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CNSM Report: Romania's banking sector remains profitable in context of pandemic crisis


The Romanian banking sector remained profitable in the context of the pandemic crisis, registering a significant net financial result of 8.3 billion RON in 2021, due to the reduction of net expenses with the adjustments for expected credit losses, as well as the upward evolution of the operational profit, according to the Annual Report of the National Committee for Macroprudential Oversight (CNSM) for 2021.

Net interest income, the main component of operating income (65.8%), registered a positive dynamic of about 4% compared to the previous year based on the resumption of lending activity and the increase of interest rates (which did not register a similar extent for the remuneration of deposits), reads the cited document.

The annual net expenses with the adjustments for expected credit losses (1.3 billion RON) decreased by 65.6% compared to those recognized in the previous year, their dynamics being positively influenced by the economic recovery.

"Compared to 2020, both the net profit and the profitability indicators increased (the former by 64.6 percent): return on assets - ROA (by 0.4 percentage points, up to 1.4 percent) and return on equity - ROE (up 4.8 percentage points to 13.4 percent). Earnings polarization was maintained, with large banks accounting for 87.1 percent of aggregate positive financial results. The market share of loss-making banks recorded an all-time low (0.9 percent). The cost/income index has changed insignificantly to 53.8 percent (remaining in the medium risk range according to the prudential limits of EBA [European Banking Authority])," shows the report.

On the other hand, the cited document shows that the risks and challenges generated, maintained or amplified by the pandemic crisis did not disappear in 2021, a series of vulnerabilities accumulating during this period. Among them is the quality of assets, especially in terms of the portfolio for which the moratoriums were used.

"Thus, the existing developments must be followed by both credit institutions and the central bank, in order to limit the possible negative effects in the situation of the materialization of the related risks: vulnerabilities regarding the quality of assets, especially from the perspective of the portfolio for which moratoriums were used; the rise in the potential loss of interest rate risk materialization in the face of a large volume of government securities and rising interest rates, reduced operational efficiency (especially for small banks), increased operational risk (including in terms of cyber risk) in the context of the acceleration of the digitization process against the background of the pandemic crisis, but also of the competition from the Fintech/BigTech sector," the document further specifies.

CNSM representatives show that the COVID-19 pandemic fundamentally affected the way people carried out their daily activities, in some cases, irreversibly, and one of the sectors that had to adapt quickly to the new challenges was banking.

In a very short period of time, credit institutions were forced to adopt teleworking for employees whose duties could be performed from home without requiring their physical presence at the job. Also, within the branches, the contact with the public was limited, these being reorganized in order to comply with the sanitary norms in force, CNSM reminds.

The response speed of the banks and the extraordinary measures taken have allowed these institutions to continue their operations with minimal interruptions and to protect their employees and customers from the risk of illness. Although at the time the measures seemed to be temporary, some of them became permanent and the banks had to change their business strategy so as to adjust to the new needs of customers and the market conditions stimulated by the COVID-19 pandemic.

"These adaptation processes required significant investments in the digitalization of banking products and services. According to a BNR19 questionnaire, the costs for digitization in the period 2017-2020 amounted to about 2.44 billion RON, especially for technological innovation projects, of which almost three quarters focused on the relationship with clients. The fact that the amount budgeted for 2021 amounted to almost half of the cumulative expenditures in the four years shows the acceleration of the digitalization process amid the pandemic crisis, but also of competition from the Fintech/BigTech sector. Despite these changes regarding the digitalization of banking, but taking into account the fact that in Romania there is: (i) a large gap between the urban and rural environment, (ii) a low level of financial education, (iii) an aging population (people with low computer skills), and (iv) the lowest degree of the society's digitalization in the EU, banks will most likely maintain a proper mix between digital services and counseling with physical presence in the territorial units in order to better respond to customer demand and expectations," underlines the CNSM Annual Report .

On the other hand, however, given the fact that about 70 percent of the Romanian banking sector is owned by European banks, the advance in digitalization can be stimulated by the streamlining efforts of European parent company groups, but adapted to the local market.

Consequently, the risks, from this perspective, are considered lower in Romania compared to the rest of the EU countries, but in the next period a sustained effort by the banking industry is needed for the digital development in a resilient manner in terms of operational risk, the source said.