RADU GRAŢIAN GHEŢEA, CEC BANK: "Provisions - the main risk for the banking system in 2013"

Reporter: How has lending evolved this year at CEC Bank compared to 2011?

Radu Graţian Gheţea: We are convinced that we will exceed our targets on lending and deposits alike, at the end of the year. We expect to see our loan balance increase 4-5%, and our deposits to increase 7-8%, respectively, compared to the previous year.

On the lending segment, our balance increases, even though they are spectacular compared to the small drops or increases which are seen in the Romanian banking system, do not fully reflect our lending effort, because considering that CEC Bank is focused on lending to agriculture, especially for current output, this means short term lending. For example, we grant loans in February, they get repaid in October, meaning that at the end of the year they are not booked as growth. If we look at the turnover the bank did over the years, as well as in 2012, basically the amount of the loans was turned over twice, through drawdowns and repayments which are not reflected in the final balance of the year.

We have continued to focus on lending to the agricultural sector, but we also had a particular appetite for projects financed using European grants, either for agriculture, or for the local public administrations.

We have also been concerned that there have been problems which led to the cessation of disbursements to the beneficiaries of European grants, but we have found that we can continue financing projects which use European grants, because the percentage of customers of CEC Bank who had irregularities in the implementation of those projects which use European grants is insignificant.

Reporter: What was 2012 like for CEC Bank when it comes to attracting deposits?

Radu Graţian Gheţea: Customers still save money and this is normal, as long as there is low appetite for investments. Customers preferred to bring their money to the bank. Aside from the traditional saving products, CEC Bank also allowed individuals or companies to purchase government bonds on the secondary market. This is not something conducive to an increase in our deposits attracted from customers. On the contrary, it results in a decrease of their volume, but since we have a rather large portfolio of government bonds, we have diversified their sale on the secondary market, both on the interbank market, as well as to our individual and corporate customers, who saw government bonds as a very good form of saving.

Reporter: After five years where CEC Bank was profitable, what do you expect this year?

Radu Graţian Gheţea: We expect positive results, even though the year wasn't a very good one in terms of the loan portfolio. CEC Bank has continued setting up provisions, which is something that has happened in the entire banking system, to cover default risks which might arise. Even though we have set up provisions, we will continue to be a profitable bank.

Reporter: How attractive will lending to SMEs remain, after the introduction of the Basel III norms?

Radu Graţian Gheţea: Banks need to find solutions for lending to SMEs after the implementation of the Basel III. It's about adapting to the environment, because without doing that you can't survive. Transition periods are rare. I am confident that the banking system will find the necessary solution, so that the money gets where it should, even though, at the present time, the requirements of Basel III seem like an impassable hurdle.

Reporter: Could the liquidity standards stipulated by Basel III cause a serious competition among banks to attract resources and in the long run to an rise of the interest rates on deposits?

Radu Graţian Gheţea: There's been talk for a long time now about how the parent banks which have subsidiaries here have not withdrawn money from Romania, but neither did they bring in any fresh capital. The message which the parent banks are sending to their Romanian subsidiaries is: "Start learning to stand on your own two feet, start attracting deposits from your local market and stop coming up to us asking for funds, because we have something else to do".

For a few months now, banks which were rather indifferent to saving and the activity of attracting deposits have become more aggressive, in the positive sense of the word. They have become more active in the market, to attract deposits. In spite of this, the downward trend of the interest rates paid on deposits in Romania has not been dramatically affected. Sure, we were expecting the interest rates to fall faster. With some occasional spurts, the interest rates in Romania have fallen. In spite of all the competition to attract deposits, the interest rates have gone down. I think that in 2013 we will see the same competition to attract deposits, but the interest rates will continue to fall, because there are some yardsticks that banks have to relate to. One of them is the key policy rate. The National Bank of Romania has issued a clear sign about lowering the interest rates, and going against the current is not advisable. You have to be very flexible in the banking sector and you need to succeed in directing your efforts towards the maximum efficiency. I don't expect the interest rates to increase. We have the signal from the NBR which we can't ignore.

Reporter: The Basel III norms emphasize strengthening capital. Considering these norms, will the banks' shareholders bring more capital into the country?

Radu Graţian Gheţea: The foreign and local shareholders of the banks in the Romanian banking system, even under the more unfavorable circumstances of Basel III, will bring in capital to the local subsidiaries, due to the simple reason that this banking system is solid enough at this moment. The shareholders will bring in capital to prevent businesses that have a future in this country from falling apart. In my opinion, the Romanian banking system has a guaranteed future, because there is an incredible amount of investment opportunities, which can not be made without financing from the banking system. I am referring to agriculture, which doesn't have financing, the lack of infrastructure, the European funds which can't be exploited without the help of banks. Any banker knows these things and the shareholders also need to be convinced that regardless of how long the crisis will last, regardless of the evolution in Europe, Romania has opportunities for growth.

Romania has a bit of a head start compared to other countries and we should use this advantage which we will have the moment the economic recovery begins in the European region. We have a headstart due to the extraordinary opportunities which can immediately create jobs.

Reporter: What are the factors which will put pressure on our banking system in 2013?

Radu Graţian Gheţea: The main risk is that of provisions and it relates to the borrowers' risk of default, which would reflect a less than expected economic development. Provisions are still a problem which will create a drop or a significant reduction of the profitability of banks in 2013 as well. Provisions are strictly tied to the European situation, and being a member of the European Union, Romania is bound to be affected by everything that is happening.

There is also a technical risk of the implementation of Basel III, which will probably create many requirements in terms of human and financial resources.

Reporter: The number of non-performing loans has increased from one month to the next. Will we see a worsening of this situation next year? What will this mean for the banking system?

Radu Graţian Gheţea: I don't see 2013 bringing any changes for the better in the area of non-performing loans and provisions. If the provisions increase, then that also means that the banks' efficiency drops and there is a need for more capital. Let's hope that at least some sectors will continue to perform well and those include the projects financed using European funds.

At CEC Bank, the weight of non-performing loans in the agricultural sector is far lower than the weight of loans granted to that sector out of the total number of loans. At a certain time, CEC Bank had 18% of its loans in the agricultural sector, but the non-performing loans in that sector represented only 6% of the total number of non-performing loans.

Reporter: Banks can become shareholders of companies to help their financial turnaround, through debt-to-equity conversions. Has CEC Bank entered the shareholder structure of any company?

Radu Graţian Gheţea: For now we are at a stage where as long as the insolvency practitioners are doing their job well, than we just watch them from afar, but we don't get involved directly. There have been some cases where we were close to entering the shareholder structure and it is still unclear whether we should go there as shareholders as well.

Reporter: Starting in February 2013, lawsuits will no longer be accepted unless the plaintiffs prove that they have participated in a mediation session first. Have banks started to resort to mediators?

Radu Graţian Gheţea: The banking community is the promoter of banking mediation. Together with the Romanian Banking Institute and with the mediation commission we trained two classes of mediators. The first mediation sessions have timidly begun to appear. CEC Bank has about 10-12 mediations. We have about 30-40 mediations in the entire banking system. We have recently sent a letter to the banking community, announcing the existence of the Association of Banking Mediators and that it would be a good thing for them to cooperate with it in order to lower the number of cases which go to court, because most of them have no reason to do so.