Can BVB Help Romanian Entrepreneurs Build A Strong Bank?

10.27.2011 By Andrei Chirileasa , Roxana Pricop

Eastern European countries need to encourage local banks, and where there aren’t any, they may have to build them from scratch, in order to have an alternative to the financing offered by foreign banks, is the conclusion of an analysis published on the website of the world’s leading business daily, The Wall Street Journal.

"This model has worked well in Romania before WW II, when tens of local banks were set up, many of them through public subscription, i.e. by selling shares to individuals.

These banks, which were listed on the stock exchange, helped develop Romanian agriculture and industry, especially in the interwar period. But then foreign banks had a very low presence on the local market, and the capital market was much more developed than it is now.

But how viable is this model right now, when the market is dominated by foreign banks?

Are local entrepreneurs still willing to take on the risk of setting up banks and can the stock exchange provide the necessary financing for their development?

"The stock exchange is an alternative for any business that needs financing, implicitly for banks. It is preferable for a bank to attract capital from the stock exchange to finance its activity than to borrow, and this should be taken into consideration," says Valentin Ionescu, general manager of the Bucharest Stock Exchange (BVB).

"One example is the interwar period, when on the Bucharest stock exchange there were 30-35 banks listed, which collected money from investors and financed local companies. Another positive example is Banca Transilvania, Ionescu said.

Indeed, Banca Transilvania (TLV.RO) is the best example of how a local-held bank can develop through the mechanisms of the capital market, but unfortunately it is one of the few positive examples that the Romanian stock exchange can cite 15 years after its re-establishment.

At present, the perception of the local stock exchange as an alternative provider of financing is a very poor one. The founder and chairman of Banca Transilvania, Horia Ciorcila, who managed to build the largest Romanian-held bank, does not , in turn, believe that this example can be replicated under the current circumstances.

"The Romanian capital market cannot, in its current structure, act as an engine of economic growth because there was no concern at official level to develop it. A new concept would be needed, the market should be completely liberalized, in the European spirit, in order to make it attractive for investors, and only then could we talk in a few years' time about such an initiative," says Ciorcila.

But this is not the main reason why he thinks a second 'Banca Transilvania' is not possible at the moment.

"In the current international context, it would have been good for Romania to have 4-5 strong local banks. The development of a local bank would be good, but I don't think it can be done anymore, because I don't see any appetite from Romanian or Bulgarian entrepreneurs or from any other country in the region for setting up banks. This is because out of the existing banks only a few are still profitable, while the rest neither are nor will be over the next few years," Ciorcila explained.

Bankers believe neither the government, nor the National Bank (BNR) can do very much at this time to develop local-controlled banks.

"Everywhere around the world banks have been created by capitalists, not by state structures. The BNR has the role of regulating and supervising the banking system and cannot get involved in supporting certain banks only because they are Romanian-held," says Nicolae Surdu, who runs Banca Carpatica, the second-largest Romanian-controlled private bank, developed by Sibiu businessman Ilie Carabulea.

"The task of consolidating and developing Romanian capital in the banking system belongs to capitalists and Romanian entrepreneurs. But they are not attracted by investment in the banking sector because a bank does not bring immediate profits, but over medium and long term. Amid high volatility, stock exchange financing is unreliable and can be dangerous, if the moment of launching a bond issue is not carefully chosen," Surdu adds.

The development of Carpatica is also linked to the capital market, but unlike Banca Transilvania, which managed to attract strong shareholders (EBRD, IFC, Bank of Cyprus, SIF regional investment funds) to help it with capital in difficult times, the Sibiu-based bank relied on a very small number of investors, with Carabulea preferring to have more control. So, in the last few years, the bank has faced financing problems, recorded significant losses, is now looking for a strong partner, and could even be taken over by a foreign investor.

The latest initiative of a local entrepreneur on the banking market is Banca Feroviara, established by Valer Blidar, the owner of Astra Vagoane Calatori Arad. The bank, set up two years ago, has among its shareholders several companies involved in rolling stock manufacturing. But its operations are small.

Under the circumstances, analysts say the model proposed by Wall Street Journal analysts is difficult to implement.

"Romania's lending market of the last few years has largely been based on external resources, so for a very long time we will be dependent on foreign capital. The old Romanian slogan of doing it "on our own" will be difficult and painful to implement because of the lack of internal financing. In order to get financing from our own resources, there needs to be a high rate of saving in the private sector, consumption needs to be cut, but the economy needs investments in the production capacity and work productivity needs to be boosted," explains Florin Ilie, manager of the capital markets department of ING Bank.

"Moreover, Romanian banks are too small to take over the task of lending from foreign banks, so I think it is much more feasible to find solutions to attract new foreign investment to offset the outflows of capital from the banking sector," Ilie adds.

(English version by Daniela Stoican)