 30% in 2011F).
However, BT receives support from the central bank, which provides it with cheapliquidity. This enables it to buy BTs government securities purchased with the money,
thus benefitting BTs interest income and capital ratio (which improves mechanically
through the higher marking to market of its available-for-sale portfolio).
Florin IlieBucharest +40 21 209 1218
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Contents
Romanian banks 1Sector overview 3Sector growth ..................................................... ........................................................... .....5FX funding gap...................................................................................................................8QE Romanian style ......................................................... ................................................. 11Banking costs...................................................................................................................14What about Greek banks?................................................................................................15Impact of switch to IFRS ........................................................... ....................................... 16Central bank future policy.................................................................................................18Market forecasts...............................................................................................................18Companies 21BRD Groupe Societe Generale ........................................................... .............................23Banca Transilvania...........................................................................................................37Disclosures Appendix 51
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Sector overview
Deleveraging in the Romanian banking sector is proving hard to execute. An FX
funding squeeze is pushing up deposit rates, despite the National Bank of Romania(NBR) providing excess liquidity.
Balance-sheet stagnation, currency and duration mismatch, and high risk costs are
keeping sector profitability in negative territory, although there are significant
differences between individual players.
Asset-quality deterioration shows signs of flattening; however, weak revenue streams
mean that the sector is set for cost-cutting via layoffs and network downsizing in
2012.
A move to international accounting and reporting standards from January 2012
should have a positive impact on capital ratios.
In our view, the central banks policies appear to be designed to: (1) maintain excess
RON liquidity; (2) support vulnerable locally-held operators; (3) stop the relaxation of
minimum reserves; and (4) develop a bridging bank to take over eventual
bankruptcies.
Deleveraging and NPLsThe Romanian banking sector is finding it both difficult and costly to deleverage and
decrease its reliance on parent bank funding. Indeed, the sector leverage ratio has been
hovering at c.8% for much of the current financial crisis. Overall, capitalisation (tiers I and
II) is 650bp above the regulatory minimum, but this sector-wide average figure obscures
significant variations among individual banks.
Euro funding is the main concern, amid a sector EUR loan-to-deposit ratio of 233%,
meaning it is imperative that the reliance on parent banks is reduced. Currency and
duration mismatch between local assets and liabilities burdens the system with market
and, above all, liquidity risk: long-term EUR-denominated assets vs short-term RON-
denominated liabilities. Local long-term savings are scarce, which bids up deposit rates.
Fig 1 Deleveraging is proving hard to execute Fig 2 Funding FX lending is the primary concern
14.513.813.8
7.98.1
15.014.7
8.17.67.3
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Capital adequacy ratio ( 8%) (%) Leverage ratio (x)
65%
225%
119%
0%
50%
100%
150%
200%
250%
2007 2008 2009 2010 2011
LDR - RON (%) LDR - FX (%) LDR - total* (%)
Leverage ratio = Tier 1 capital/total average assets
Source: NBR
*Total = Non-governmental, residents. LDR = Loan-to-deposit ratio
Source: NBR
Deleveraging is slow and
costly; currency and duration
mismatch is the main risk,
with mid-term EUR funding
the prime concern
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Balance-sheet stagnation, currency and duration mismatch, and high risk costs are
keeping sector profitability in negative territory. Over-leveraged banks have suffered
significant losses, while better-off players have recorded positive returns on equity (RoEs)
below their cost of equity. We believe 2012 looks set to be the third consecutive year that
the sector makes a loss as a whole. Note that losses are unevenly distributed across the
sector, with those players marking sizeable losses most likely to need additional capital.
In 4Q11, NPLs flattened out a touch above 14%, but we believe weak economic growth
and earnings forecasts could push them higher still in 2012. Perhaps counter-intuitively,
NPLs have been higher for RON loans than for FX loans. RON loans were previously
sold only to customers with lower bargaining power (riskier consumer lending and small-
and medium-sized enterprises); they also came with a high interest rate differential, due
to the NBRs policy of maintaining high interest rates for the local currency in an effort to
rein in an overheating pre-crisis economy and subsequently reduce FX rate volatility.
Fig 3 Sector profitability remains negative Fig 4 Asset quality deterioration is slowing for now
1.6%0.3%
-0.2% -0.1%
17.0%
2.9%
-1.7% -1.4%
-5%
0%
5%
10%
15%
20%
2008 2009 2010 2011
ROA (%) ROE (%)
6.5
14.114.2
23.3
0.0
5.0
10.0
15.0
20.0
25.0
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
NPLs ratio (%) Credit risk ratio (%)
Profitability is heterogeneous across sector with big differences among banks
Source: NBR
Please refer to Impact of switch to IFRS section for important explanations.Romanian rules are different from IAS, which can affect the internationalcomparability of data
Source: NBR
NPLs put Romania and Hungary in a different, much riskier league to the Polish and
Czech markets. However, high loan-to-deposit ratios are a common feature in CEE
banking, and Romania is no exception; Romanian banks share the same relative
dependence on external FX funding as their Polish counterparts.
2012 is likely to be the third
consecutive year of negative
overall sector returns
NPLs flattened in 4Q11, but
further increases are likely in
2012 on weak economic
growth and earnings
forecasts
NPLs put Romania in a risky
league with Hungary, but the
loan-to-deposit ratio is in line
with wider CEE region
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Fig 5 NPL ratios in CEE (%) Fig 6 Loan-to-deposit ratios in CEE (%)
0
2
4
6
8
10
12
14
16
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
CZE HUN POL ROM
60
70
80
90
100
110
120
130
140
150
160
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
CZE HUN POL ROM
Source: National sources, ING estimates Households and non-financial companies loans and deposits
Source: National sources, ING estimates
Sector growthRomanias macroeconomic situation is stable and the primary future concern is meagre
growth, not the fiscal deficit. Banking penetration is at a virtual standstill and growth
prospects for 2012 are in single-digit territory.
Fig 7 Banking penetration is at a standstill Fig 8 Non-government loans are inching up
37%
18%
0%0%
-4%
36%
39%
40%
41%
40%
-10%
-5%
0%
5%
10%
15%
20%
25%30%
35%
40%
2007 2008 2009 2010 2011
33%
34%
35%
36%
37%
38%
39%
40%
41%
42%
Assets real growth (lhs, %) Non gov't loans / GDP (rhs, %)
33%
25%
4%
-3%-3%
1%7%5%
0
50,000
100,000
150,000
200,000
250,000
2007 2008 2009 2010 2011
-10%
0%
10%
20%
30%
40%
Non-gov't loans (RONm) Real growth (%) Nominal growth (%)
Source: NBR, NIS Source: NBR, NIS
Economic growth in 9m11 spurred an increase in corporate lending. However, the
downside is that the Euro funding gap widened with the timid pick-up in lending as clients
continue to seek EUR-denominated loans, given the interest differential and also
emboldened by the continued NBR-vetted relative stability of the exchange rate.
Relative pick-up in corporate
lending, but widening FX
funding gap
Single-digit growth in 2012F
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Fig 9 Timid (and fragile) pick-up in corporate lending Fig 10 EUR lending is still outpacing local currency
-10
0
10
20
30
4050
60
70
80
90
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Household lending (% p.a.) Corporate lending (% p.a.)
-20
-10
0
10
20
30
40
50
60
70
80
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
RON lending (% p.a.) EUR lending (% p.a.)
Source: NBR EUR lending growth rate calculated excluding exchange rate effect
Source: NBR
Slow growth rates are a problem also found across the rest of the CEE region. The main
drivers of this trend are the constraints generated by over-dependence on foreign funding
and weakness in local consumption.
Fig 11 Loan growth in CEE (% pa) Fig 12 Deposit growth in CEE (% pa)
-20
-10
0
10
20
30
40
50
60
70
80
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
CZE HUN POL ROM
-10
-5
0
5
10
15
20
25
30
35
40
45
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
CZE HUN POL ROM
Source: National sources, ING estimates Source: National sources, ING estimates
The prolonged contraction in consumer and SME lending was counter-balanced in 2011by larger corporate loans and government-sponsored mortgage schemes. On the positive
side, penetration of various lending segments in GDP terms is far lower than EU or CEE
averages, which bodes well for the long-term growth perspective. However, convergence
in higher banking penetration rates seen in more advanced economies is unlikely to be
smooth or occur anytime soon. Penetration is tied to the absolute level of discretionary
disposable income in a tradable price-equalisation common market such as the EU; from
this standpoint, we believe Romanian is currently where it should be in terms of banking
penetration in GDP.
Growth rates are in line with
the region
Banking penetration rates arewhere they should be
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Fig 13 Chance of growth: corporate and mortgages Fig 14 Corporate lending leads the field (RONm)
11%
6%
21%
14%13%
15%13%
6%5%
4%3%
21%19%
18%18%
0%
5%
10%
15%
20%
25%
2007 2008 2009 2010 2011
Consumer / GDP Housing / GDP Corporate / GDP
0
50,000
100,000
150,000
200,000
250,000
2007 2008 2009 2010 2011
Retail loans Non-financial company loans
Source: NBR, NIS, ING Source: NBR
We expect government-sponsored mortgage schemes to continue for the near future, as
they appear to be politically acceptable across the spectrum and are currently in their
fourth phase.
However, consumer lending is set to slump further, due to strict new restrictions on the
currency and maturity of consumer loans, coupled with weak demand as a result of low
consumption and earnings.
Corporate lending in Romania is a function of the European economy. The most dynamic
corporate segments are multi-national subsidiaries and local medium-sized corporations
(near-abroad sub-contractors of choice for Western European integrators and multi-
nationals), both of which are directly connected to the health of the broader EU economy.
Fig 15 Stalled retail lending hides mortgage growth
(RONm)
Fig 16 Strong exports have spurred investment (RONm)
0
20,000
40,000
60,000
80,000
100,000
120,000
2007 2008 2009 2010 2011
Consumer Housing Other retail
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2007 2008 2009 2010 2011
Corporate 5yrs
Source: NBR Source: NBR
But, with exports highly dependent on fragile European demand, domestic consumption
appears to be the only substantial source of growth in the future. For the moment, this is
not the case as consumption remains weak. Corporate lending appears most correlated
with new consumer goods orders.
Mortgages schemes are a
function of government
discretion and consumer
lending is falling away;
corporate lending is a
function of EU economy
Weak domestic consumption
is main drag on growth
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Fig 17 GDP components show weak consumption Fig 18 Consumer goods orders drive corporate lending
-35%
-25%
-15%
-5%
5%
15%
25%
1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11
GDP Household consumption Fixed investment
5.0
0.0
5.0
10.0
15.020.0
25.0
30.0
35.0
40.0
45.0
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
New manufacturing orders total (% p.a.)
New orders consumer goods (% p.a.)
Corporate lending (% p.a.)
Source: NIS Source: NBR, NIS
In our view, domestic consumption is unlikely to take-off in 2012. Improvements in real
wage growth in 2H11 have been driven by a favourable base effect and soft inflation.
With local elections scheduled for June and general elections for November, the
incumbent government could be tempted to increase pensions and civil servant salaries
in 2Q12, but any such move will be limited by the constraints of Romanias agreement
with the IMF. The growth in salaries has a weak pull effect on household lending, as the
population is still dealing with high leverage ratios and significant loss of revenue in 2009-
10. Improvements in industrial confidence and output have now levelled off, and we
expect further softening, tracking EU sentiment.
Fig 19 Real wage growth is a weak pull on loans Fig 20 Industry provides support for growth
10.0
8.0
6.0
4.0
2.0
0.0
2.0
4.0
6.0
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Real salary growth 3MMA (% p.a.)
Real household loans growth 3MM (% p.a.)
-25
-20
-15
-10
-5
0
5
10
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Industrial confidence (sa, lhs)
Industrial output (3MMA, %YoY, rhs)
Source: NBR, NIS Source: NIS, DG ECFIN
FX funding gapDespite international banking groups seeking to reduce FX exposure, a goal shared by
the central bank, the incipient pick-up in lending in 2011 came as FX lending increased.
The FX funding gap and liquidity risk attached to it grew, rather than fell as intended.
Longer maturity loans are overwhelmingly in EUR, while short-term lending facilities have
a stronger RON component, thus adding duration mismatch to currency mismatch.
But there is a silver lining: exposure to exotic currencies (non-EUR, non-US$ foreign
currencies; mostly CHF) is only 9% of the total lending portfolio (rising from 8% at the
2012 has started on a soft
note
FX funding gap, and attached
liquidity risk, grew in 2011
Exposure to exotic
currencies is not a concern;
it is all about EUR
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onset of the crisis only because of the statistical effect of RON depreciation against these
currencies). Most FX loans are EUR-denominated.
Fig 21 Foreign currency lending exposure still growing
Fig 22 Positive: small exposure to exotic currencies
0
50,000
100,000
150,000
200,000
250,000
2007 2008 2009 2010 2011
LCY-denominated loans (RONm) FCY-denominated loans (RONm)
46% 43% 40% 34% 34%
47% 49% 52%57% 57%
7%8% 8% 9% 9%
0%
100%
2007 2008 2009 2010 2011
RON loans (%) EUR loans (%) Other ccy loans (%)
Source: NBR Source: NBR
The currency structure of the different retail lending segments reflects the bargaining
power of Romanian borrowers vs banks: (1) mortgages have previously been accessed
by much-sought-after more affluent retail clients asking for lower EUR rates; and (2)
consumer loans appealed to lower- and middle-income segments, which had less choice
and took on higher RON rates. Therefore, riskier retail clients received higher-rate RON
loans and generated higher risk costs. Going forward, consumer lending if any is
likely to be almost exclusively in local currency.
Fig 23 Consumer loans: currency structure (Dec 2011)
Fig 24 Housing loans: currency structure (Dec 2011)
RON
42%
EUR
43%
Other
currencies
15%
RON
5%
EUR
82%
Other
currencies
13%
Source: NBR Source: NBR
Corporate lending is mostly in RON for short maturities and in EUR for longer maturities,
mirroring the retail lending picture. Indeed, the reasons are similar; longer maturities have
previously been available for larger, more secure borrowers. However, this sort of
adverse selection functioned to the detriment of all parties involved clients and banks.
Riskier retail clients get
higher-rate RON loans and
generate higher risk costs
EUR dominates longer
maturities in corporate
lending with shorter
maturities in RON
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Fig 25 Corporate lending five-year currency structure
RON
54%
EUR
41%
Other
currency
5%
RON
26%
EUR
72%
Other
currency
2%
Source: NBR Source: NBR
We believe banks are now trying hard to push local currency lending, but recent trends
show that EUR lending is particularly resilient. This is due to the strong client preference
for EUR loans as a result of the still-sizeable interest rate differential, as detailed in the
QE Romanian style section.
Meanwhile, the central bank is trying to narrow the differential (also detailed in the
following section), but to no avail as it currently provides short-term excess liquidity with
little or no bearing on the long-term funding needs of commercial banks lending
portfolios.
Fig 27 Local currency lending needs a push Fig 28 Euro-denominated lending particularly resilient
65,309
80,39876,950
68,10271,847
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2007 2008 2009 2010 2011
Local currency loans (RONm)
CAGR: +2%
18,653
23,352 23,83926,114
27,914
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2007 2008 2009 2010 2011
EUR-denominated loans (EURm)
CAGR: +11%
Growth calculated in nominal terms. Only loans specifically reported as RON-denominated are included
Source: NBR
Growth of stock calculated in EUR-equivalent to eliminate exchange rateinfluence. Only loans specifically reported as EUR-denominated included
Source: NBR
Local savings are almost entirely short term, both in local and foreign currency. The
interest rate differential and relatively stable exchange rate continue to make RON more
attractive to savers, hence the widening funding gap vs the structure of the loan portfolio.
High interest differential
continues to favour EUR loan
demand
RON remains the currency of
choice for local savings due
to the interest rate differential
and relatively stable FX rate
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Fig 29 Mismatch: local funding is short term (RONm) Fig 30 RON remains attractive for savers (RONm)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2007 2008 2009 2010 2011
O/N & 1 yr deposits
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2007 2008 2009 2010 2011
LCY deposits EUR deposits Other ccy deposits
Source: NBR Source: NBR
The spread between Romanian and Eurozone lending rates is on the low side. For
example, the spread between Romania and the Eurozone for new EUR-denominated
loans to households for house purchases on a ten-year initial fixed rate is currently
c.200bp (widening from as low as 100bp in mid-2010 and a negative spread as at end-
2008). This spread is lower than CDS spreads against much of the Eurozone, suggesting
that, if anything, lending costs at least for EUR-denominated loans are set to rise in
the near future rather than moderate down.
Fig 31 Country risk is reflected in funding costs Fig 32 Lending rates reflect funding constraints
0
100
200
300
400
500
600
700
800
900
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Romania 5Y CDS (bps) Hungary 5Y CDS (bps)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Eurozone EUR housing loan rate (% p.a.)
Romania EUR housing loan rate (% p.a.)
Source: Reuters New loans to households for house purchases on a ten-year initial fixed rate
Source: NBR, ECB
QE Romanian styleIn Romania, the central bank is currently enforcing an inflation-targeting policy. The
experience of hyperinflation in the 1990s continues to skew current monetary policy
towards cautious and slow relaxation. Moreover, the NBR is sometimes seen to be
targeting exchange rate stability at the expense of high and volatile local currency interest
rates. Irrespective of the central banks rationale and intentions, this has certainly been
the outcome, which in turn has encouraged EUR borrowing and RON savings.
EUR lending rates are likely
to rise in the near future to
reflect country risk and the
funding gap
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The NBR recently engaged in providing excess short-term liquidity in local currency.
While this move cannot alleviate the long-term funding gap, it offers marginal help to the
FX swap market, which we estimate to have daily volumes of 150-200m on 1-3 months.
However, this is just a short-term partial and ineffective solution to the broad long-term
funding gap among Romanian banks.
Fig 33 Slumping inflation allows NBR to pump liquidity
Fig 34 Swapping RON for EUR for FX funding
0
5
10
15
20
25
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Interbank deposits rate (%) Policy rate (%) CPI (%)
0
1
2
3
4
5
6
7
8
Dec-1
0
Jan
-11
Feb
-11
Ma
r-11
Ap
r-11
May-1
1
Jun
-11
Ju
l-11
Aug
-11
Sep
-11
Oc
t-11
Nov-1
1
Dec-1
1
Jan
-12
RON FX swap implied yield 1M (%)
RON FX swap implied yield 3M (%)
Source: NBR, NIS Source: Reuters
Instead, the excess liquidity goes mostly into lower yields for government securities
which we feel could also be one of the NBRs targets. In addition, the list of market
markers in the latest government fixings (auctions of government securities) are
predominantly locally-held banks, some of whom received NBR support when they got
into trouble in the past. At the same time, repo market volumes have risen dramatically,
further supporting this assessment.
We believe that NBR support for locally-held banks will continue, thus benefiting players
such as Banca Transilvania and, to a lesser extent, Banca Carpatica. Local banks are
most likely to benefit from current excess RON liquidity because they do not have group-
imposed limits on sovereign exposure to Romanian government debt, as is the case for
foreign-owned banks, for risk management purposes. This means that locally-held banks
are uniquely placed to take on NBR liquidity and place it into government securities,
which we expect to continue for much of 2012.
Fig 35 Extra liquidity helps treasuries, inter-bank rate Fig 36 Treasuries fixing yields vs country risk
0
5,000
10,000
15,000
20,000
25,000
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
5.00
5.50
6.00
6.50
7.00
7.50
8.00
Repo volume (rhs, RONm)
ROBOR 3M monthly avg (lhs, %)
3Y Gov't securities fixing latest date of month (lhs, %)
6.8
6.9
7.0
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
Feb-1
2
Dec-1
1
Nov-1
1
Sep-1
1
Aug-1
1
Jul-11
May-1
1
Apr-11
Feb-1
1
Jan-1
1
0
100
200
300
400
500
600
5Y GS Bid price (lhs, %) Romania 5Y CDS (rhs, bps)
Source: NBR, NIS Source: NBR, Reuters
Excess RON liquidity lowers
inter-bank rates, RON FX
swap yields, government
debt yields; provides support
for locally-held banks
Locally-held banks are
uniquely placed to take on
NBR liquidity and place it into
government securities
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The central banks move to provide additional RON liquidity could also be a reaction to
concern about the dampening effect of the banking liquidity squeeze on domestic
consumption. The competition for scarce local savings intensified in 2H11, resulting in
deposit rates being bid up steeply. However, NBR measures have met with limited
success so far on this front, as they have merely slowed the pace of deposit rate growth.
Fig 37 RON deposit rates reflect liquidity squeeze Fig 38 NBR easing is due to tight funding market
-4
-2
0
2
4
6
8
10
Jan
-07
May-0
7
Sep
-07
Jan
-08
May-0
8
Sep
-08
Jan
-09
May-0
9
Sep
-09
Jan
-10
May-1
0
Sep
-10
Jan
-11
May-1
1
Sep
-11
Real spread RON new loans (%)
Real interest rate RON new deposits (lhs, %)
0
5,000
10,000
15,000
20,000
25,000
Dec-1
1
Nov-1
1
Oc
t-11
Sep
-11
Aug
-11
Ju
l-11
Jun
-11
May-1
1
Ap
r-11
Ma
r-11
Feb
-11
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Repo volume (rhs, RONm)
Real interest rate RON new deposits (lhs, %)
Source: NBR Source: NBR
In our view, the NBR can reasonably be expected to continue to provide excess RON
liquidity in 1Q12 and probably 2Q12. The growth of money does not create inflation,
hence avoiding influencing the inflation target in the current environment.
In an economy that has adopted an inflation-targeting framework by using interest rates
as the main instrument of control, the role of monetary aggregates has decreased.
Romanian data show that even very rapid growth of money is not necessarily linked to
higher inflation, and the NBR is clearly aware of this.
Fig 39 Growth of money does not create inflation Fig 40 Policy rate shows still-cautious NBR stance
-20
-10
0
10
20
30
40
50
60
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
M2 (% p.a.) M1 (% p.a.) CPI (% p.a.)
VAT increase
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Jan-0
6
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Jan-1
0
Jul-10
Jan-1
1
Jul-11
Jan-1
2
Policy rate (% p.a.) CPI (% p.a.)
VAT increase
Source: NBR, NIS Source: NBR, NIS
To sum up, the funding squeeze will push up local deposit rates despite the NBRs
attempts to counter this by providing excess liquidity. Moreover, monetary policy easing is
likely to be hindered by the central banks strong preference for a stable exchange rate,and a quick look at Romanian inter-bank rates is quite revealing.
NBR intervention has merely
slowed deposit rate growth
Excess RON liquidity set to
continue in 1H12
Easing likely to be hindered
by a strong revealed
preference for a stableexchange rate
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If we look more closely, the inter-bank market shows yet another helping hand from the
NBR for more stretched market players: lower rates to fulfil minimum reserve requirement
(MRR) obligations (note that the MRR observation period and the maintenance period are
one-month long and successive, and the observation period lasts from the 24th
day of the
previous month to the 23rd
day of the current month).
Fig 41 Trade-off: stable FX, but volatile interest rates Fig 42 Inter-bank rate follows MRR period
-5
5
15
25
35
45
55
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
ROBOR 3M (%) Spread ROBOR-ROBID 3M (%)
RON under pressure
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
ROBID overnight (%) ROBOR overnight (%)
Extra liquidity by NBR
Source: NBR Source: NBR
Banking costsThe profitability of Romanian banks is a mixed picture. Some players post deep losses
while others make a profit, although in most cases, the return is less than their cost of
equity. Internal costs represent the difference between these banks, namely risk costs
stemming from varying capacity to perform risk management during high-growth stages.
Several players also suffer from inefficient distribution networks. During the boom time,
most branches were opened in more affluent cities and towns. As banks vied for market
share, they overcrowded areas where eligible clients were located, a problem
compounded by the fact that only 55% of Romanians live in urban areas. Branch
economics show that break-even can be achieved with a minimum of 2,500 active clients,
while current figures imply less than 1,500. As such, we believe further sector
restructuring is likely in 2012.
Fig 43 Top ten Romanian banking operations
Net profit
Rank Bank Parent Country Assets (RONbn) Market share (%) (RONm)
2009 2010 2011 2009 2010 2011 2011
1 BCR Erste Austria 62.9 67.6 71.2 19.1 19.8 20.1 -327
2 BRD Societe Generale France 46.4 47.5 48.0 14.1 13.9 13.6 472
3 Banca Transilvania N/A Romania 19.5 21.6 25.7 5.9 6.2 7.3 146
4 CEC Bank Government Romania 20.8 21.6 24.7 6.3 6.4 7.0 38
5 Raiffeisen Raiffeisen Austria 20.0 21.7 23.6 6.1 6.5 6.7 316
6 Unicredit Tiriac Bank UniCredit Italy 20.3 20.4 22.3 6.1 6.0 6.3 103
7 Volksbank N/A Austria 21.7 19.7 17.7 6.6 5.8 5.0 -635
8 Alpha Bank Alpha Greece 21.2 21.3 16.5 6.4 6.2 4.7 -118
9 ING Bank ING Holland 10.9 12.0 14.3 3.4 3.6 4.0 127
10 Bancpost EFG Greece 14.6 13.5 12.2 4.5 3.9 3.5 17
Source: Company data, ZF
Romanian banks also face relatively high exogenous operating costs, which they cannot
control and which they pass on to clients. Competition among market players does notaffect these costs in client pricing, and higher pricing is a dampener on growth.
A helping hand for vulnerable
players to meet MRR
obligations?
High exogenous operating
costs and rising productpricing stifle growth
A mixed picture in terms of
profitability; differences and
losses are due to risk costs
Over-extended distribution
networks mean the sector is
set for more restructuring in
2012
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In addition, recent regulations that impose/affect costs include:
Prohibition of using internal rates when setting lending prices and using fixed rates orfloating rates pegged to a market index.
Scrapping of early repayment fees.
Lending restrictions on FX loans and strict limits on the tenor of consumer loans.
Cost of guarantee funding rising from 0.2% in 2010 to 0.3% in 2011.
However, exogenous costs come in other different forms:
FX rate stability has a price: the FX market is atrophied, which means lower tradingprofits for the banking sector.
Fig 44 FX rate stability has a price: weaker FX market
Fig 45 Cost-to-income ratio reflects weaker revenue
0
500
1,000
1,500
2,000
2,500
3,000
Oct-11
Jun-1
1
Feb-1
1
Oct-10
Jun-1
0
Feb-1
0
Oct-09
Jun-0
9
Feb-0
9
Oct-08
Jun-0
8
Feb-0
8
Oct-07
Jun-0
7
Feb-0
7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.54.0
4.5
5.0
FX trading volume (rhs, EURm)
EUR/RON avg rate (lhs, RON)
68
56
64 65
45.00
50.00
55.00
60.00
65.00
70.00
75.00
Dec-1
1
Sep-1
1
Jun-1
1
Mar-11
Dec-1
0
Sep-1
0
Jun-1
0
Mar-10
Dec-0
9
Sep-0
9
Jun-0
9
Mar-09
Dec-0
8
Sep-0
8
Jun-0
8
Mar-08
Cost-to-income (%)
Source: NBR Source: NBR
What about Greek banks?We believe the Greek fallout for Romania will continue to be significant, but ultimately
manageable, strictly from the perspective of banking asset exposure; this notwithstanding
the collateral effects and contagion risk.
According to publicly-available data, Greek banks owned 13% of total net assets in the
Romanian banking market at end-2011, ie, 10.6bn of total net assets.
Fig 46 Greek banks operating in Romania
Net profitRank Bank Parent Country Assets (RONbn) Market share (%) (RONm)
2009 2010 2011 2009 2010 2011 2011
8 Alpha Bank Alpha Greece 21.2 21.3 16.5 6.4 6.2 4.7 -118
10 Bancpost EFG Greece 14.6 13.5 12.2 4.5 3.9 3.5 17
11 Piraeus Bank Piraeus Greece 9.5 9.4 8.1 2.9 2.7 2.3 44
12 Banca Romaneasca NBG Greece 8.6 7.6 7.4 2.6 2.2 2.1 -122
25 ATE Bank ATE Greece 1.4 1.9 1.6 0.4 0.6 0.4 -160
Total 55.3 53.7 45.8 16.8 15.6 12.9 -340
Source: Company data, ZF
If we assume significantly more stringent ratios for Greek banks in Romania than overall
sector averages, as shown in the hypothetical stress-test scenario in Figure 47, this still
implies a funding gap of 4.0bn. In this example, half of the gap is covered by EUR
funding from parent banks, which represents c.3% of Romanias GDP.
Impact significant, but
ultimately manageable
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Fig 47 Stress-test scenario for Greek bank exposure
Indicator Scenario assumption Source
Market share in total banking assets (%) 12.9 Based on publicly-available data
Total net assets (bn) 10.6 Based on publicly-available data
Loans-to-deposits (%) 220 Assumption (119% for the sector)
Loans-to-assets (%) 70 Assumption (64% for the sector)
Deposits (bn) 3.4 Scenario calculationGap (bn) 4.0 Scenario calculation
Note: unless otherwise indicated, the figures used above represent only a hypothetical scenario analysis
Source: ING estimates
The scenario considered in Figure 47 is also based on conclusions drawn from looking at
individual Greek operations in Romania, given available information from parent bank
reports. Figure 48 presents a scenario analysis of Alpha Banks 2010 numbers (the bank
has the largest presence in Romania among Greek banks).
Fig 48 Estimate of Alpha Banks Romanian funding gap scenario analysis (m)
2010
Assets Equity 363
Liabilities 4,673
Estimated liabilities from group (based on transactions with group companies by parent) 2,930
Implied loans (assuming 70% of assets, as in scenario above) 3,525
Local liabilities 1,742
Loans/deposits (if all local liabilities are considered deposits) (%) 202
Note: this table reflects scenario analysis by the analyst and does not necessarily reflect the actual situation.
Source: Company data, ING estimates
Romania is targeting a 3% budget deficit in 2012, after ending 2011 slightly above 4%.
On the budget revenue side, even incremental improvements in revenue collection
(currently only 34% of GDP vs 40% in Bulgaria, for example) and EU fund absorption
would visibly help with the deficit. Public debt stands at c.34% and, all things being equal,we believe Romania can, in extremis, absorb costs of the magnitude estimated above.
Impact of switch to IFRSThe Romanian banking sector switched from Romanian accounting standards (RAS) to
international accounting and reporting standards (IFRS) in January 2012.
Based on our analysis, the change in accounting standards will have three material
effects: (a) loan impairment provisions will be lower (profit before tax will be higher, as will
tax on this profit); (b) capital adequacy ratios (CAR) stand to look better; and (c) banks
with sizeable assets available for sale could see noticeable swings in capital.
In Figure 49, we show the key accounting differences between local standards, valid until
December 2011, and international standards, with our assessment of the impact of a
move to IFRS from January 2012.
Switch from RAS to IFRS
starting January 2012 should
give a one-off boost to capital
ratios
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Fig 49 IAS/IFRS vs RAS
IAS/IFRS RAS Impact
Impairment (accounting) The portfolio of loans is split into two
categories: significant and non-
significant, based on pre-set criteria.
Impairment is determined individually for
the first category, and collectively for the
second category. Impairment is
determined only on objective proof of an
already existing reason that would justify
the impairment. If a specific reason is not
found for a loan in the significant
category, the loan is classified in the
second category and subject to collective
impairment treatment (based on general
risk assessment: country risk, industry,
etc). Similarly, a non-significant loan that
has a specific individual impairment will
be transferred to the first category
(individually impaired). Impairment is
calculated against the net present value
of the impaired assets cash flow.
Each client is classified into a prudential
category. There are five categories based
on three criteria: (a) financial performance;
(b) debt service; and (c) judicial status. The
five categories are: (1) standard; (2) watch;
(3) sub-standard; (4) doubtful; and (5) loss.
For each category, the NBR regulation sets
a standard impairment coefficient: (1) 0%;
(2) 5%; (3) 20%; (4) 50%; and (5) 100%,
respectively. All loans to a specific client are
impaired based on client classification,
irrespective of the individual situation of
each of the loans granted to that client.
RAS is stricter (and generates higher
impairment than IAS) because, for instance,
if the term is past >90 days, 100%
impairment automatically occurs regardless
of any other criteria or existing collateral or
any cash flow recovery.
Two impacts:
(1) Provisions under IAS are lower (profit
before tax is higher, all things being
equal, vs RAS).
(2) Banks can reduce their FX positions
(by selling EUR) held for net provisions
on impairments on loans denominated in
EUR (much of this occurred in late-
December, but banks may be waiting for
the go-ahead from the NBR, following
January 2012 prudential reporting, before
decreasing FX positions further thus
providing support for the local currency in
the short term).
Impairment (prudential
reporting)
As of January 2012: (a) accounting will be IAS/IFRS; and (b) prudential reporting will be
performed according to NBR regulations. There are two categories of prudential
reporting: (i) impairment (according to NBR Regulation 11/2011); and (ii) indicators
(own capital, solvency ratio, large exposures, etc). Prudential reporting is only done to
NBR, and investors can only see the aggregated indicators for the banking sector as a
whole as reported by the NBR. To calculate own capital, for instance, all inputs (share
capital, reserves, retained profits, etc) are taken from IAS/IFRS accounting, but they are
adjusted for any adverse difference between Regulation 11/2011 P&L net impairment
provisions and IFRS net impairment provisions.
Calculation of the Capital Adequacy
Ratio (CAR) is still different from IFRS,
as bank capital used in the calculation is
not IFRS-determined, but influenced by
NBR Regulation 11/2011. This means
that while the CAR stands to look better
than before, it will not be fully IFRS
compliant and will still be lower than it
would be under IFRS solely.
Hyper inflation adjustments
(IAS 29)
In the event of hyper inflation (eg, in
Romania in the 1990s), a hyper inflation
restatement surplus is calculated and
included in the share capital.
No hyper inflation adjustments to share
capital.
Capital structure changes accordingly
(share capital is higher under IFRS).
Financial assets available
for sale
Any difference from marking to market,
regardless of whether it is positive or
negative, is booked through the balance
sheet (capital) and not through the
income statement.
Only the negative difference from marking
to market is booked via the income
statement. Positive differences are not
booked.
Banks with sizeable AFS could see
significant swings in capital (capital for
solvency is still calculated according to
the local central bank standard, but
starts from IFRS figures, with some
adjustment for impairments, as shown
above), due to differences resulting from
mark to market.
Deferred tax Starting in January 2012, accounting-wise, net provision income/(expense) is booked
according to IFRS, while tax-wise, it is still NBR Regulation 11/2011, which is the norm.
This entails a taxable income difference. As RAS is harsher on net provisions, the fiscal
treatment is more favourable than IFRS, and banks need to book a deferred tax liability.
Deferred tax liabilities will be higher
under IFRS, while current tax will be
lower.
Off-balance-sheet loans Loans held off-balance-sheet under RAS
are taken back on balance sheet under
IAS.
Loans taken off-balance-sheet until July
2007 (on several criteria) and held off-
balance-sheet until recovery or write-off.Loans were no longer taken off-balance-
sheet from June 2007.
Loans on the balance sheet could be
slightly higher under IFRS, depending on
a banks individual situation. There is achance of a small increase in retained
profits (and, consequently, capital) from
this change in accounting.
Amortisation of origination
commissions
IAS only allows effective interest rate
(EIR) for the amortisation of originating
commissions.
RAS allows two alternatives for
amortisation of originating commissions:
(1) linear; or (2) EIR.
Impact depends on accounting policies
enacted by each bank before the
change.
Fixed assets Conditions: (1) life >one year; (2)
generates benefits; (3) useful for
economic activity. No value threshold.
Two conditions: (1) life >one year; (2)
value above government decision-
prescribed level.
Depends on the decision of the
accountant, but not a material impact.
Smaller items formerly treated as neither
expenses or fixed assets will now either
be expensed or be classified as a fixed
asset (plenty of discretion left to
accountant).
Source: ING
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Central bank future policyThe central banks policy line, in our view, seems to be: (1) generating excess RON
liquidity; (2) support for locally-held players; (3) no significant relaxation of minimum
reserves; and (4) a bridge bank to take over eventual bankruptcies.
Excess RON liquidity is certainly pushing down short-term inter-bank rates and
government debt yields, while in the process offering a helping hand particularly to
locally-held banks, as detailed in this report. Hence, we expect the NBR to continue to
provide excess liquidity into 2012. However, excess short-term RON liquidity is not
helping to address the FX funding and duration gaps that are stifling growth in the
Romanian banking sector. RON lending fell in January for the first time in the past 12
months, providing further proof that excess liquidity from the NBR does not help private
lending. Our assessment is also supported by the trend in RON deposits, which grew
2.4% in January (14% YoY).
We expect the race for scarce local savings, which manifests itself by pushing up deposit
rates, depressing net interest margins and reducing the scope for growth, to continue for
the foreseeable future. While the NBR could relax the MRR, and we believe it willprobably do so at the margins, significant relaxation appears unlikely. Freeing up FX
funding from foreign parent banks would most likely result in a cancellation of the
corresponding funding line to Romanian subsidiaries to reduce the funding gap. Indeed,
the NBR would only see its FX reserves diminish without any additional benefit to lending
and the economy at large.
Against this backdrop, we anticipate the central bank attempting to negotiate another
(gentlemens) agreement with the foreign banking groups in Romania, modelled on the
one agreed in 2009, to prevent a steep reduction in FX funding for their Romanian
subsidiaries. According to the NBRs deputy governor, meetings to this effect will start in
March 2012. Regardless of the outcome, we do not see these talks as a potential game-
changer.
Romania has c.30 banks with market shares ranging between 0% and 3% these are
particularly vulnerable in a funding squeeze scenario. In this context, the central bank is
reportedly setting up a bridge bank, under the Deposit Guarantee Fund administration.
We view this as a positive step for the sector; introducing an efficient and effective
instrument to deal with any extreme situations should these arise in the future. The risk is
that should the bridge bank be put to use in the future, the state be tempted to prolong its
ownership of these banking operations, thus increasing the states presence in the
banking sector, which could affect competition and distort market incentives.
Market forecastsBased on our analysis, Figure 50 shows the macro and market assumptions we use as
the basis of our company financial forecasts.
Excess liquidity, support for
locally-held banks, no MRR
relaxation, bridge bank
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19
Fig 50 Macro and market assumptions
2007 2008 2009 2010 2011F 2012F 2013F 2014F
Macro
Nominal GDP (RONbn) 416 515 498 514 570 610 680 731
Real GDP growth (%) 6.3 7.3 -7.1 -1.3 2.5 0.8 2.5 3.0
CPI (average %YoY) 4.8 7.9 5.6 6.1 5.8 3.0 5.6 4.3
3-month rate (ROBOR) 7.9 13.0 11.3 6.8 5.8 5.5 6.5 6.03-month rate (EURIBOR) 4.3 4.6 1.3 0.9 1.4 1.1 0.9 1.0
5-year yield (%) 7.5 10.6 10.8 7.3 7.3 7.0 7.4 7.2
Banking assets
Total net assets (RONm) 251,426 314,442 330,184 341,946 354,009 364,629 390,153 421,366
Assets growth rate (%) 46 25 5 4 4 3 7 8
Assets/GDP (%) 60.4 61.1 66.3 66.5 62.1 59.8 57.4 57.7
Loans
Loans, gross - total (RONm) 148,181 198,056 199,887 209,294 223,034 234,185 252,920 275,683
Loans growth rate (%) 34 1 5 7 5 8 9
Loans/GDP (%) 35.6 38.5 40.1 40.7 39.1 38.4 37.2 37.7
Loans/assets (%) 59 63 61 61 63 64 65 65
Loans/deposits (%) 115 131 119 118 119 119 117 116
DepositsTotal deposits (RONm) 129,063 151,439 168,076 178,088 188,188 197,598 215,382 236,920
Deposits growth rate (%) 17 11 6 6 5 9 10
Deposits/GDP (%) 31.0 29.4 33.8 34.6 33.0 32.4 31.7 32.4
Minimum reserves (MRR)
Regulatory MRR RON (%) 20 18 15 15 15 15 10 5
Regulatory MRR FX (%) 40 40 25 25 20 20 20 20
Source: NBR, NIS, ING estimates
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Companies
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BRD Groupe Societe Generale Romanian banks February 2012
23
BRD Groupe Societe Generale
Steady as she goesBRD will likely focus on downsizing, deleveraging and cost-cutting in 2012. With
expected profitability in line with CEE peers, BRD operates in a riskier environment
with a wide FX funding mismatch and a low provision coverage ratio. We
downgrade to HOLD (from Buy) and cut our TP to RON12.5 (from RON15.0).
Downsizing, deleveraging and cost-cutting likely to dominate 2012. Given the weak
economic backdrop, management will likely focus on those items under its control (costs,
risk management) while also seeking to reduce its funding exposure to Societe Generale.
We expect continued growth in NPLs, although a 43% cost-to-income ratio should help to
keep the net result flat YoY. In 2012-13, we expect growth to continue to be affected by
the large FX funding gap, compounded by the widening loan duration mismatch. BRDs
profitability is in line with its CEE peer group average due to its better cost-efficiency.
Valuation: conservative forecasts justify upside, but risks are high. Our target price
implies a 2011F PBR of 1.2x, which we believe is justified as: (1) it reflects an estimated
100bp RoE spread over the cost of equity for the year and higher spreads going forward;
(2) more upside implied by the DDM and relative valuations is likely to be limited by the
share overhang risk stemming from large institutional stakes in the company; and (3) a
higher country risk would prevent BRD from losing its discount to safe haven Polish
banks, while posting similar mid-term RoEs.
Share overhang could be main drag on stock. BRD is a closely-held stock, despite its
seemingly generous 39% free float. SIFs have been gradually selling down their holdings
in BRD, but we estimate that up to 30% of its shares are still held in large institutional
stakes. Based on SIFs reporting, we estimate that they sold a net 2% of BRD in 9m11,
which is equivalent to the shares total trading volume over the past three months.
Overhang risk is partially mitigated by the fact that large trading volumes in the company
occur as block trades. However, BRDs shareholding structure and trading behaviour
mean the company usually lags wider market dynamics.
Three-year EUR MTN planned for 2Q12 is catalyst for lower discount to peers.
BRDs operating cost efficiency and higher net interest margins counter its increased cost
of equity and greater cost of risk. We believe the shares could trim the current 30%
discount to peers to 20% if BRD reduces its funding dependence on Societe Generale estimated to be 1.9bn, ie, 19% of liabilities as at December 2011F by issuing an MTN
(medium-term note) in 2Q12.
Forecasts and ratios
Year end Dec (RONm) 2009 2010 2011F 2012F 2013F
Revenues 3,693 3,664 3,510 3,544 3,718
Pre-provision profit 2,056 2,111 1,965 2,020 2,119
Net profit 1,146 1,008 982 996 1,211
Normalised EPS (RON) 1.65 1.45 1.41 1.43 1.74
Dividend per share (RON) 0.73 0.28 0.18 0.17 0.50
Normalised PER (x) 6.7 7.6 7.8 7.7 6.3
Dividend yield (%) 6.6 2.5 1.6 1.6 4.5
Price/book (x) 1.6 1.3 1.2 1.0 0.9Normalised ROE (%) 25.2 19.0 16.0 14.3 15.4
Source: Company data, ING estimatesFlorin IlieBucharest +40 21 209 1218
Hold (previously Buy)Price (23/02/12)
RON11.00
Target price (12-mth)
RON12.50 (RON15.00)
Forecast total return
15.2%
Banks
Romania
Bloomberg: BRD RO
Reuters: ROBRD.BX
Share data
Avg daily volume (3-mth) 223,524
Free float (%) 39.0
Market cap (RONm) 7,666
Dividend yield (12F, %) 1.6
Source: Company data, ING estimates
Share price performance
8.0
10.0
12.0
14.0
16.0
01/11 05/11 09 /11 01/12
BRD RO
BET-XT rebased
Source: Bloomberg
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Valuation
BRDs operating cost efficiency and higher net interest margins counter its increased
cost of equity and greater cost of risk. We believe BRD has room to trim its discount
to peers if it reduces its funding dependence on Societe Generale by issuing an MTN
in 2Q12.
We use a blended valuation methodology (DDM and relative valuations, using price-to-
earnings and price-to-book, respectively) to calculate a valuation range and a
fundamental average valuation. The valuation range for each of the two methods is
provided by: (a) scenario analysis in the case of the DDM model; and (b) the minimum
and maximum value yielded by a range of peer group multiples in the case of the relative
valuation. Our target price is the average valuation with a liquidity discount.
Fig 51 Valuation output Fig 52 Implied multiples
0.0
5.0
10.0
15.0
20.0
25.0
Multiples DDM
15.4
14.3
11.0
Market price
Target price
12.5
1.5x
10.9x
1.0x
7.7x
1.2x
8.7x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
PER PBR PER PBR PER PBR
Target price Current price Peer group
2011F 2012F 2013F
Source: ING estimates Source: ING estimates
The assumptions used in our base-case DDM model are those reflected and discussed in
the Operations and Financials sections, in conjunction with the main Sector overview.
Fig 53 DDM model assumptions (base-case scenario)
Assumptions 2012F 2013-17F Avg 2018F+ Comment
Cost of equity (%) 13.2 13.1 11.9 Risk-free rate = Yield on five-year government bonds (mostly l iquid) using macro assumptions, risk
premium = 6%. Reported preference risk premium could be up to 200bp higher for differentinvestors.
Asset growth (CAGR, %) -0.1 6.6 9.2 Downsizing unt il 2015F, fol lowed by marginal reclaim of market share.
DPS CAGR (%) 186.0 24.9 8.4 Significant increases in first phase are due to base effect (very low dividend payout in 2010-11).
ROAA (avg %) 2.0 2.6 2.3 Bottom-up calculation (see Financials section).
ROAE (avg %) 14.2 15.7 17.8 Migrating from a depressed state to a steady profi tabil ity level.
Dividend payout (avg %) 35.0 56.1 63.6 Payout level allows a capitalisation of 400-700bp in excess of the regulatory minimum, and leverage
of the 2011F maximum level for the entire forecast period.
Equity/assets (avg %) 14.1 16.6 12.7 Deleveraging until 2015F, followed by a conservative marginal re-leveraging in a steady state.
Source: ING estimates
BRD could trim its trading
discount to peers by
reducing dependence onparent funding
DDM reflects downsizing,
deleveraging, cost control
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Fig 54 DDM valuation (base-case scenario)
Dividend discount model 2012F 2013F 2014F 2015F 2016F 2017F
DPS (RON) 0.50 0.87 1.05 1.21 1.34 1.52
Discount rate (%) 13.2 13.4 13.2 13.2 13.0 12.9
PV of DPS (RON) 0.44 0.68 0.72 0.74 0.72 0.73
PV of LT DPS (RON) 10.26
Cumulative PV per share (RON) 14.29
Source: ING estimates
Fig 55 Model and forecast changes vs last published
Old New Comment
2012F RoE (%) 22.4 14.3 Distressed market, bank affected by NPLs and FX funding gap
LT RoE (%) 19.0 17.8 Less friendly regulatory framework, less leveraged model
2012F equity/assets (%) 9.4 14.6 Deleveraging and downsizing already well under way
LT equity/assets (%) 6.3 12.7 Structurally less leveraged model
2012F dividend payout (%) 49.7 35.0 Lower profitability, need to deleverage
LT dividend payout (%) 68.4 63.6 Move towards a structurally less leveraged model
2012F risk-free rate (%) 10.5 7.2 Country risk comes off
LT growth rate (%) 6.0 5.0 Paradigm shift leads to a more conservative growth pattern
Source: ING estimates
Fig 56 DDM valuation sensitivity analysis (RON)
Risk premium (%)
5.00 6.00 7.00
4.00 14.99 13.13 11.65
5.00 16.57 14.29 12.53LTG 2018+ (%)6.00 18.70 15.79 13.63
Source: ING estimates
Fig 57 Valuation output and target price calculation (RON)
Relative valuation DDM valuation
Max 21.6 18.3
Min 7.4 11.0
Avg
Valuation output (base case) 15.4 14.3
Target price 12.50 (15% liquidity discount)
Source: ING estimates
BRD trades at an average 30% discount in PER and PBR terms against its peer group
median. Our target price implies reducing this discount to 20%.
Fig 58 Relative valuation
Bloomberg
code Rating
Target
price Mkt cap PER (x) PBR (x) ROE (%)(lc) (US$m) 11F 12F 13F 11F 12F 13F 11F 12F 13F
Komercni KOMB CP Hold 3,720.0 7,244 9.4 10.4 9.6 1.7 1.6 1.5 18.5 15.4 15.9
OTP OTP HB Buy 4,100.0 5,035 11.2 9.6 6.3 0.8 0.7 0.7 11.4 9.9 12.1
BRE BRE PW Buy 314.3 4,011 11.3 10.9 8.9 1.6 1.4 1.2 14.9 13.5 14.6
BZ WBK BZW PW Sell 203.2 5,380 13.6 13.0 11.7 2.3 2.0 1.8 17.1 16.4 16.2
Handlowy BHW PW Buy 86.5 3,252 14.8 13.3 11.2 1.6 1.5 1.5 10.8 11.7 13.2
PKO BP PKO PW Buy 41 13,752 11.5 10.7 9.5 1.9 1.7 1.6 17.1 17 17.4
Garanti GARAN TI Buy 8.5 15,449 8.6 8.1 6.2 1.4 1.3 1.1 17.9 16.8 19.2
Peer median 11.3 10.7 9.5 1.6 1.5 1.5 17.1 15.4 15.9
BRD GSG BRD RO Hold 12.5 2,343 7.8 7.7 6.3 1.2 1.0 0.9 16.0 14.3 15.4
Prices as at 23 February 2012
Source: Bloomberg, Company data, ING estimates
We believe BRD is riskier than its peers; the companys country risk is reflected in ahigher cost of equity and a greater cost of risk. However, BRDs return on assets is in line
with its CEE peers, as is its yield, while we do not consider the companys capitalisation
to be an issue even in a pessimistic scenario. This is because the bank makes up for its
BRD trades at an average
discount of 30% to peers
We believe BRD is riskierthan its peers, but more cost-
efficient due to higher
margins
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higher risk through better cost efficiency and, to some extent, higher net interest margin.
In our view, BRD needs to deleverage faster, given that it is more dependent on parent
funding than its peers, and that this dents short-term growth.
Fig 59 Peer group valuations (%)
Rf rate
3yr EPS
CAGR
Mkt cap/
dep Yield
Loan/
deposit Cost/income Risk costs ROA Equity multiplier (x)2012F 2012F 2011F 2011F 2012F 2011F 2012F 2011F 2012F 2011F 2012F
Komercni 3.4 2.3 24.2 7.2 77 41 42 0.5 0.7 1.4 1.7 9.0 9.0
OTP 8.5 13.6 18.8 0.0 109 47 48 3.0 3.0 1.0 1.1 7.0 7.0
BRE 5.5 30.1 23.9 0.0 132 49 48 0.6 0.7 1.2 1.2 12.0 12.0
BZ WBK 5.5 14 36.3 0.0 84 48 47 1.1 1.1 2.2 2.3 8.0 7.0
Handlowy 5.5 5.8 44.7 3.4 58 60 58 0.7 0.7 1.9 2.0 6.0 6.0
PKO BP 5.5 12.2 28.3 4.4 100 40 40 1.4 1.2 2.1 2.1 8.0 8.0
Garanti 9.6 12 29.9 1.6 99 43 43 1.1 1.2 2.3 2.1 8.0 8.0
Peer median 5.5 12.2 28.3 1.6 99 47 47 1.1 1.1 1.9 2.0 8.0 8.0
BRD GSG 7.2 10.7 22.8 1.6 108 44 43 2.3 2.3 2.0 2.0 7.6 6.7
Source: Bloomberg
In our view, BRD deserves to trade at a discount to Komercni (also owned by Societe
Generale), given its lower risk (risk costs, cost of equity and loan-to-deposit ratio).
Fig 60 PER ranking Fig 61 PBR ranking
0
2
4
6
8
10
12
14
BRDGSG
Garanti
OTP
Komercni
BRE
PKOBP
Handlowy
BZWBK
PER 2012F
0.0
0.5
1.0
1.5
2.0
2.5
OTP
BRDGSG
Garanti
BRE
Handlowy
Komercni
PKOBP
BZWBK
PBR 2012F
Source: Bloomberg (prices as at 21/02/12), ING estimates Source: Bloomberg (prices as at 21/02/12), ING estimates
BRD has a strong management team, good cost control and the second-largest
distribution network in Romania (and the most effective one). With several competitors in
a state of distress, we believe BRD could consolidate the market over the medium term;
however, it is too early for this expectation to be reflected in the companys share price.
Risks and catalystsBRDs shares are subject to systemic risks that can affect the market as a whole. We
focus on BRDs company-specific idiosyncratic risks.
We feel BRD should trade at
a discount to Komercni
Share overhang is main drag
and MTN plan is the main
potential catalyst for shares
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Fig 62 Risks and catalysts
Type Item Comment
Risk Share overhang We estimate that up to 30% of stock is still held in large institutional stakes. Based on SIFs reporting, we
estimate that they sold a net 2% of BRD in 9m11, which is equivalent to the shares total trading volume over
the past three months.
RiskParent funding With an FX loan-to-deposit ratio of 153%, BRD is dependent on Societe Generale for EUR funding. The
company needs to reduce its dependency due to pressure to downsize and deleverage.
Risk Low coverage provision BRDs 2011 IFRS coverage ratio will only be known in April 2012, but the company ended 2010 with a
coverage ratio of c.37% under IFRS (40% under RAS, which, according to management, rose to 60% at the
end of 2011), which implies the strong possibility of further significant expenses. In our assumptions, we factor
in continued high NPLs and cost of risk.
Risk Political risk From a political perspective, there are currently no specific plans for legislative measures targeting banks.
However, 2012 is an election year in Romania (general elections are due to be held in November). As such,
we believe any aggressive government position against banks over the next few years could be a risk, and
upside potential could be reduced via increased taxation or changes in regulations. In our view, BRD has a
better chance of being able to cope with change than local peers thanks to its economies of scale and cost
efficiency.
Catalyst MTN According to management, BRD intends to issue a 1-1.2bn three-year note by mid-2012, depending on the
evolution of Societe Generale CDS vs the local cost of funding in FX. This would substantially reduce liquidityrisk and BRDs scope for downsizing.
Source: ING
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Operations
Downsizing and deleveraging
In 2012, BRD will likely focus on downsizing, deleveraging and cost-cutting. We
believe management plans to focus on those items under its control and reduce its
exposure to its parent company.
BRDs downsizing is a direct result of Societe Generales need to reduce its exposure to
Romania. We expect BRD to pursue a strategy of continued moderate downsizing of its
business in the medium term in light of the weak economic outlook. Hence, we anticipate
a CAGR of only 3.4% over the next three years, but any resulting decrease in market
share is likely to be mostly due to a reduction in non-core assets.
Fig 63 Downsizing Fig 64 Deleveraging
0%
5%
10%
15%
20%
25%
30%
2007A
2008A
2009A
2010A
2011F
2012F
2013F
2014F
2015F
50%
60%
70%
80%
90%
100%
110%
Mkt share assets (lhs, %) Mkt share loans (lhs, %)
Mkt share deposits (lhs, %) LDR total (rhs, %)
0.0
5.0
10.0
15.0
20.0
25.0
2007A
2008A
2009A
2010A
2011F
2012F
2013F
2014F
2015F
Total capital adequacy ratio (%) Leverage (x)
Positive impact from introduction of IAS/IFRS in
Jan 2012 but local prudential rules will still apply
Source: Company data, ING estimates Source: Company data, ING estimates
In our view, BRDs need to reduce its FX funding gap (almost entirely in EUR) is of
paramount importance; however, this has not yet happened (the companys loan-to-
deposit ratio actually increased in 2011 vs 2010). In a bid to procure local savings, banks
have been bidding up deposit rates. BRD joined the race in 2H11, thus eroding its net
interest margin for the year, and we expect this to again be the case in 2012.
Fig 65 Funding gap Fig 66 Competition for deposits
85% 83%
147%153%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
2010A 2011A
Loans/deposits RON Loans/deposits FX
4.0
4.2
4.4
4.6
4.8
5.0
5.2
5.4
2007A
2008A
2009A
2010A
2011F
2012F
2013F
2014F
2015F
Net interest margin (%)
Source: Company data (RAS) Source: Company data, ING estimates
Downsizing and deleveraging
already well under way
Net interest margin has
suffered from competition to
procure local savings and the
need to reduce funding gap
Downsizing, deleveraging
and cost-cutting
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From a liquidity risk perspective, BRDs currency structure worsened in 2011, as was the
case with the rest of the market (FX loans grew faster).
Fig 67 Currency structure of loans Fig 68 Currency structure of deposits
Loans in RON
45%
Loans in FX
55%
Deposits in
RON
60%
Deposits in FX
40%
Source: Company data (RAS), Company management Source: Company data (RAS), Company management
Based on previous annual reporting of transactions by related parties and what can be
inferred from subsequent quarterly reporting, we believe that as at end-2011, funding
from Societe Generale made up c.1.9bn, or 19%, of BRDs total liabilities (from 21% in
December 2010).
The liquidity risk was much worse at end-2010 compared with the previous year. Indeed,
a large swing in deposit maturity terms in 2010 resulted in a wide funding gap in the 1-5
year bracket, on top of the existing long-term gap. We expect BRDs annual report, due in
April 2012, to shed some light on the development of this duration mismatch over the
past year.
Fig 69 Funding from Societe Generale Fig 70 Liquidity risk Duration funding gaps (RONm)
0
500
1,000
1,500
2,000
2,500
2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2011F
0%
5%
10%
15%
20%
25%
Borrowings from related parties (lhs, EURm)
Related parties/total liabilities (rhs, %)
-15,000
-10,000
-5,000
0
5,000
10,000
2009A 2010A
Gap 5 yrs
Source: Company data, ING estimates Source: Company data
Cost-cuttingIn our view, BRDs operating environment will probably worsen in 2012. However, the
companys pre-provision profitability is relatively high and should provide a buffer against
higher provisions, although this needs to be reinforced through cost-cutting. Cost-cutting
is likely to arise as a result of revenue weakness triggered by a combination of factors, all
of which are exogenous to BRD managements control:
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Shrinking net interest margins due to faster re-pricing of deposits.
Weak credit demand, which continues to favour EUR over domestic currency.
Atrophied FX market due to tight control by the central bank.
Currency mismatch between assets and liabilities is partially and temporarily mitigated
by RON FX swaps, which hit financial market results.
In our view, the FX minimum reserve requirement is unlikely to be lowered in the near
future, while political risk looms large in this electoral year. As such, we expect high
exogenous costs (as discussed in previous sections) to remain constant at best with risk
to the upside. In addition, we believe managements focus will likely be on controllable
costs:
General expenses: further layoffs (on top of 5% net layoffs in 2011) and a possiblemarginal reduction in the number of outlets (flat at 937 in 2011).
Risk management to bring down risk costs.
Fig 71 ROAA by component Fig 72 Asset quality
(8)
(6)
(4)
(2)
0
2
4
6
8
10
12
14
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2011F
2012F
2013F
2014F
2015F
Net interest/assets (%) Non-interest/assets (%)
Opex/assets (%) Risk cost/assets (%)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
2007A
2008A
2009A
2010A
2011F
2012F
2013F
2014F
2015F
Impaired loans/gross customer loans (%)
Credit loss expense/avg gross customer loans (%)
Source: Company data, ING estimates Source: Company data, ING estimates
According to BRDs management, non-performing loans (NPLs) are equivalent to
impaired loans as reported in the annual IFRS statements; namely loans that do not
perform according to the contract, and for which an impairment allowance is booked. As a
result, the ratio of impairment allowance to impaired loans can be considered to fairly
represent the IFRS provision coverage ratio (36.8% as at December 2010), while
impaired loans to gross customers loans reflect the weight of NPLs in BRDs totallending portfolio.
While the value of its provision coverage ratio is a useful starting point when forecasting
BRDs IFRS income statement going forward, it is not necessarily the appropriate
measure to use when calculating the banks future CAR. According to management, the
provision coverage ratio in December 2011 under RAS and NBR prudential regulations
was 60% for doubtful and loss (rising from 40% at end-2010) and 90% for loss (>90
days), respectively. We believe these figures are relevant from a capitalisation
standpoint, given the NBRs Regulation 11/2011 when calculating own capital, all
starting inputs are taken from IFRS accounting. However, these are adjusted for any
adverse difference between net impairment provisions under Regulation 11/2011 and net
impairment provisions under IFRS.
Based on annual reporting data, we calculate that restructured loans represented 3% of
total gross loans as at end-2010, rising from 2.5% a year earlier. However, BRD has
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provided no disclosure on the level for 2011, or indeed what proportion of restructured
loans go on to become NPLs.
Fig 73 Gross loan structure (RONm) Fig 74 Provision coverage ratio
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2007A 2008A 2009A 2010A
Loans neither impaired nor overdue
Overdue but not impaired loans
Impaired loans
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2007A
2008A
2009A
2010A
2011F
2012F
2013F
2014F
2015F
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Impairment allowance/Impaired loans (lhs, %)
Impaired loans/gross customer loans (rhs, %)
Credit loss expense/avg gross customer loans (rhs, %)
Source: Company data Source: Company data, ING estimates
We estimate NPLs will continue to grow at a marginal rate in 2012, while risk costs could
see a continuation of the softening that was visible in 2011, unless the low coverage ratio
generates a surprise on this front.
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Preliminary 2011 RAS results
BRD reported preliminary 2011 results on 14 February 2012 based on Romanian
accounting standards (RAS). Unless otherwise specified, all financials used and forecast
in this report are based on IFRS reporting. Note that all prudential figures (CAR, NPL,RWA) are based on local regulations and will remain so, even after the switch to
international standards from January 2012.
We include analysis identifying material differences between local and international
standards, which can be found in the Impact of switch to IFRS section. Looking at the
mechanics of these differences, we can infer BRDs IFRS results with a margin of error,
which can be significant for certain items on the balance sheet and income statement.
The 2011 estimates in this report are derived from preliminary RAS figures, based on our
understanding of the accounting differences.
Fig 75 Income statement (RAS, selected lines, RONm)
2010 2011 %ch
Net interest income 2,336 2,279 -2
Net fee & commission income 660 680 3
Net trading income 547 334 -39
Other income 92 105 14
General operating costs (1,129) (1,152) 2
Tangibles & intangibles depreciation (129) (139) 8
Other operating costs (230) (261) 13
Net provisions (1,549) (1,289) -17
Profit before tax 604 562 -7
Tax (103) (97) -6
Net income 501 465 -7
Source: Company data
Fig 76 Balance sheet (RAS, selected lines, RONm)
2010 2011 %ch
Treasury bills 3,861 4,781 24
Loans and advances to customers, net 29,755 30,447 2
Total assets 47,494 48,028 1
Amounts owed to credit institutions 10,419 10,968 5
Amounts owed to customers 29,625 30,078 2
Total liabilities and equity 47,494 48,028 1
Source: Company data
Fig 77 Income statement (RAS, selected lines, RONm)
4Q10 4Q11 %ch
Net interest income 617 576 -7
Net fee & commission income 170 171 1
Net trading income 97 124 28
Other income 42 43 3
General operating costs (294) (290) -1
Tangibles & intangibles depreciation (33) (36) 11
Other operating costs (64) (73) 14
Net provisions (503) (420) -16
Profit before tax 32 99 207
Tax (6) (16) 171
Net income 26 83 215
Source: Company data
Prudential indicators are
calculated according to
stricter local (non-international) regulations
Our 2011 IFRS estimates are
based on recently-reported
preliminary RAS figures
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Fig 78 Income statement (RAS, selected lines, RONm)
3Q11 4Q11 %ch
Net interest income 578 576 0
Net fee & commission income 177 171 -3
Net trading income 42 124 198
Other income 21 43 109
General operating costs (285) (290) 2Tang. & intangible depreciation (34) (36) 6