The article is part of a series of analyses on the challenges of banking in this decade, by Dr. Andrei Radulescu, Director 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 number of factors, including the prompt and favourable reaction of the institutions responsible for implementing economic policies both at EU and domestic level, and the fact that banks have learned the lessons of the previous crisis.

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

Banking sector solvency ratio - Romania vs. Germany (TIER1)

Source: Bloomberg

Also, in the context of the pandemic incidence, banks on the local market continued to lend to the economy, consolidating their role as the main financier of the national economy, as evidenced by the increase in assets - by more than 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, with the annual pace of non-government credit rising to 12.8% in August, the best development since 2009, as can be seen in the graph below.

In other words, the banking sector has not only increased its exposure to the government sector, but has also accelerated the growth of exposure to the private sector over the last few months: between December 2020 and August 2021, credit to non-financial companies and credit to the population increased by 14.4 billion lei and 14.8 billion lei respectively.

Also, unlike in the Eurozone, the banking sector in Romania has accelerated lending in the recent period, as can be seen in the following graph.

We stress that the banking sector in Romania is always ready to increase its exposure to the private sector (companies and population), but in compliance with regulatory rules, as well as in a context of calibrating decisions according to risk factors, so as not to jeopardize short-term solvency and financial stability in the medium-term perspective.

Non-government credit (%, y/y)

Sources: National Bank of Romania, European Central Bank

Last but not least, the Romanian banking sector's profit increased by more than 48% y/y in the first half of 2021, with the ROE (return on equity) and ROA (return on assets) indicators recovering to 12.98% and 1.43% respectively, as highlighted in the graph below.

A high ROE 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 stress that the banking sector will resist the risks arising from short-term fluctuations in interest rates on government securities, given the high level of the solvency ratio.

Evolution of public debt/GDP ratio (%) 

Source: Eurostat

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

• The public debt/GDP ratio in Romania is very low compared to the Eurozone - in 2020 this indicator increased by only 12 percentage points year-on-year to 47.3% in Romania, as opposed to the 14.1 percentage points year-on-year increase to 98% in the Eurozone, as can be seen in the graph below;
• Romania has a high potential for nominal GDP growth in the medium term, which will contribute to lowering the share of public debt in GDP and to easing pressures on government bond interest rates;
• Fiscal-budgetary rules at EU level are suspended until 2023, and the Eurogroup recently signalled a rethink;
• We expect interest rates on Romanian government securities to converge towards the Eurozone level this decade, which will have a positive impact on banks' balance sheets (increase in the value of securities);
• Alternatives for reducing banks' exposure to the government sector include increasing exposure to cash and cash equivalents (which is undesirable in the current climate of rising inflation (annual consumer price dynamics of over 5% in August) or exporting capital (difficult to envisage in the context of the potential for growth in the domestic economy);
• The recent increase in interest rates on government securities (caused by political tensions) is short-lived, after the political crisis is over we will see a decrease in interest rates, with a positive impact on banks' balance sheets;
• The deterioration in the public finance sphere after the incidence of the pandemic at global and European level is temporary (being determined by the extensive programmes implemented by governments to counter the health crisis and its impact on the economy), and the process of fiscal-budgetary consolidation may represent an opportunity to redesign the structure of global finances.

This series also contains the articles:

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