Competition slows down banking system profit

The annual upward pace of banking system assets (28 percent in 2006), is lower than in the previous years (35 and 31 percent in 2004 and 2005, respectively). BNR officials say the main reasons are increased competition and enlargement of the banking network.

"In the short-run, we forecast a slight slowdown in income rates in the banking sector, due to several pressure factors," a National Bank study shows. Factors highlighted by BNR are higher competition, a drop in interest margins, more provisions needed due to sustained lending, ongoing investments in territorial networks, and costs related to the application of the Basel II Agreement.

By the end of 2006, profits in the banking system amounted to RON 2.19 billion (€0.69 billion), compared to RON 1.95 billion (€0.61 billion) year-on-year. Commercial bank provisions rose to almost RON 2 billion (€630.44 million), double that of H1 2006, and 52 percent higher than the balance posted in December 2006.

Net assets totaled RON 172.83 billion in December 2006, of which almost 60 percent were controlled by the top five commercial banks.

Liquid assets dropped to 52 percent by the end of 2006, from 58 percent year-on-year, BNR indicated.

This suggests that lower asset profitability is caused by a higher degree of banking intermediation. As far as income components are concerned, the ratio of operational revenues is increasing, and within these, the ratio of net revenues from operations not producing interest rates is higher, the study shows.