ERNST & YOUNG SRL

 | 

ALEXANDRU MIHAI POP

  |  11.11.2013

A new stability

In the financial global markets, stability is the most praised quality of the system and, from the smallest player, to the Central Banks, everyone is taking stability as an underlying assumption for the upcoming evolution.

ERNST & YOUNG SRL

ALEXANDRU  MIHAI POP

ALEXANDRU MIHAI POP

MANAGER - TRANSACTION ADVISORY at ERNST & YOUNG SRL

The financial markets have come a long way in providing stability in the past two decades, and a salutary effort was that of the
National Bank of Romania’s Governor of the entire period, Mugur Isarescu.

 

But stability was obtained at a price, and that price means that the necessary adaptation of the system to the post-Lehman world has not entirely been paid. For Romania, looking forward to the next couple of years, there are two current trends which we see as gaining momentum. These two are expected to be or become the focus of all the players in the market, from the top large players up to niche players.

 

Firstly, final decisive efforts in the workout department to deal with the out-of-proportion size of the non-performing loans portfolios. Within this subject it has to be included deeper credit haircuts in the corporate sector, together with outplacing of  retail portfolios, all having effects on its institution’s equity and P&L. At the same time, a restructuring of the risk profiling and overall procedures will be completed, but results of the reshuffling are already obvious in the prudency to accept clients of the current period.

 

As a direct result of this trend, a number of transactions are expected in the market. The transactional focus will be on retail portfolios, with corporate portfolios having less appetite. In order to have the portfolios tradable, a number of steps will have to be complete, including ring-fencing the clean portfolio from the effects of contagion from the non-performing assets. Secondly, a change in the strategic focus on a limited number of markets is foreseen, where the players can be considered market or niche influencers. As a direct result, consolidation is expected to be continued, with banks and insurance companies as major exponents, but also asset managers, brokerages and other financial services companies.
Results of such strategy implementation can be clearly seen in the market, with both large banks and insurance companies, showing M&A activity. Other effects could include closing of peripheral businesses, amalgamation of local businesses, or even closing of the local branches.

 

In retrospective, it may not sound as steps to achieve stability. Nevertheless, if all these steps are correctly administered at macroeconomic level, they are bound to offer the perspective of a mature system, able to manage a downward cycle, and with better equipped competitors, hence “a new” stability. The largest financial markets, banking and insurance, are largely  populated with international players. Given the nature of the changes due to take place, the first one is to be driven by the local decision makers, with local influencers, whereas the second is set out through the strategic vision, heavily influenced from the headquarters, with strategic flavor of large economies, uncorrelated to Romania.

 

The above separation of chains of interest between local and international hierarchies might bring an extra level of discomfort for the market regulators, having to manage international interests with local tools. As a result, the involvement of the regulators will become tighter in the coming period, both as promoters of change, where such is considered desirable, but also as a barrier of change.

 

For the period covering the medium-term following the next two years, the trend of consolidating the markets is expected to continue. In the banking market is expected that the number of retail networks will be reduced, but leaving the market with a better coverage of the remaining networks. In the insurance market, a double consolidation is expected, a new wave of regulation pushing players in the non-life insurance to reprioritize efforts from market share growth to obtaining margins and, in the insurance brokerage, larger players taking over significant market share in detriment of the independent players, but overall growing the market.

 

On a final note, in what concerns the Bucharest Stock Exchange as a financing market for the local economy, although positive changes are expected to occur due to new management, the overall profile might not change significantly. Therefore it will continue to be regarded as a low priority option for raising equity or securities.

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