Romanian banks will be forced to apply resilience measures and fundamentally rethink their business model in order to address profitability issues and keep the return on equity (ROE) above the cost of equity, according to a study by McKinsey & Company.

Most of them still follow the universal bank model that currently generates an adequate ROE (return on equity) of over 12% (above the 9%-11% cost of equity band estimated by McKinsey) only for the top five banks in the Romanian banking system.

The consultancy company recommend banks prepare for a period that requires them to adopt measures focused on resilience (financial, digital & technological and organizational) in the short term. In the long term, they need to invest in strategic priorities that can really improve the business model and revitalize profitability.

In the event of a prolonged recession, the McKinsey report estimates that banks’ ROE could fall below 6%. Considering a global cost of equity between 9-11% (and even higher ranges for Romanian banks), this poses fundamental challenges to local players, it warns.

The impact could be significant for the Romanian banking sector, where ~65% of revenues are generated by interest, compared to the European average of ~55%, and the top ten players in the sector (out of 34) account for ~86% of market assets.

“The big question is what will happen to these local market leaders if faced with a slowdown in volume growth and higher costs. To pass any recession in a strong enough position, Romanian banks should play both defensive (applying resilient-focused measures) on the short-term, but also offensive (accelerating digital aspirations to enhance value proposition)”, states Ovidiu Tișler, Associate Partner at McKinsey & Company in Bucharest.

andrei@romania-insider.com

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