The lack of access to finance stems an opportunity for Deutsche bank to take hold of. They can give out collateralized loans for businesses with good prospects or even invest private equity style on small and medium enterprises with a large potential for growth and returns. This move is backed up by our study that the Romanian banking sector is well capitalized and liquid, and non performing loans are on a decreasing trend.
The threat in this business model is that deleveraging pressures Romania and impaired loans weigh on bank’s profitability. Also regarding investments, Deutsche bank can undertake some investment initiatives and reap great returns because of the growing stage of the Romanian market and low investment being undertaking presently. The threat is that unstable tax policies constrain investments and exports, and banks are vulnerable to adverse developments in the euro area and particularly to home grown initiatives which may have an adverse impact on the sector.
In a study by the European commission on the population of Romania, it was noticed that although unemployment is low and decreasing, which is mostly due to persistent low activity rates, access to the labor market by vulnerable groups remain difficult and the quality and access to early childhood education and care, vocational training, apprenticeships, higher education and lifelong learning are low. Romania has the highest population of people working in agriculture within the European union states. With substantial employment in subsistence and semi-subsistence farms. Although declining, a large proportion of the population is severely materially deprived.
This is a threat to Deutsche bank’s private and business client division which seeks to provide branch banking and financial services to private customers, self employed clients as well as small and medium sized businesses in Romania. This is because of the material deprivation and the poverty level persistent in the country. Citizens are mostly employed in subsistence farming and agriculture, and with the little they earn, they would be unwilling to save it in the bank.
Romania’s financial sector
Romania’s financial sector is bank based and 80% of the banks are foreign owned. Provisioning for impaired assets is weighing on bank’s profitability. Against the backdrop of increasing loan – loss provisions and high funding costs, banking sector profitability come under pressure over the last years. After three years of losses in 2013, the banking sector recorded a modest aggregate profit.
Due to the policy of “clean up of banks balance sheets under the non performing loans” resolution plan of the national bank of Romania, banks profitability suffered and the sector recorded an estimated loss of Ron 4.3 billion at the end of 2014.
There came positive news that even though majority of the populace are into agriculture, there was an expansion of the local deposit base due to precautionary savings by both households and companies. But the Romanian banking system experienced a further contraction in the loan stock and a decline in parent bank funding.
The current vulnerability in the Romanian banking sector include:
- Still significant level of non-performing loans
- Ongoing but orderly deleveraging
- Substantial share of foreign-currency-denominated loans
- Legislative initiatives which may have an adverse impact on financial sector stability
- Geopolitical risk potentially impacting the parent bank of the Romanian affiliates.
In line with this research, I propose that the Romanian market does not fit completely into Deutsche bank’s strategic goals. The Romanian market is full of opportunities for investments and may other opportunities for their various divisions but I believe that the costs or risk outweigh the benefits they stand to gain.
There are unstable policies by the government of Romania, and profitability for the banking sector is low and also 80% of the banks are foreign owned. That is increased competition for Deutsche bank with international banks such as Citibank Europe, Bank of Cyprus, the royal bank of Scotland Blom bank France , etc which have the same if not better financial capacity.
As a result it is advised that Deutsche bank does not enter into the market because entering would incur significant costs in setting up and running the business. Due to their underlying strategy of rationalizing their geographic footprint by exiting or reducing their presence in a number of countries they think are not profitable, I believe that entering the Romanian market would not be the best option for them.
Recommended Readings
Marc Cosentino., Case In Point: Complete Case Interview Preparation, 8th Edition
Micheal Shearn., The Investment Checklist: The Art of In-Depth Research
