It has been three months since Russia was due to lift its ban on Moldovan wine

Overview of Banking Sector in Moldova

Date: 08.31.2007

Author: Iulian Bogasieru, BISNIS Representative, U.S. Embassy Chisinau, Moldova

Introduction

This market update provides information on developments in Moldova’s growing banking sector, which remains the most developed part of the country’s financial system. An economic growth spurred by increase in consumer spending, proximity to the European Union and the network of free trade agreements within CIS and South Eastern Europe attracted several reputable banks to open offices in Moldova in 2006. Unless otherwise mentioned, this report does not cover the breakaway region of Transnistria.

Overview

Moldova’s banking sector continues to develop rapidly, experiencing sound growth rates since the infamous 1998 Russian ruble crisis. In 2006 alone, the banking sector grew 27%. Preliminary statistics show that the trend continues in 2007. Banks have been increasing their role in economic development by providing more loans and diversifying their products. They have been getting more involved in providing consumer credits and financing home purchases. Ever-growing remittances from Moldovans working abroad have contributed to boosting saving deposits in banks. Consumer confidence in placing money in the banking sector has been largely restored, yet seldom stretches beyond a one-year timeframe. With increased demand for credit money, this puts a significant constraint on availability of long-term loans, which have been sourced primarily by international financial institutions. Banks still need to learn how to manage available short-term liquidities to provide more long-term loans. At the same time, banks prefer to extend short-term loans that earn higher profits than if they lent long-term. High interest rates ranging from 15% to 24% on loans issued in national currency, a deterrent for many a Moldovan business, still, have not put off private individuals who are borrowing money for acquisitions ranging from home appliances to apartments. This has left the legal framework overtaken by market developments. There is not yet a law on mortgages even though a number of banks and financing companies have been lending money for the growing residential construction sector. Credit history bureaus are all but lacking. Hopes have been pinned on the entrance of two western banks in 2006 to bring in not just capital, but also a transfer of skills and technology and lower interest rates.

The Sector and the Banks

Moldova’s banking system was set up in two tiers in 1991 around the time of the breakup of the USSR and currently comprises the central bank and 15 commercial banks. The total count of commercial banks is set to increase to 16, with the recent issuance of a preliminary banking license by the central bank to the international financing company ProCredit. The company has been successfully operating in Moldova for several years by niche specialization on small and medium-sized businesses.

Set up in 1991 under the law on the National Bank of Moldova, the central bank licenses, supervises and regulates the activity of financial institutions in Moldova. The National Bank is accountable to the Moldovan Parliament. An overhaul of the banking legislation was undertaken in 1995 in keeping with the structural reforms that extended the role and functions of the central bank and second-tier commercial banks. The National Bank has undertaken measures to uphold banking stability, scoring considerable progress in observing international standards and codes as set out by the Basel core principles for effective banking supervision. In 2006, the central bank’s priority objective was shifted from maintaining the stability of the national currency to ensuring price stability. The banking sector successfully withstood the shocks of the Russian wine and agricultural embargo in 2006 that triggered fears of an imminent collapse in the banking sector.

Under the current situation of high liquidity in the banking system, the National Bank has been discussing with the banking community the opportunity of transition to Basel II requirements. Some commercial banks have tightened their own regulations at their own initiative.

A deposit insurance fund was set up in 2004 to guarantee a minimum amount of individuals’ saving deposits in commercial banks.

The National Bank issues three types of licenses for commercial banks, with level A as the lowest and level C as the highest. To receive a level A license, a commercial bank has to have a minimum required capital of 50 million Moldovan lei (USD 4.1 million). It allows a bank to perform basic services such as accepting deposits and lending. A level B license doubles the minimum required capital and allows, besides borrowing and lending, foreign exchange operations. Level C triples the minimum required capital and allows banks to perform the whole range of banking and investing operations. In a bid to bring about consolidation in the banking sector, the National Bank has raised the minimum required capital over the years a few times.

The country’s foreign exchange reserves increased more than 5 times from $179.6 million in 1994 to $991.8 million on August 24, 2007. This covers more than three months of imports.

Private banks dominate the sector, with Banca de Economii (Savings Bank) being the last majority state-owned bank. As part of the IMF Memorandum, the Government announced a tender to value Banca de Economii and requested IFC’s assistance to prepare the bank for privatization.

Source: Moldovan National Bank www.bnm.md

$1= MDL 12.0789

Some 65 percent of the banking capital is accounted for by foreign investment. A portion of that ownership comes from less regulated off-shore centers such as Cyprus and Cayman Islands, with the final owners hard to identify. The year 2006 saw the arrival of reputable European banks in Moldova: Italy’s Gruppo Veneto Banca and France’s Societe Generale, both acquiring two mid-size banks. In the case of Mobiasbanca, the takeover by the French bank propelled the bank in the top 5 Moldovan banks. Romania’s Banca Comerciala Romana, a subsidiary of Austria’s Erste Bank, has a branch in Chisinau. Another Austrian bank, Raiffeisen Bank, set up a representative office with a view to establish a fully operational bank in the future. The appearance of foreign banks is expected to stir up competition and have a positive impact on interest rates and tenors of loans. This may further boost customer confidence and stability of the sector.

Foreign direct investments in Moldova’s banking sector rose three fold in 2006, to $40.6 million. According to the Organization for Attracting Investments and Promoting Moldovan Exports, investments in the banking sector averaged $11.9 million per year in 2002-2005.

In 2006, Veneto Banca made a large investment in Eximbank, Russia’s Petrocommerce invested in Unibank, Banca Comerciala Romana in its daughter bank in Chisinau and Societe Generale de France in Mobiasbanca.

The total number of bank institutions (branches and representative offices) reached 966 in 2006. While Moldova’s landscape does not pose challenges to banks opening offices in all major settlements, most bank offices are concentrated in Chisinau, which is not just the administrative capital, but also the business and economic center of the country.

As of June 31, 2006, the top 5 commercial banks in Moldova contributed 66.7% of the total banking assets worth MDL 26.84 billion (USD 2.26 billion), 70.0% of total deposits worth MDL 20.09 billion (USD 1.69 billion) and 65.9% of the total loans of MDL 16.38 billion (USD 1.38 billion). All five banks have level C licenses.

The current top five Moldovan banks are:

1) Moldova Agroindbank, the largest bank

2) Banca de Economii, majority state-owned savings bank

3) Victoriabank, first private commercial bank

4) Moldindconbank, private commercial bank

5) Mobiasbanca, owned by Societe Generale de France

thousand MDL

Banks, as of 06/31/2007	Total assets	Liquid assets	Total deposits	Total loans	Net profit, 2004	Net profit, 2005	Net profit, 2006	Net profit, 1Q2007
Moldova Agroindbank	5,508,921.8	1,261,503.0	4,320,342.0	3,916,209.0	122,602.7	138,133.4	184,213.2	66,273.7
Banca de Economii	4,107,675.2	2,463,332.5	3,457,597.6	1,540,767.7	88,709.6	70,015.7	81,978.0	38,071.6
Victoriabank	3,235,506.0	1,018,579.0	2,579,388.0	2,044,692.0	50,620.0	66,191.0	106,128.0	40,088.0
Moldindconbank	2,844,959.6	802,283.7	2,253,778.1	1,923,211.5	41,321.2	41,778.3	65,116.7	25,132.0
Mobiasbanca	2,198,040.5	785,226.4	1,465,817.0	1,378,233.3	32,007.9	45,047.5	60,377.0	23,237.1
Total	26,844,602.8	8,972,968.9	20,095,944.2	16,384,227.7	426,596.3	502,302.5	691,695.8	251,340.6

Source: Infotag

$1= MDL 12.0789

Commercial banks are universal, providing services to both corporate and retail clients and lacking any special industry focus. Universality helps balance risks in a small-size market like Moldova. Nevertheless, the year 2006 showed that banks continued to customize their products for targeted consumer segments, such as lending to individuals and small and medium-sized enterprises.

The Clients

Public use of commercial banks, spurred by growing remittances from Moldovans working abroad, has been on the rise. Total deposits grew 27.9% in 2006 to reach MDL 14.40 billion (USD 1.18 billion). Total deposits to GDP ratio climbed to 39.1% in 2006, which is quite a remarkable progress compared with a 15.5% ratio in 2000. The large volume of remittances contributes to a high rate of bank deposits in foreign currency, usually US dollars or Euros. Only a portion of those remittances end up in banks, with many Moldovans using the cash to cover their current needs. One of the challenges for the GoM and banking sector has been attracting the incoming money into the system and putting it to productive use. Local banks have been innovative by introducing schemes in which individuals were encouraged to open saving deposits to finance house purchases.

With the Russian ruble crisis happening less than a decade ago, Moldovans are divided about their confidence toward the national currency, despite higher interest on deposits in Moldovan lei (15.5% vs. 9% in foreign currency). Unstable exchange rates influenced by seasonal fluctuations in the flow of remittances are partly the reason. Almost half of all deposits in 2006 were in foreign currency, U.S. dollars and euros primarily. The recent appreciation of the national currency to the U.S. dollar has led to foreign currency yielding ground to leu-denominated deposits.

As attested by statistics, over 90% of bank deposits are opened for periods up to 12 months. This puts further pressure on banks in managing assets for long-term loans, the insufficiency of which has long been seen as an impediment to business development.

Moldovan banks have been diversifying their activity. Banks now issue and service debit cards and offer quick money transfers, on-line banking and housing finance. In 2006 alone the number of card users increased by 33.9% to 579,100. The number of ATMs and stores accepting payment cards has extended. The vast majority of Moldovans however see their cards’ sole utility in doing away with carrying banknotes in their wallets. Cash withdrawal is the number one transaction in which cards are used. Banks still have to do more in promoting the use of cards in point-of-sale transactions. While a few banks have been advertising credit cards, these are still marginally used. Personal checks are not used at all in Moldova.

Bank Loans

The cost of loans remains high for borrowers, with interest rates ranging from 15% to 24% in Moldovan lei and 8% to 18% in foreign currency. Always a source of complaints by businesses, the interest rate reflects the country’s high inflation and risk associated with financing a project. To help manage inflationary pressures, the National Bank Law was changed in 2006 to shift the primary policy objective of the central bank to price stability. Interest spreads have been dropping over the years to reach 6.25% for transactions in foreign currency and 5.89% in Moldovan lei.

As attested by the credits to GDP ratio that shot up from 14.3% in 2000 to 31.4% in 2006, banks have raised their importance in financing economic development. High interest aside, demand for loans is vibrant. Even though corporate lending dominates the banks’ loan portfolio, retail lending has been gaining market share with the consumption boom fueled by Moldovans buying more electric appliances and investing in new housing or home improvement.

The reluctance with which banks were making forays in retail lending four years ago turned into outright enthusiasm. Virtually all banks now have standardized retail lending products to tap into the most attractive growth segment. In 2006, consumer lending increased 61.8%, amounting to MDL 1.3 billion (USD 104.3 million).

Limited in their long-term financial resources, banks have been relying on credit lines from IFIs primarily and their retained profits to lend money for periods longer than one year. Borrowing from IFIs is however costly for banks due to Moldova’s perceived high risks. A better alternative for a couple of banks with foreign ownership has been the loans from their parent banks.

Mortgage Loans

Residential constructions have been booming, most spectacularly in the capital city of Chisinau. Banks started lending money for real estate purchases only a couple of years ago. With maturity periods ranging from 3 to 15 years, such loans are granted at 14%-16% interest in Moldovan lei and 12-14% interest in U.S. dollars and euros. If hidden fees are taken into account, interest rates may go as high as 21%. Even though there are no exact statistics about this market and laws on mortgage financing or credit bureaus are yet to be voted by Parliament, a review of bank figures and offers denotes market growth. This growing market and lack of sufficient experience by banks in dealing with mortgages is one of the focuses of the USAID-funded project Access to Credit Initiative.

Besides banks, a few financing companies, including Prime Capital owned by a U.S. investment fund, have also been active in financing house purchases.