This report covers the market developments and statistics data released up to June 1.

Romania’s banking system reported in Q1 an aggregated net profit of €187mn -- the largest quarterly profit in more than six years. But this might be misleading, since the NPL ratio was still 13.85% at the end of March and only one third of the whole bundle of bad loans was removed from banks’ balance sheet in the past year. On the upside, the banks took firm steps to clean their balance sheet – strongly encouraged by the central bank. The cost is that the banks incurred losses of more than €1bn in 2014 – double the losses in 2013. Losses reported in 2014 measured 1.34% of the banking system’s average assets.

Lending has moderately and selectively increased – particularly the local currency mortgage loans. Such new mortgage loans denominated in local currency expanded by 45% y/y in January-April this year. New bank loans issued by Romanian banks to households and non-financial corporations increased by 5.3% y/y to RON15.4bn (€3.5bn) in January-April. The volume of new loans denominated in local currency increased by 13% y/y, while new loans denominated in euros contracted by 12% y/y (in euros).

Romania’s government endorsed the revised Fiscal Code, which includes significant tax rate cuts, in March. The VAT rate was cut in June to 9% for food and related services. Romania’s independent Fiscal Council has endorsed a government bill cutting the VAT rate on food, but warned that the move is risky. The European Commission has on May 13 recommended that Romania take all necessary measures to complete the 2013-2015 BoP programme and implement the comprehensive tax compliance strategy in order to return to the medium term fiscal deficit objective in 2016. The EC’s forecast that Romania’s headline deficit will deteriorate sharply to 3.5% of GDP in 2016 is based on the assumption that Romania’s draft fiscal code, which was adopted by the government in March.

Key points:
• Banking system reports robust €187mn profits in Q1, after massive losses in 2014; however, full-year results might remain in the negative area considering the still large volume of NPL
• New bank loans issued in Romania up 5.7% y/y, to €3.45bn in Jan-Apr
• Bank loans in Romania 3.8% down y/y at end-April, currency substitution loses ground
• Bad loans remain constant in Romania during Q1; The NPL ratio decreased by one third on year, to 13.85% at the end of March from 20.39% one year earlier
• Romania’s largest bank BCR reports Q1 profits, NPLs still a problem; the bank plans to sell €2bn NPL bundle within weeks – sources
• Romania’s government endorses new Fiscal Code, cuts foodstuff VAT rate in June
• EC asks Romania to take measures against expected fiscal slippage
• Fiscal Council endorses VAT cut on food, but says is risky
• Romania’s government posts 0.7% of GDP surplus in Q1
• Romania’s EU funds absorption rate up only 1.1pp up to 54.22% at end-April
• Public debt up 6.9% y/y at €59.75bn, or 39.8% of GDP at end-Feb
• Romania posts €406mn, 0.3% of GDP C/A surplus in Q1