Domestic interest rate margins will narrow further due to the interest rate convergence towards European levels, say EFG Eurobank analysts.

The spread of average interest rates, applied by credit institutions for RON-denominated transactions, declined by more than three percentage points to 8.3% last year, under the effect of the tightening competition among players in the domestic banking sector.

This was also aided by the constant improvement in the credit quality of the loan portfolios, according to a survey by EFG Eurobank, the main shareholder in Bancpost. Therefore, the Greek analysts see the shrinking weight of loans classified as substandard, doubtful and loss from 6.1% in December 2005 to 5.5% at the end of last year as a "positive development".

These results occurred amid an accelerated lending growth (nongovernmental lending climbed by almost 47% last year), thus proving the central bank's concerns were not solidly founded.

However, the prospects of the RON interest rate margins narrowing pace maintaining are quite limited. In their latest survey on Central and East-European emerging economies, Bank Austria analysts consider NBR is likely to maintain the interest rate at 8% per annum as at least the end of 2007. Under the circumstances, there would not be much room for interest rates to decrease, either.

Domestic bankers are also reluctant concerning the further decline of interest rate margins. On the one hand, in the segment of lending for corporate clients, the tight competition has forced banks to cut down interest rates to levels similar to foreign markets in recent years. In the retail segment, interest rate margins have also thinned out, owing to banks' desire to gain ground in terms of lending, and more recently to the need to raise more capital from customers.

Under the circumstances, domestic bankers consider s