In their latest report, the analysts at Raiffeisen Capital & Investment (RCI) say that the narrowed margin in net interest and heightened salary spending are the main threats on Banca Transilvania's profitability.
The analysts at RCI, Raiffeisen's brokerage company, believe the multiples at which Banca Transilvania (TLV) shares are currently trading suggest a slightly over ambitious evaluation, given that the bank has so far sacrificed its profitability in order to boost market share. "Long term prospects are taken into consideration in the price, and investors are aware that a significant improvement in profitability is out of the question in the near future," RCI analysts say in a report.
The analysts also believe: "TLV's strategy has been the right one, but profitability should be more of a concern." According to them, this would be the right time for such an approach, amid the rising cost of salaries and rents. On the other hand, the rising costs for the overall system make any greenfield investment in the Romanian banking system more expensive, which heightens the attractiveness of Banca Transilvania as an acquisition target.
RCI analysts also believe that, on closer inspection, Banca Transilvania's results are less than impressive, whilst the main problem is the reduction of the net interest margin from 5.5% in 2005, to 4.1% in 2007, and to an estimated 3.8% in 2008. The decline in the difference between the credit interest rate and the deposit interest rate has been generated by tightened competition on the market and by the bank's strategy to boost its market share by offering smaller interest rates in the first part of the crediting period.
The pressure on the interest margin will continue amid still tight competition on crediting, as well as on deposits, an area where BT performed poorly in the first half of the year, with deposits going up 13% compared with credits, which grew by 21%. Banca Transilvania also lost in terms of competitiveness lately, amid an increase in RON interest rates, which implicitly triggered an increase in the interest rate difference between credits in RON and in euros, RCI analysts say. Banca Transilvania traditionally prefers credits in RON, due to the competitive disadvantage it has compared to banks that are held by foreign groups when it comes to lending in euros.
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