The article is part of a series of analyses about the banking challenges in this decade, made by Dr. Andrei Radulescu, Director of Macroeconomic Analysis, Banca Transilvania.

The banking sector in Romania has been resilient to the incidence of the pandemic and its consequences so far, an evolution influenced by a series of factors, among which the prompt and favorable reaction of the institutions responsible for implementing economic policies both at the level of the European Union and domestically, as well as the fact that banks have learned the lessons of the previous crisis.

Thus, currently, the solvency indicator in the domestic banking sector is 23.88% in the second quarter of 2021, at historical maximum levels, well above the minimum requirements, but also higher than the threshold recorded in March 2020, at the time of the health crisis incident, 20.37%. From the perspective of comparative analysis on the TIER 1 solvency indicator, a very high level is observed in the local banking sector compared to that in Germany, the first economy of the Euro Zone, Romania's main economic partner.

Solvency indicator banking sector – Romania vs. Germany (TIER1)

Source: Bloomberg

Also, in the context of the pandemic outbreak, banks in the local market continued to lend to the economy, consolidating their role as the main financier of the national economy, an aspect highlighted by the increase in assets - by over 67 billion lei between the end of March 2020 and the end of the first half of 2021.

Evolution of assets in the banking sector in Romania (billion lei)

Source: National Bank of Romania

At the same time, banks accelerated lending in 2021, the annual pace of non-governmental credit rising to 12.8% in August, the best performance since 2009, as can be seen in the graph below.

In other words, the banking sector has not only increased its exposure to the governmental sector, accelerating the growth of exposure to the private sector over the past months: between December 2020 and August 2021, loans granted to non-financial companies and loans directed to the population increased by 14.4 billion lei and 14.8 billion lei, respectively.

Also, unlike the Euro Zone, the banking sector in Romania has accelerated lending in the recent period, as can be seen in the following chart.

We emphasize that the banking sector in Romania is always ready to increase exposure to the private sector (companies and population), but respecting regulatory norms, as well as in a context of calibrating decisions based on risk factors, in order not to jeopardize short-term solvency and financial stability from a medium-term perspective.

Non-governmental credit (%, year/year)

Sources: National Bank of Romania, European Central Bank

Last but not least, the profit of the banking sector in Romania increased by over 48% year/year in the first semester of 2021, noting a revitalization for the ROE (return on equity) and ROA (return on assets) indicators at 12.98%, respectively 1.43%, an aspect highlighted in the chart below.

A high level of return on equity indicator is very important, both from the perspective of bank shareholders (who aim to maximize profit), and for the viability of the banking sector.

Evolution of profitability indicators in the banking sector (%)

Source: National Bank of Romania

In this context, we emphasize the fact that the banking sector will withstand the risks arising from short-term fluctuations in interest rates on government securities, given the high level of the solvency rate.

Evolution of the public debt/GDP ratio (%) 

Source: Eurostat

In conclusion of the series of articles on the banking sector, we draw attention to a few aspects regarding the impact of banks' exposure to the public sector in Romania:

• The public debt/GDP ratio in Romania is very low compared to that recorded in the Eurozone – in 2020 this indicator increased by only 12 percentage points year-on-year to 47.3% in Romania, as opposed to an increase of 14.1 percentage points year-on-year to 98% in the Eurozone, as can be seen in the graph below;
• Romania has a high potential for increasing nominal GDP in the medium term, which will contribute to reducing the share of public debt in GDP and to diminishing the pressures on interest rates on government securities;
• Fiscal-budgetary rules at the level of the European Union are suspended until 2023, and the Eurogroup has recently signaled a reconsideration of these;
• We expect the convergence of interest rates on government bonds in Romania towards the level in the Eurozone in this decade, which will have a positive impact on the banks' balance sheets (increase in the value of the bonds);
• Among the alternatives to reducing banks' exposure to the government sector are increasing exposure to cash and equivalents (which is not desirable at the current moment, characterized by the intensification of inflation (annual consumer price dynamics of over 5% in August)) or capital export (difficult to consider, in the context of the development potential in the internal economy sphere);
• Recent increase in interest rates on government securities (caused by political tensions) is short-term, after the end of the political crisis we will witness their decrease, with a positive impact on the banks' balance sheets;
• The deterioration in the public finance sphere after the incidence of the pandemic at the global and European level is temporary (being determined by the extensive implementation programs of Governments to counteract the health crisis and its impact on the economy), and the fiscal-budget consolidation process can represent an opportunity for redesigning the structure of world finances.

This series also contains the articles:

• Paradigm shift in monetary policy
• Excess liquidity accumulation at the banking sector level
• Structure of banking system assets – developments in the Eurozone, Romania's main economic partner
• Structural evolutions in the banking sector sphere in Romania after the Great Financial Crisis