In The Rush For Cash Banks Would Pay Just Anything To Get It

10.19.2011 By Razvan Voican

Inflation continued to decline fast in the last few months, going below 4%, yet many banks continue to pay over 7% yearly interests to keep their clients and compensate for the lesser support from their parent banks.

The inflation trend and the interests offered by banks have been out of sync for months now, as a large group of lenders offers higher interests instead of cutting them, in order to lure customers or prevent the existing ones who are worried about the possible effects of the foreign crisis on the local market from leaving.

The foreign crisis has rendered a number of foreign bank branches unable to rely on funding from their parent institutions, unless the situation is really special, so that their strategic focus is on self-funding from the local market as much as possible.

Under the circumstances, a special group is made of up Greek-held banks, which have stood out over the last two years at least through the generous interests they pay on deposits. These interests show even in the losses posted by the Greek banks, because it is hard to justify over 7% interests with investment options that provide a minimum of profit.

Out of the group of Greek-held banks, Bancpost, the local branch of EFG Eurobank, particularly stands out, which pays the most generous interests of 7.75% per annum for twelve-month deposits or 7.5% per annum for six months deposits, while the inflation is down to 3.45%.

The generosity of Bancpost, a bank that has been posting losses by Romanian accounting standards for more than five years now extends to the euro deposits, too, for which it offers 4.35% per annum for twelve-month deposits and 4.25% for the six-months ones. Bancpost situation is even more special since it is supposed to merge with Alpha Bank, which means a change of the entire range of savings products.

Whereas Alpha Bank, its partner in the merger suddenly abandoned the fight over deposits with interests above the market average last fall, Bancpost remained engaged in a competition of generosity with Piraeus, which pays 8% per annum for five-month leu deposits and no less than 4.8% for the euro deposits with the same maturity. In other words, both banks are doing everything possible pricing-wise to keep their clients and maybe gain new ones.

The banks that pay 7.75% or 8% per annum for leu deposits cannot find profitable government securities investments and the extremely weak lending business makes it complicated to estimate the profitability they should normally try to achieve.

The pressure these banks are probably under makes them strive to get lei from clients that they may convert into euros via currency swap. Compensating for the reduced support from parent banks is all the more difficult since most banks on the market have much lower deposits compared with the credits granted.

Average interest rate on new leu deposits fell below 7% on the market as late as April, and has not gone down since, not even by 0.5%.

There are ten banks on the market paying over 7% per annum to get leu deposits now.

The Greek-held banks are the most aggressive, with Portuguese-held Millennium, which its parent bank no longer considers a strategic priority, Banca Carpatica, which does not have a strategic foreign shareholder to supply it with foreign currency and Banca Feroviara, the youngest lender on the market, following close behind.

The National Bank of Romania (BNR) this spring sent out some signals to those very generous banks, but has not done so lately, even though banking sources say certain lenders have trouble getting funding from the interbank market so that the deposits attracted are an even more important source of cash.

BNR has recently recommended Greek-held banks to set aside cash reserves to prevent potential problems that may arise from their relations with their parent banks. Which might explain why the aggressive interests Bancpost and Banca Romaneasca pay.

There might also be delicate situations, when banks put up for sale, like ATE Bank attract deposits by offering 7.25% per annum for lei and 4.5% for euros.

The very generous banks include lenders among the top 15 by assets. Adding to them the many small banks offering high interests on deposits, there results a significant number of lenders that can take no steps to make loans cheaper.

So that the situation no longer has anything to do with the inflation or BNR's key rate but with the cash troubles caused by the international situation.

(English version by Loredana Fratila)