BCR cleans up balance sheet, eyes bet­ter results in 2015

Top 100 See - - Top 100 Banks - By Doinita Do­lapchieva

What are the main fac­tors that in­flu­enced BCR's fi­nan­cial results in 2013 and how do you think they will af­fect the bank's per­for­mance in 2014?

BCR achieved a chal­leng­ing task in 2013, re­turn­ing to breakeven af­ter one-off items. More im­por­tantly, we had to deal with bold de­ci­sions re­gard­ing costs, or­gan­i­sa­tion and strat­egy, aimed at con­sol­i­dat­ing the fun­da­men­tals of BCR as the lead­ing bank in Ro­ma­nia. The bank's op­er­at­ing in­come recorded a mar­ginal de­crease of about 1.0%, mainly driven by the still sub­dued credit de­mand and lower in­ter­est rate en­vi­ron­ment favoured by the mon­e­tary pol­icy eas­ing, with key rate cuts to­talling 125bps in the sec­ond half of the year putting pres­sure on in­ter­est in­come and mar­gins. On the other hand, the op­er­at­ing in­come was sup­ported by a sub­stan­tial in­crease in fee in­come of ap­prox­i­mately 18%, as a re­sult of con­tin­u­ous fo­cus on grow­ing trans­ac­tion bank­ing busi­ness. Fol­low­ing com­pre­hen­sive op­ti­mi­sa­tion mea­sures and strict cost dis­ci­pline, in 2013 the bank achieved a re­duc­tion in op­er­at­ing ex­penses of more than 10%.

Fur­ther­more, the risk charges sig­nif­i­cantly de­creased by around 40% due to lower non­per­form­ing loan (NPL) in­flows in both re­tail and cor­po­rate seg­ments.

In the sec­ond half of last year, the first results of our turn­around ef­forts be­came vis­i­ble,

with large scale busi­ness re­struc­tur­ing com­pleted, NPL stock de­clin­ing for the first time since 2008 and re­bal­anc­ing of the loan book to­wards lo­cal cur­rency well un­der­way.

What are the main goals the bank is pur­su­ing in 2014?

We en­tered into the sec­ond half of 2014 with the strong com­mit­ment to clean up our balance sheet and en­hance fu­ture ca­pac­ity to de­liver strong per­for­mance of the healthy, solid core of the bank which is cur­rently show­ing con­sis­tent signs of im­prove­ment, as BCR suc­ceeds in cap­tur­ing new lend­ing market share along with re­in­forc­ing the over­all de­posit base.

We are tak­ing de­ci­sive mea­sures aimed to ac­cel­er­ate re­duc­tion of the NPL balance al­ready in 2014 - it is down about 25% com­pared to year-end 2013 - through write-offs, sales and re­cov­er­ies, while at the same time plan­ning to fur­ther im­prove our com­pet­i­tive ca­pac­ity in both the re­tail and cor­po­rate fran­chises of the bank. On top of this, BCR will de­liver this year the full cost ben­e­fit of the 2013 re­struc­tur­ing pro­gramme.

What are your ex­pec­ta­tions re­gard­ing your fi­nan­cial per­for­mance in 2014?

As men­tioned be­fore, we are ex­e­cut­ing our strat­egy ac­cord­ing to the main pil­lars de­fined. Given the mag­ni­tude and ac­cel­er­ated im­ple­men­ta­tion of the clean-up mea­sures, we can­not achieve over­all prof­itabil­ity this year, how­ever we are con­vinced that we are on the right path and the fi­nan­cial per­for­mance of the bank will im­prove sub­stan­tially from next year on­wards.

How will the cen­tral bank's rec­om­men­da­tion to re­move fully-pro­vi­sioned NPLs from the balance sheet af­fect the bank's 2014 results?

Strictly re­fer­ring to the write-off of an NPL which is al­ready fully-pro­vi­sioned, such op­er­a­tion does not pro­duce any profit and loss im­pact. How­ever, for those NPLs that we need to bring close to 100% pro­vi­sion­ing level be­fore be­ing able to write them off, there are one-off ad­di­tional risk charges to be booked this year that will ob­vi­ously hit our bot­tom­line re­sult in 2014. An­other im­por­tant fact to be men­tioned is that, by mov­ing an NPL off-balance sheet, we do not cease the claim against the re­spec­tive client.

What NPLs ra­tio do you ex­pect BCR to achieve at the end of the year?

As men­tioned, given our cur­rent ef­forts to re­duce the NPL vol­ume in an ac­cel­er­ated man­ner, by end-2014 the bank's NPL ra­tio should de­crease by about 5.0 per­cent­age points as com­pared to the end of 2013; this is also a func­tion of the com­mer­cial per­for­mance of the bank, i.e. our abil­ity to main­tain or some­what grow the size of the healthy book.

What are the main chal­lenges BCR is fac­ing in the medium term?

Go­ing for­ward, we clearly an­tic­i­pate the bank's abil­ity to de­liver pos­i­tive results based on achiev­ing sus­tain­able growth of healthy busi­ness, main­tain­ing strict cost dis­ci­pline and sta­bilised rev­enue stream. Such tar­geted per­for­mance is well-an­chored in con­ser­va­tive as­sump­tions and a very strong cap­i­tal base. Ben­e­fit­ting the de­ci­sive mea­sures un­der­taken this year, 2015 should al­ready be a nor­mal­ized year to this ex­tent. Thus, the main chal­lenges ahead re­side in our ca­pac­ity to re­solve the NPL stock and to achieve sus­tain­able prof­itabil­ity and con­sid­er­able im­prove­ment in the over­all qual­ity of BCR's balance sheet, while fac­ing sig­nif­i­cant head­winds com­ing from still frag­ile busi­ness con­di­tions in the con­text of a low in­ter­est rate en­vi­ron­ment, mar­gin pres­sure and the coun­try's eco­nomic growth still de­lay­ing to trans­late into more solid loan de­mand, and last but not least a tough reg­u­la­tory frame­work.

What market share in terms of as­sets do you ex­pect the bank to have at the end of the year?

BCR's market share by to­tal as­sets stands at 17% as of June 2014, slightly down from 17.5% as of end-2013. We see the to­tal as­sets of the Ro­ma­nian bank­ing sec­tor con­tin­u­ing to de­crease in 2014 in line with the gen­eral clean-up ef­forts in the market and still sub­dued over­all loan growth, there­fore we do not ex­pect a dra­matic change in our re­lated market share go­ing for­ward, BCR main­tain­ing its com­fort­able lead­ing po­si­tion in the market.

What are your pro­jec­tions re­gard­ing the pace of lend­ing growth in Ro­ma­nia in 2014?

Based on the de­vel­op­ments so far in the year and the cur­rent NPL res­o­lu­tion ini­tia­tives through­out the sec­tor, we ex­pect a slight low-sin­gle digit con­trac­tion of the over­all lend­ing in Ro­ma­nia ver­sus the end of 2013, as the good growth we see so far in terms of new lend­ing in lo­cal cur­rency, es­pe­cially in re­tail, still does not pro­duce enough vol­umes to off­set the im­pact of the banks' balance sheets clean-up and nat­u­ral re­pay­ments. Ac­cord­ing to our lat­est fore­casts, mort­gage lend­ing is the seg­ment show­ing good yearon-year growth in 2014 in terms of out­stand­ing bal­ances, some­where in the range of mids­in­gle dig­its.

What is your fore­cast for the Ro­ma­nian bank­ing sec­tor's over­all NPL ra­tio at the end of 2014?

Fol­low­ing the cen­tral bank's rec­om­men­da­tions and based on the lat­est avail­able data pub­lished by the reg­u­la­tor, as of the sec­ond half of 2014 the NPL ra­tio for the sec­tor has al­ready im­proved by three per­cent­age points against end-2013, and the trend will ob­vi­ously con­tinue, how­ever this de­pends on how the other play­ers in the market will deal with their own NPL is­sues and at the same time on their abil­ity to gen­er­ate new busi­ness.

We en­tered the sec­ond half of 2014 with a strong com­mit­ment to clean up our balance sheet.

Adri­ana Jankovi­cova, CFO

Banca Comer­ciala Ro­mana (BCR), a member of Erste Group since 2006, is Ro­ma­nia's largest fi­nan­cial group. Be­sides uni­ver­sal bank­ing oper­a­tions, in­clud­ing re­tail, cor­po­rate and in­vest­ment bank­ing, trea­sury and cap­i­tal mar­kets, the group also pro­vides leas­ing and as­set man­age­ment ser­vices, among oth­ers. BCR's net­work in­cludes more then 560 re­tail units, over 2,100 ATMs and 13,500 POS ter­mi­nals.

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