Russian banking system 2015: between sanctions and prospects
by Armen Danielyan, Delovoy Profil
Today Russian economy shows all signs of slowdown and upcoming crisis with lowering oil prices and foreign economic sanctions tied to geopolitical tensions as main factors lying at the root of it. Introduction of the US and EU sanctions against major Russian banks and oil companies banned middle- and long-term debt financing for the periods of more than 30 days. Another pressure point was major rating agencies’ lowering foreign currency sovereign credit ratings on Russia and its regions to speculative grades with a negative outlook. The direct effect of all these measures was the reduced supply and the increased cost of foreign currency borrowing in the money market.
Still the key questions are (1) to what extent the imposed sanctions influence the current state of Russian banking system and (2) what are the banking system prospects assuming the retention of sanctions through 2015.
(1) To what extent the imposed sanctions influence the current state of Russian banking system
Analysis of the performance of banks included in the original sanctions list shows that the sanctions had no material adverse effect of the operations of those banks till September 2014. According to the Bank of Russia statistics their total assets rose by 18.0% during the period. The banks significantly reduced the volume of transactions with non-residents and focused on the Russian market. Transactions with residents expanded by 35.0%. A negative consequence of the imposed sanctions was a decrease in the volume of individual deposits by approximately 23% according to the Bank of Russia, but in general the funds raised from residents till September 2014 increased by more than 20%.
The effect of the second wave of sanctions was also not as adverse as it could have been. The banks covered by sanctions have substantial capital: according to the Bank of Russia data the capital adequacy ratio ranges from 10.5% to 15.7%. The banking system is stable now, although moderate negative trends resulting primarily from recent structural slowdown in the Russian economy are observed.
At the end of 2014 lack of liquidity in Russian banking sector was caused mainly by ruble devaluation processes as well as individual intentions to run on a bank. In order to stabilize Russian rouble exchange rate the Bank of Russia increased the key interest rate from 10.5% to 17% but it was not enough to keep rouble from devaluation and the lack of liquidity problems deepened. In 2015, in spite of the key interest rate decrease to 15%, most small and middle-sized banks suffer from liquidity challenges. Even widening the list of banks able to take part in the Bank of Russia credit auctions was not enough to ease tensions.
At the same time the imposed sanctions affect only current liabilities of banks and those banks and financial organizations that used external borrowing to cover cash deficiency will continue using this opportunity in future.
In order to solve current liquidity problem the Bank of Russia plans further key interest rate decrease, widening credit auctions and – if needed – lowering reserve ratio.
Rouble deposits of banks lost their value because of Russian rouble devaluation and inflation rate appreciation. Today banks act decisively to increase corporate loan interest rates aiming to reduce risks of assets devaluation. At the same time these measures cut demand for corporate loans.
Quite a different situation can be observed in retail lending. According to the Russian legislation banks and financial institutions are not in the position of changing retail interest rates unilaterally otherwise stated in loan agreement. So the bank activity in retail lending remains under pressure. As for the borrowers’ debt burden according to polling data provided by the Bank of Russia the debt burden of borrowers remained largely unchanged, and the weighted average value of the debt-to-income ratio (calculated as the ratio of borrowers’ total payments under a loan agreement for the past quarter to their total income) stays at 33%.
Despite the constant level of the borrowers’ debt burden, according to Unified Credit Bureau data an upward trend in the number of loans per borrower is observed. The situation may be challenging for the banks specializing in retail lending, especially for those with foreign currency denominated loans, as steep Russian rouble devaluation questions the timely repayment of debt.
Net income depreciation and demand for capital
Continuing Russian rouble weakness and exchange rate volatility also dented the confidence in the local currency and put a drain on deposits. To retain depositors, banks sharply increased interest rates on deposits which also led to a rise in their liability costs and further squeezed interest rate margins increasing balance sheet problems.
According to the official statistics net income in the banking sector in 2014 decreased 41% owing to earnings from operations dilution and charge for impairment provision increase. Losses on stock markets along with inability to attract foreign capital and increasing funding costs aggravated a problem of demand for capital.
These developments prompted the authorities to implement coordinated stabilization measures. The Bank of Russia introduced new 28 and 365 days foreign currency loans to banks with a capital over RUB 100 billion (for which 11 largest banks qualify). The government approved a RUB 1 trillion recapitalization plan for banks financed with domestic sovereign bonds (OFZ). The State Duma approved a bill allowing the government to place up to 10% of the National Wealth Fund on subordinate deposits and subordinate bonds of Russian banks.
Banks will get RUB 550 billion from the National Wealth Fund including RUB 300 billion for Vnesheconombank, the state development bank, to increase «lending to organizations of the real sector». The authorities also prompted that more measures to avoid banking system crisis might be introduced.
Wave of bankruptcies
Responding to current tough conditions some experts await a wave of bankruptcies in 2015 with as many as 20% Russian banks at risk of folding. The Center for Macroeconomic Analysis and Short-Term Forecasting estimates that 200 banks face collapse this year and 160 – next year on the back of combination of bad loans and Russian rouble devaluation. Others are predicted to face a steep challenge to stay afloat.
These forecasts seem to be exaggerated. The resolution of Russian banking system is a prerequisite for its globalization and, according to the projections based on evaluation of already taken and planned stabilization measures the number of bankruptcies will not exceed its usual annual ratio: 20-30 banks with most weak financials.
Thus, current problems of Russian banking sector, not so much originating from the imposed sanctions, as dealing with structural slowdown in the Russian economy, are far from being critical or adverse.
(2) What are the banking system prospects assuming the retention of sanctions through 2015
Taking into account (but no fully based on) the imposed sanctions the main tendencies in Russian banking system through 2015 are supposed to be as follows:
- Net loss: Russian banks are expected to post net loss in 2015 of about RUB 500 billion.
- Key interest rate – 13%: The expected key interest rate level will remain at the level of 13% or higher throughout the 2015, substantially increasing the overnight REPO price.
- Authorities support: Russian authorities will continue implementing coordinated stabilization measures, including capital injection which may prevent Russian rouble from strengthening.
- Lending revival: a RUB 1 trillion recapitalization plan for banks financed with domestic sovereign bonds (OFZ) is set to revive lending and increase loan portfolio by about RUB 800 billion annually.
- Consolidation: Increasing dominance of state-related banks and progressive concentration of the market are likely to continue. New entrants will be limited due to economic situation and 20-30 banks with weakest financials will go bankrupt.
Eastern money market in focus: Over the long Russia is predicted to seek less dependence on Western capital markets in favour of Asia and BRIC countries.
Cooling economic growth, provoked by lowering oil prices and foreign economic sanctions, triggers certain challenges for Russian banking system in 2015. At the same time processes, that take place in Russian banking at the moment, will make it much more resistant to external shocks in the long run.
Delovoy Profil, Moscow, Russia
published: March 2015