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August 22, 2008updated 04 Apr 2017 1:14pm

The rise of the European housing bank

Erstes Romanian subsidiary BCR has joined the growing number of banks in Central and Eastern Europe offering bauspar home loan schemes, savings programmes which give access to a discounted loan William Cain examines a system worth 200 billion in Germany alone with current NPLs of just 0.03 percent.BCR, Erstes Romanian subsidiary, has launched a housing bank which helps customers benefit from state bonuses on savings and beneficial loan interest rates The housing bank, launched locally as BCR Banca pentru Locuinte (BCR BpL), is based on a similar model to German bauspar products, in which customers are contracted to make savings for 18-24 months to qualify for a low interest loan

By William Cain

Erste’s Romanian subsidiary BCR has joined the growing number of banks in Central and Eastern Europe offering bauspar home loan schemes, savings programmes which give access to a discounted loan. William Cain examines a system worth €200 billion in Germany alone with current NPLs of just 0.03 percent.

BCR, Erste’s Romanian subsidiary, has launched a housing bank which helps customers benefit from state bonuses on savings and beneficial loan interest rates. The housing bank, launched locally as BCR Banca pentru Locuinte (BCR BpL), is based on a similar model to German bauspar products, in which customers are contracted to make savings for 18-24 months to qualify for a low interest loan. Bauspar, which translates literally from German as ‘build-save’, is a concept used widely in Germany and Austria as part of their building society sectors and is expanding across Central and Eastern Europe (CEE) markets as foreign banks like Erste, Raiffeisen International and UniCredit move in.

BCR has been signing up to 1,000 contracts per day in Romania since its launch, according to sources in Romania, suggesting it would easily beat its conservative target of 50,000 contracts this year. A BCR spokesman said the results so far had been encouraging.

The bauspar system is a closed system which does not rely on capital markets – loans are funded entirely from customer deposits. But it is becoming increasingly popular among banks in CEE both because of its impressive record on non-performing loans – the average is just 0.03 percent – and government incentives to savers.

The main bauspar countries are Germany, Austria, Czech Republic, Slovakia, Hungary and Croatia. In Germany, the industry’s balance sheet volume is worth around €200 billion, while in Austria, outstanding loans total €40 billion.

While the technicalities of the product vary from country to country – particularly with regard to the level of government support – the basics remain the same. The bauspar system links the savings process to the granting of a loan. It is technically a contractual savings scheme, as consumers are contracted to save for a certain period before being granted the loan, to which they continue to make repayments. In most countries, the state offers a savings bonus in the initial phase to incentivise saving from low-income groups.

The system is effective because it builds a credit record before the loan is granted, proving the consumer is likely to be able to make repayments on the future loan. This is particularly appealing in emerging CEE, where customer data is less readily available.

In a typical contract, the consumer pays an up-front fee of 1 percent of the total contract sum. They pay monthly savings instalments of around 0.5 percent of the total contract sum for a minimum of 18 months or until 40 percent of the contract sum has been saved. This phase usually involves a government premium interest rate on savings.

In Romania, for example, Raiffeisen’s Banca pentru Locuinte, pays out 4 percent in interest, and the government tops it up to 5.7 percent, up to a total of €150 per year. After the loan is granted, the monthly redemption payment is usually around 0.6 percent per month of the total contract, with an average redemption period of 11 years. Raiffeisen offers 6 percent for its loans in Romania, with the government guarantee giving it a reasonable margin.

A government subsidy

While a government subsidy has helped bauspar products catch on in CEE, according to Andreas Zehnder, general manager of the European Federation of Building Societies (EFBS), the system works in Germany largely without the subsidy. Only individuals with salaries of less than €25,000 ($37,000) are able to qualify for the savings premium.Bauspaar contracts

But Bausparkassen, the German building societies which issue the product, make up around 35 percent of German mortgage lending. The loans are most often used as a complement to a mortgage product than as a home loan in their own right. Usually, bauspar funds make up 30 percent of the purchase price of a home, with the rest of the loan granted by a more traditional mortgage and deposit.

Zehnder said Russia and some South American countries were also looking at introducing the product.

“It is a more stable form of housing finance than the high loan-to-value mortgage lending we have seen in other countries,” Zehnder adds. “People have to show they have the ability to save money to qualify for the loan.”

Despite the popularity of bauspar in CEE, Adrian Coles, chief executive of the British Building Societies Association (BSA) said he thought it was unlikely the product was viable in countries with mature housing finance markets like the UK or the US.

He told RBI: “It is a fairly inflexible scheme as I understand it. Quite how you could offer a fixed rate on savings over a certain time period and grant a fixed rate loan at some point in the future… there would be all sorts of financial risks.”

BCR Banca pentru Locuinte’s product in Romania is structured to fund home improvements or other purchases rather than full home loans. A bank spokesperson said this was because the product is not as appealing to customers when real estate prices are rising rapidly, as they have been in Romania.

The bank said the product should work well in the market because it will compete with consumer loans which typically charge high rates of interest. Bauspar products can offer rates priced 600-800 basis points cheaper than other loans because of the way they build customer data before issuing the loan. Consumers also like the product because if they enter into a housing bank contract they qualify for a 15 percent state bonus on savings up to a maximum of €150.

Martin Skopek, retail vice-president at BCR, and chairman of BCR BpL, said: “BCR is bringing to the market a product that will help a broad base of customers. Romanians really need such products as those provided by BCR BpL. A recent survey shows 70 percent of the people want to improve their housing conditions.”

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