The prospects of banks listed on the BVB in 2024

The main banks listed on the Bucharest Stock Exchange (BVB) had an exceptional evolution last year, in conditions where high interest rates and a certain robustness of the economy, which meant that borrowers did not have payment problems, were reflected in profitability credit institutions.

The shares of Banca Transilvania (TLV) rose by 37.5% last year, marking a new series of historical highs, and including dividends, the gross yield of the institution's securities rose to 43.8%. Shares of BRD - Groupe Societe Generale (BRD) had a similar dynamic, with a 37.8% increase in the stock price and a total return of 44.9%, including the dividend granted last week. Admittedly, the appreciations were manifested in an environment with high inflation that erodes real returns, but even so the developments are remarkable.

The growth of the securities of the main credit institutions listed on the BVB was higher than that of the shares of European banks as a whole, reflected by the Euro Stoxx Banks index, which rose by 23% last year.

"It seems that the level of profitability of our banks is one of the highest in Europe. Obviously, this was also reflected in a good stock market performance for the listed banks," says economic analyst Aurelian Dochia.

In addition to profitability, the listing of Hidroelectrica, which brought new money to the BVB, and the prospect of our market moving into the MSCI emerging category are elements that can explain the evolution of banking shares last year.

• Alin Brendea: "Decreasing inflationary risks and maintaining economic growth, even lower, offer good protection to bank assets"

Analysts and brokers say that there are premises for credit institutions to perform this year, but they point to certain specific problems that may appear in some sectors of the economy, which may lead to delays or defaults on loans, with an impact on banks' balance sheets.

Alin Brendea, the director of operations of the Prime Transaction brokerage, is of the opinion that the prospects of the banking sector remain positive in 2024 as well. "The level of interest rates on the money market, even if decreasing, will continue to provide a good source of earnings for banking companies taking into account the significant difference between active and passive interest rates that the current inflationary economic environment provides", the broker told us from Prime.

Last year, the increase in net interest income was the main factor that contributed to banks' profitability, as can be seen from the nine-month financial statements published by the two main BSE credit institutions.

"On the other hand, the decrease in inflationary risks and the maintenance of economic growth, even lower, offer a good protection to bank assets, which will ensure the limitation of losses from possible provisions due to problems in repayment of credit installments", says Alin. Brendea.

The director of Prime added: "Last but not least, the state's effort to increase the taxation of the economy and the new IT technologies applicable in the banking field, should help both to increase revenues and to maintain banking profit margins, traditionally higher on the local market compared to more developed economies".

• Alin Brendea: "The evaluation indicators are far from values that could label Banca Transilvana and BRD as expensive shares"

According to the broker, although the trading rates have increased recently, the valuation indicators, calculated on the basis of the latest available financial data, remain at decent levels, far from values that could put the label of expensive shares on the securities of the two largest local banks traded at the BVB rate: Transylvania and BRD.

According to the data available on the BVB Research Hub portal, both Banca Transilvania and BRD shares had, at the end of last week, levels of the P/E indicator (which compares the stock market valuation with the profit) below the median of comparable securities (6.13 for TLV and 5.29 for BRD, versus 7.18 peer median). In the case of the P/B ratio (which compares the stock market valuation to equity), TLV's securities were more expensive than the median, and those of BRD were at a similar level (1.62 for TLV and 1.4 for BRD, compared to 1. 38 median peer).

From the point of view of profitability, the two big banks on our stock exchange are better than their competitors in the region, both return on assets (ROA) and return on equity (ROE) being above the median of comparable securities, which include OTP, Komercni Banka, PKO Bank Polski and Moneta Money Bank, according to BVB Research Hub data.

• Adrian Codirlaşu: "Once the interest rates are reduced, the demand for loans will increase, which will further support the income of the banking system"

Adrian Codirlaşu, vice president of CFA Romania, is of the opinion that the banking sector in our country has very good prospects both in the short and medium term, as well as in the long term.

"Compared to the other countries in the European Union, Romania is poorly banked, so there is great room for growth," the analyst told us. "Once the interest rates are reduced, the demand for loans will increase, and this will further support the income of the banking system. The increase in volumes compensates for the decrease in interest rates, so that profitability is maintained", added the vice-president of CFA Romania.

On the other hand, Adrian Codirlaşu also highlights the risks looming over the banking sector.

"Of course an economic recession affects the profitability of banks, but let's hope that this will not occur in the coming years," the CFA analyst told us, adding: "We also see that when there is money in a sector, the Government is looking to take them. We've seen this in energy, private pension funds that have even tried to be nationalized, we've seen a tax put on bank assets, etc. There is this risk (not that the banks will be charged extra). But such a fiscal policy is not compatible with being a member of the OECD".

• Aurelian Dochia: "There is a risk that, this year, the international banking sector will suffer primarily because of the real estate sector"

Economic analyst Aurelian Dochia is of the opinion that the profitability of credit institutions will decrease this year, but our banks are well capitalized and there is no risk of a major crisis, like the one in 2008-2010.

"I think that 2024 will be a more difficult year, with greater risks, including for the banking sector, but this also depends on what will happen on the international financial markets. There is a risk that, this year, the international banking sector will suffer primarily from the real estate sector. In Austria, a large real estate company (Signa Holding) is in trouble, causing difficulties for creditors. However, this could also happen in other areas where banks have been involved in the financing of the real estate sector whose situation is changing - interest rates are high, we are witnessing a reduction in the demand for housing financing and office space rentals and of the industrial ones have slowed down a lot. Many developers are in trouble, which means the banks that helped finance them will also be in trouble. This will be seen in 2024", Aurelian Dochia told us.

The analyst pointed out that it is not yet completely excluded that, this year, we will witness a recession in Europe.

"It's not the main scenario, but if this happens, the banks will suffer because many of their customers will have difficulty paying," says Mr. Dochia.

However, in his opinion, there is no risk of a banking sector crisis like the one in 2008-2010, when the level of non-performing loans was very high and there were high risks of bank failures. "At the moment the banks are well capitalized, the main risk indicators look good and I don't think there is a risk of this type. But I think credit dynamism will decrease and non-performing loans will increase in 2024, which will affect banks' profitability," the economic analyst told us.

• Daniela Iliescu, Patria Bank: "Through the additional tax applied to the turnover, the performance differences between the banks deepen, to the disadvantage of the medium and small ones"

Starting this year, credit institutions will have to pay a 2% turnover tax, which will drop to 1% from 2026, in addition to the 16% profit tax.

An analysis carried out by Patria Bank based on the annual financial statements for the year 2022 of Romanian banks reveals the significantly different impact of this tax on credit institutions, depending on their size. Patria Bank divided the credit institutions in our country into three categories: large banks (with a market share of over 5%), medium banks (with a market share between 1% and 5%) and small banks (with a market share of below 1%).

"If on average for large banks the CA Tax implies a 6.8% reduction in annual net profit, for medium banks this loss increases more than 2.5 times, reaching 17%, and for small banks the CA Tax brings an average profit reduction of 44%, almost halving their profit", says Daniela Iliescu, member of the Board of Directors of Patria Bank, in an article published in the latest newsletter of the Association of Financial-Banking Analysts from Romania (AAFBR).

According to Patria's administrator, this additional fee deepens the differences in the performance of medium and small banks, to their disadvantage and in favor of large banks, further creating the premises for a negative impact on their appetite to develop lending activity. Banca Transilvania and BRD have market shares of over 5%, thus entering the category of large banks, in the classification of Patria Bank.

• Tradeville estimates the highest dividends for the two largest banks in the BET index

The brokers estimate that the two credit institutions will pay dividends this year, the average yields being around 5.9% in the case of Transilvania Bank and 7.3% for BRD, compared to the share price at the end of last week. The credit institution from Cluj has a policy by which it offers shareholders a combination of dividends and free shares.

According to the Prime Transaction and Goldring reports, the estimates are for the optimistic scenarios, which imply that the regulatory authorities no longer impose restrictions on the allocation of dividends, as has happened in recent years, due to the pandemic and inflation.

Tradeville estimates the highest dividends at 1.6711 lei for TLV and 1.6226 for BRD, with net yields of 6.6% and 8.8%, compared to last week's closing share price.

In the first nine months of last year, Banca Transilvania obtained operating revenues of 5.6 billion lei, 27% more than in the same period last year, and a net profit of 2.3 billion lei, up 36%. In the case of BRD, operating revenues amounted to 2.8 billion lei, 11.4% more than in the first nine months of last year, and net profit was 1.2 billion lei, up 20.8% compared to the January-September 2022 interval.