"The banking system bears the brunt of the crisis"

Reporter: This year, Romanian banks have cleaned up their balance sheets. According to Mr. Nicolae Cinteză, as a result of this process, banking institutions have posted losses and will end this year with a loss of approximately 2 billion lei. What is the situation at CEC Bank in that regard?

Radu Graţian Gheţea: In the about eight years that I've been an employee of CEC Bank, its results have only been discussed once a year, at the time of auditing the financial statements. Therefore, I can not comment on that matter.

All the more so considering that during the year, there are very high variations from one month to the next - a bank may post non-performing loans which it sets up provisions for, one month, and on a different month it may have earnings from a sale of NPLs.

Moreover, September results are never audited. At the end of the year, numbers are comparable from one bank to the next.

All I can say is that for eight years, the bank has been profitable. Obviously, this doesn't mean that we may not see a decrease in profitability due to market conditions.

The fact that Mr. Cinteză has hinted at a loss of 2 billion lei, only validates what I said two weeks ago, that there will probably be major losses in the banking system, resulting from booking the non-performing loans accumulated over time.

The Romanian banking system has the ability to withstand this last expense shock. I've said it before and I am going to say it again - the banking system is footing the bulk of the bill of the crisis. I would advise those who think that isn't the case to look at the amounts of the losses and the contributions to the capital increases lately, in Europe and in Romania. They will see that the shareholders of banks (without myself being part of that category) have been forced to accept the fact that in some cases they don't have dividends to collect, rather, they have to bear losses, including share capital increases.

About two years ago there were talks about share capital increases made between 2008 and 2011 of approximately 4,500 billion Euros, in other words 4.5 trillion Euros, on a European level. They were heavily related to the countries' contributions to the bail-out of their national banking systems, which in Romania has not been nor will it be necessary.

In Romania, according to my calculations, approximately 2.4 billion had been brought to increase the capitalization of banks, by the end of 2012. That number is probably a lot higher now.

Obviously, we shouldn't minimize the losses that companies and the economy in general have had, but I have discussed the sector that I work in and I think that the bill is steep. At one time, I actually wondered who would want to invest in this sector. Apparently, there is still an appetite for that in Romania, because opportunities exist and because in the very recent past, (2006-2007), there were tidy profits being made, just like in other areas.

The idea is that the banking sector will take on a significant portion of the non-performing loans, which it will never recoup or if it does, it will be a very small part.

Reporter: There are banks that have sold batches of non-performing loans. Is CEC Bank considering that?

Radu Graţian Gheţea: The selling of NPLs is not a recent phenomenon and it will continue. Those that have a low percentage of non-performing loans can be congratulated, but that doesn't mean that they did not have any, instead, it means they sold them, transferred them within the group or to other companies and they cleaned up their balance sheets earlier.

If we are referring to CEC Bank, things are a little more complicated, because we do not have companies within the group to allow us to transfer our non-performing assets to them. In the past, the bank sold very few non-performing loans, which were consumer loans. At any rate, I can safely say that the solvency ratio of CEC Bank is very comfortable.

Reporter: What exactly does it mean when you say the solvency ratio is comfortable?

Radu Graţian Gheţea: Comfortable means somewhere in the 11%-13% range, and that means that the bank grants loans, it takes on risks. If the solvency ratio is at 20%, then that means that the bank has no lending activity.

Reporter: CEC Bank is one of the banks that have been subjected to the stress tests conducted by the NBR, not to those performed by the ECB. What was the result of the test that CEC Bank was subjected to by the National Bank of Romania?

Radu Graţian Gheţea: No Romanian banks have been subjected to the stress tests of the European Central Bank. We have passed the AQR test performed by the NBR, which has not identified any problems that would be a cause for concern. But the next phase is for the domestic banks to be subjected to an AQR test conducted by the European Oversight Authority, a test which will probably be performed next year.

Reporter: There have been some talks, at the level of some commercial banks in our country, over the last few months, concerning possible mergers/acquisitions. Can you tell us what moves of that nature are going to happen in Romania?

Radu Graţian Gheţea: I can not make any comment about other banks, neither as president of the Romanian Banking Association (ARB), nor as CEO of a commercial bank. But it is clear that after this crisis there is a phenomenon happening in the market - not of downsizing of the domestic and European banking sector, but rather a voluntary reorganization performed by banks, which, is, unfortunately, becoming increasingly eminent, through regulations that might come from the European Commission and the European Parliament. I am referring to the operation of "banking restructuring", an idea which is being discussed more and more in the European Parliament and which is proposing all kinds of solutions such as separating the retail side from the investment banking side.

There are all kinds of models - the British model, the German model, etc. -, every MP has their own model, the European Parliament and every country's parliament are democratic institutions, in which everybody promotes their own ideas. Unfortunately, there is also the possibility of some ideas that could harm the end goal, which is the economic turnaround.

According to the European Banking Federation, wherein I represent Romania, but also according to my position as a banker is that, after a certain point, there can be too much of a good thing. The moment we get to the point where we have too many restrictions the appetite for lending drops as well, and the effect will be undesired.

I've recently attended the latest meeting of the Board of Directors of the European Banking Federation, and there it was decided that the Federation will adopt an attitude of constructive opposition. We won't take to the street to protest, but we need to show exactly what the effects of over regulation and excessive involvement in the organization of banking activity can be. A major discomfort and a major discrepancy will be created between the European banking system and the American or Asian ones. We will be overregulated compared to the others.

Reporter: Under these circumstances, could consumers move to the other markets?

Radu Graţian Gheţea: Certainly.

Reporter: Speaking of the initiatives of parliament members, a madness surrounding the loans denominated in Swiss Francs has been created, in Romania as well as in Europe. We have legislative projects on the issue, we have ongoing lawsuits and we have even draft proposals submitted by some banks to resolve the issue of loans denominated in CHF. What is your opinion on the matter?

Radu Graţian Gheţea: I can not comment on what another bank does, but it is certain that, at one point, the banks that have behaved in a certain way have to take some losses, one way or another. The relationship that banks have with their customers is very tense here, in some cases it has come to lawsuits, and there needs to be a détente. Each bank decides the manner that it wants to do this in. In the banking community, we are trying to take steps for defusing the tension which exists in the relationship between banks and consumers, by explaining the role, the functions of commercial banks, as well as the risks that banks and their customers have to take on.

This is a period when we all need to work towards having a greater transparency when it comes to what gets done. It is very difficult for the tense situation to persist forever without affecting the appetite for lending, for economic development.

Reporter: What are the steps that banks in general, and CEC Bank in particular, are taking to relaunch lending?

Radu Graţian Gheţea: I think that we have all remained stuck in a reporting system, where we make the following calculations: "What was the loan balance at the end of last year? 100. What was the balance at the end of this year? 98. That means a 2% drop". I think we are at a stage where this shouldn't be the main benchmark for measuring the evolution of lending, instead we should only actually take into account how many loans have been granted in the period in question, because all the actions for cleaning up the balance sheets lead to reduced exposure.

If, in a hypothetical case, a bank has had a balance of 100%, it has written off 10% and at the end of the year it has a balance of 98%, that means it has an increase of 8. Thus, if we look at turnover, the picture of lending is not that gloomy.

With these write-offs, even though at the level of the entire system, at the end of September, we had announced a drop in lending of approximately 4%, if we look at the loan balance of CEC Bank we see an 8% increase.

The drop appeared following massive sales and write-offs. Lending hasn't decreased, it is rising slowly, but this is not being reflected the way it should.

Our bank is a bank that predominantly lends to SMEs, agriculture and the local and public administrations. Agriculture is seasonal, especially when speaking about European subsidies and national subsidies. Customers would need to receive the subsidy by March and they get it in November. In this context, they come in and they take a loan from the bank, from March to November, when they repay it. All this lending activity, which is not negligible, is not reflected in the balance sheet that exists in the beginning of the year, nor in the one at the end. That is why it would be best to look at what is happening with turnovers and we will see that lending is increasing. This is not what was happening in 2005-2007, when the balance of loans was increasing naturally, simply out of the loans that were being granted. Meanwhile, the subsidies have come in, agriculture has begun picking up, and agriculture is seasonal. It is a different lending structure.

Reporter: What percentage of the loans granted by CEC Bank go into agriculture?

Radu Graţian Gheţea: Approximately 42% of our loans go to SMEs. Some of them operate in agriculture or in the food business, but if we take strictly agriculture into account, then that amounts to 18-20% of our loans. Almost 10% of them represent the loans granted to the local public administrations.

Reporter: There are some opinions that CEC Bank should be a niche bank. What do you think about that?

Radu Graţian Gheţea: Going back to our mission, which says that CEC Bank should be a commercial universal bank, which would lend mostly to SMEs, the agricultural sector, and the local public administrations, and that particular attention should be paid to projects financed using European funds, we will see that the loan structure closely follows it.

There have been and there still are some talks that CEC Bank should be the bank of SMEs, the bank of agriculture, a bank just for European grants or just for investments.

I am calling on these people who make that kind of considerations, not to issue that kind of opinions, before consulting with the Government, the Ministry of Public Finance, as shareholder, or the National Bank, all of which can have a say in the matter, or else we get into hilarious situations.

Let's not forget that CEC Bank used to be most powerful savings bank in Romania and that it is still very powerful in that regard. We have almost three million active individual savings accounts and 1,069 branches all over the country. Investment banks are far smaller than that.

If CEC Bank hadn't turned into a commercial bank, it would not be around today, because at the onset of the real estate crisis, the only investments CEC Bank had were home loans and public sector loans. The state has cut the interest rate to a minimum, and the real estate sector has collapsed. We have adapted all our products to the agricultural sector, SMEs, local administrations, etc. We have developed our network and we have diversified our activity in order to lend money to farmers, small entrepreneurs etc.

All of these products have been developed in the last five years. We have cofinanced projects funded using European funds, which have brought into the country over 1.5 billion Euros in the form of grants. We can add to that bridge-loans for agricultural subsidies, on the European funds segment we have approximately 23,000 loans, and on the national funds segment we have about 80,000 loans. We have financing lines from the EBRD, from the EIB and the Bank for Development of the European Council.

Reporter: What is your collaboration with the Guarantee Funds like?

Radu Graţian Gheţea: We work a lot with the Fund for the Guarantee of Rural Loans and we also work with the National Fund for the Guarantee of Loans for Small and Medium Enterprises (FNGCIMM).

Reporter: There are bankers who claim that the FNGCIMM is no longer a reliable partner for banks. What is the relationship that CEC Bank has with this guarantee fund like?

Radu Graţian Gheţea: In this case, I have the following theory - a guarantee fund that is completely maintained by the state and subjected to customs and rules that only apply within state institutions, has a rigidity that a private fund does not have, without somebody being to blame for that. This is where I agree with those who say that it is easier to work with private funds than it is to work with state funds.

Reporter: Last week, the norms for the "First car" program were approved. Will you be granting loans under this program?

Radu Graţian Gheţea: We are ready for the "First car". We've never missed a government program, because we are a state-owned bank, and also because through our network we can benefit from all the advantages that these programs offer, as we are closer to customers.

Reporter: How did the "First Home" program do at CEC?

Radu Graţian Gheţea: CEC Bank has granted many loans under the "First Home" program, especially during the period when the signs that loans denominated in foreign currencies were no longer as advantageous as they used to be. I've always been a promoter of loans denominated in lei. We are now more active on that segment, because there is demand for loans denominated in lei.

Reporter: What is the ratio of loans denominated in lei out of the portfolio of loans granted by CEC Bank?

Radu Graţian Gheţea: In our case, the portfolio of loans denominated in lei has been clearly bigger than that of forex loans. In general, forex loans account for approximately 10%, while the rest are denominated in lei.

Reporter: How did the interest rates move at CEC Bank?

Radu Graţian Gheţea: The latest rankings made based on interest rates showed that we have the best products, in terms of costs, even in the case of forex denominated loans. As for the effective annual interest rate, in general, we are in the top three. We have deliberately resorted to that strategy, because we had a handicap to make up and we had to do something to attract customers. But, little by little, we have reached balance.

Reporter: Today, CEC Bank celebrates 150 years of operation. What are your wishes for the bank you lead, at the time of its anniversary?

Radu Graţian Gheţea: Those that come after us will probably be proud that this bank is comparable, in terms of its age, to similar institutions in countries such as Germany or France, where savings banks were created precisely at the same moment that CEC was created, 150 years ago.

Eight years ago, when I was hired here, I was asked about my vision and I've always said that the bank had to find a different direction - it had to become a universal commercial bank, because it if stayed a niche bank it could have problems. Apparently I was right.

It's hard to make predictions now, because there is a rather high volatility in the environment that we work in, in the economic and banking sector, in Romania, as well as all over the world and in Europe. It would be hard to say that in ten years CEC Bank will probably be in the "retail ring fence" category of banks - in other words those banks that will be surrounded by a circle to protect depositors. It is one of the concepts promoted by the British Banking Association and by the British government, which are saying that investment banks should be separated from retail banks. According to the opinion of the two institutions, that would be the solution for reducing systemic risk, reducing moral hazard and reducing the likelihood of companies going into default, as well as minimizing the impact of bankruptcies and promoting competitiveness, in retail as well as in investment banking.

As for the feasibility of this concept, when the British ran some calculations, they came to the conclusion that only 18% of their banking system would qualify for separation. Everyone claims that the universal commercial bank model, can still be accepted, provided small adjustments are made.

Going back to your question, our wish is for CEC Bank to preserve its ability to adapt to market conditions, namely, to the consumers' demands, but also to the potential models that may be imposed in the future.

The requirement that we are facing, as well as what we want for ourselves, is to grow as much as possible. We have proved that we can do that. I joined the bank when it had a market share of 4.03%, and now it has somewhere between 7% and 8%. Eight years ago, CEC Bank was ranked 9th or 10th and now it is in the top 5. We have financial resources, we have sufficient deposits to continue granting far more loans, but in order to do that, we need a capital increase.

We have been asking for a capital increase for a long time, a 1 billion lei capital increase was even stipulated in the state budget in 2011, but unfortunately, it could not be done. The only resource which has allowed us to create the possibility for growth was the bank's profit, and during the years of crisis, we have succeeded in increasing our capital by approximately 112 million Euros, by using our profit.

I want to emphasize the fact that we will be able to adapt to any type of change, because over the last eight years we have demonstrated that we can make some essential changes with the specialists that exist at CEC Bank and with the ones we got to join us from other banks. I think it is very important for the future of this bank to be capable to adapt to market conditions.

Reporter: Thank you!