Bank buying
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Emerging Markets

Bank buying

Foreign ownership of Romanian and Bulgarian banks is not all good

Banking sector privatization has attracted foreign players and waves of liquidity into the region. In fact, privatization has largely translated into foreign ownership. In Romania, Societe Generale’s purchase of a 51% stake in the Romanian Development Bank in 1999 was ground-breaking. In the last seven years, this trend has intensified, culminating in Austria’s Erste Bank purchase of Banca Comerciala Romania, the country’s largest bank. With this deal, 90% of Romanian banks are now foreign owned, one of the highest levels in Europe.

 

In Bulgaria, after a severe financial crisis in 1997 that led to a major foreign exchange collapse and contracting GDP, the government adopted major economic reforms. Along with the currency board agreement, the privatization of the banking sector was central to this liberalization process. Unicredit and its subsidiaries HVB and Bank Austria Creditanstalt are now major players in the country, with three-quarters of assets (around E19 billion) owned by foreign banks.

Although foreign ownership has brought foreign expertise, improved governance standards and swathes of capital, the composition and pace of such financing flows is worrying many. Individuals and businesses are borrowing more, banking on the expectation that their incomes will rise. Credit to the private sector grew by more than 50% in Romania in 2006, buoyed by proliferating retail demand. Bulgaria witnessed 25% private-sector credit growth in the same period. Florin Citu, chief economist at ING Bank, Romania believes the good days will last: “The credit boom is certainly sustainable; we are optimistic that there is great growth potential, with mortgage growth in particular.”

However, Andrew Colquhoun, sovereign credit analyst at ratings agency Fitch, cautions: “The pace of growth of bank credit seen in these countries, and the scale of external imbalances to which this has contributed, is ultimately unsustainable and will need to slow at some point.”

Although central banks in both countries have sought to reduce lending volumes through higher reserve requirements and other regulations over the last two years, the abundance of foreign currency has diluted the impact of such administrative measures. In 2006, foreign exchange-denominated deposits were 51% of the total in Bulgaria and 56% in Romania. High levels of foreign ownership protect banking system solvency in the event of deposit withdrawals or a sharp rise in non-performing loans. This is scant consolation, however, for consumers and businesses who would still feel the chill if head offices in Germany or Italy order their Balkan subsidiaries to freeze new lending. —S.V.

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