The spread between interests on loans and interests on deposits in RON has halved on the retail segment over the last three years, from an average of almost 15 percentage points in 2004 to less than seven in January 2007, according to the data published by the NBR.
At the same time, the banks were careful enough to maintain a constant ratio from simple to double between the average interest rate charged on credits and the rate paid to customers for their deposits.
The most spectacular decline in interests on RON loans occurred in 2005 compared with 2004. The spectacular adjustment by 7 percentage points in one year was followed by a slight correction in 2006, when the average interest on the new loans in RON was somewhat higher than the average in 2005. For instance, even in January 2007, the new loans in RON were slightly more expensive than in August 2006.
The reduction of the spreads was even more serious in the case of corporate clients, from an average of 11 percentage points in 2004 to 4.6 points in January 2007. Competition became the main factor to put pressure on the interests on loans, which made banks go as far as to accuse each other of operating dumping prices that did not factor in the real costs and the risks entailed. With or without dumping, the market stood only to gain, although the image of the nominal interest rate can be misleading, as long as the banks have specialised in finding ways to disguise the other components of the total cost of a loan, like fees and insurance.
The reduction of the interests in RON led to a fast-paced growth in the volume of loans granted in domestic currency, yet the financial results posted by several banks in 2006 show the effect was not strong enough to offset the cost of compressing interest spreads, which is the traditional stream of income for banks.
BCR, the biggest bank on the market, saw its net profit increase by less than 5%, taking into consideration the incurred costs after its integration into the Erste group. The net profit of Raiffeisen, the third largest bank on the market, almost stagnated having risen by a mere 1.1%, again due to the spread compression and to costs incurred as a result of restructuring and network expansion.
As merely increasing the volume of loans was not enough to offset the losses generated by the spread reduction, the banks were quick to veer to boosting their revenues from fees, and went as far as to introduce such "taxes" where portfolios or the quality of services do not justify them yet. In BRD-SocGen's case, the revenues from fees increased twice as fast as net revenues from interests last year, and came to account for 36% of the total net banking revenue.
As far as the euro spreads are concerned, the nominal decline was not as spectacular as with RON, though the spread fell even further, from 7.8 percentage points in 2004 to an average of 5.2 in January 2007.
Despite an upward trend on the part of the euro benchmark interest rate, competition managed to push the rates on credits down during the second half of last year, while interests on deposits followed a slightly downward trend, eroding margins even further.
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