"Countries included in the study share a number of features, but there are also marked differences between them. There may not be many positive signs at present, but there are some improvements we may see in 2013. The worst performing countries in the banking sector expect more of an improvement, according to our results. I think the situation in Romania and Hungary can only improve" says Zdeněk Tůma, Head of Banking at KPMG in the Czech Republic and former Governor of the Czech National Bank.
The overall results of the survey show that the Romanian banking sector is quite stable, with relatively good capital adequacy, despite having experienced losses for two years now. Risks to the banking sector were countered by the efforts of credit institutions, which translated into the consolidation of solvency, provisioning and liquidity levels as well as by measures taken by the National Bank of Romania to address prudential regulation, supervision and adequate management of risks faced by the banking system. “Romanian banks have made advances in the last few years to restructure key areas such as risk management and clean their portfolio of underperforming assets,” says Serban Toader, Senior Partner, KPMG in Romania.
Austria played a major role in the economic transformation of banks in Central and Eastern Europe (CEE), which is why the survey also covers the Austrian banking sector. For Austrian banks, foreign subsidiaries in the region remain an important source of income; despite some losses, they show a positive trend overall. There is a pressure leading towards greater consolidation of the Austrian banking market, and the Austrian government is pushing the banking sector towards early adoption of prudent regulatory measures. The banks will have to prepare restructuring and recovery plans which aim towards greater stability and resolvability.
Cezar Furtuna, Partner, Financial Services, KPMG Romania explains: “Austria’s involvement is substantial in the Central and Eastern Europe region and especially in Romania where Austrian control accounts for approximately 30% of the banking sector and 4 of the top 10 banks in Romania are Austrian-owned. Developments in the Austrian banking market have noticeable effects in Romania and understanding Austria is key for the whole region.”
Regarding the current situation in the banking sector, 66% of the respondents described 2012 as worse than last year and banking executives expect 2013 to be similar. Despite overall expectations, positive development is predicted for the sector in Romania, Austria, the Czech Republic and Hungary; in contrast, Slovakia and Poland expect business conditions to worsen in 2013.
As far as strategic plans are concerned, the surveyed banks are leaning more towards cost-cutting rather than to investment aimed at long-term growth. Measures currently being taken by a majority of banks include steps to increase the efficiency of internal operations and IT solutions to reduce operating expenses. Banks also plan to implement or increase the use of outsourcing and get rid of unprofitable or less key business activities. Government support and debt restructuring are widely considered irrelevant, except in Austria.
According to Serban Toader, “Banks have increasingly focused their attention on cost-cutting and many of them have managed to reduce their cost base to a certain degree”. However, “these banks have been delaying long-term plans and investments and this cannot continue for much longer before they start to experience the adverse effects of overlooking the future of the business.”
Most banks in Romania are making an effort to increase the efficiency of internal operations. 82% of banks in Romania have either reduced their number of employees already or are planning to do so; similar measures have been taken by many Austrian and Hungarian banks. Investments in regulatory compliance and in risk management are considered the most important investment areas for the coming year, both in terms of the size of investment and the number of banks that are investing.
The vast majority of banks have made specific changes in their approach to risk management (only 6% reported no changes). Most banks have already improved methodologies and increased management’s focus on risk management. Roughly half of respondents also expanded the resources they put into risk management. In all the countries in the analysis, credit risk is considered to be the most significant of all the risks surveyed.
“Banks have made significant advances in upgrading their risk management policies and procedures in the last few years but are now experiencing difficulties in achieving growth. The banks were used to being able to grow at a very fast rate by granting loans and accepting segments of customers which would not be suitable for the current risk management standards”, says Cezar Furtuna.
Strengthening the confidence of companies and investors is regarded by respondents as the most important factor driving financial performance in the banking sector. The factors which were rated as the most important were strengthening the confidence of companies and investors (26% and 25% respectively), effective regulation (24%) and monetary policy (17%).
According to Razvan Nan, Senior Manager, Banking Advisory, KPMG in Romania, “Regaining the trust of customers and investors is key for the Romanian banking system. Banks need to learn from past failures and build a new relationship based model for the future.”
In Poland, Romania and Hungary monetary policy has emerged as a significant factor. Other factors were also highlighted as important: more job opportunities in Hungary, increased customer spending in Slovakia and improved consumer confidence in Romania.
27% of banks surveyed said they were finding it more difficult to raise capital. Many respondents from Romanian banks saw access to long-term funding as one of their biggest future challenges.