Russian banks have turned a corner and are starting to look healthy again, after being among the hardest hit by the events of the last 12 months. Performance now far outstrips what is seen in neighbouring countries in Eastern Europe and the CIS, with strong government intervention credited with the strong turnaround. The traditional nature of their businesses, relative to their Western rivals, simplified the rescue process. William Rhode reports.
Less reliance on foreign funding and strong support from the central government is helping Russian banks emerge from the global credit crisis quicker than their neighbours in Eastern Europe or the Commonwealth of Independent States (CIS).
“We have nearly reached the bottom in Russia,” said Dmitry Dmitriev, head of research covering financial institutions at VTB Capital in Moscow. “There will be two-three more bad quarters in terms of banks' results and then, after that, the recovery will be in full effect.”
Others are more cautious. “It is too early to talk about a recovery in the Russian banking system, as a significant impairment of assets continues to negatively affect the capital bases of Russian banks,” warned Semyon Isakov, an analyst at credit rating agency Moody’s in Moscow. “Nevertheless, short-term liquidity concerns have eased thanks to strong government support and a relatively low reliance on the wholesale foreign funding.”
Things have changed markedly in the last six months. “We have witnessed a shift from liquidity issues, to asset quality and adequacy of capital base,” said Mickael Gibault, managing director in investment banking at Troika Dialog in Moscow. The loss of confidence in the interbank market in September 2008 hit Russian banks hard, but intervention by the state has been instrumental in turning things around, he said.
Russian banks will find it easier to stage a comeback than their Western European counterparts, due to the relatively straightforward nature of their businesses, said Dmitriev. “Russian banks will stage a quicker comeback than many Western banks because their balance sheets are not so complicated by leveraged debt structures and derivatives,” he explained.
With a number of loans falling due in the second half of this year, there have been concerns that a second wave of the financial crisis will hit Russian banks this autumn. Yet this fear is now receding, amid a growing consensus that Russian companies will be better placed to service their debts as aggressive restructuring plans and falling interest rates gain traction.
A breadth of opinions remain regarding how bad things could get. Gibault predicted it could be 8%-10% by year-end 2009. Moody’s said the figure could increase to 20%, from 11% of total loans at the beginning of Q2. In a June report titled Russian Banks: Major Challenges Amid The Economic Downturn, it calculated that an additional 10%-15% of loans have been restructured to avoid payment default.
Standard and Poor's has said problem loans could soar to 35%-50% of total lending in Russia, Ukraine and Kazakhstan – though it predicted actual loan losses would not be more than half that level in Russia. Meanwhile, the central bank has estimated Russian banks have restructured 20% of their bad loans.
Analysts said that strong central government support is helping a recovery. A state guarantee scheme is being launched in the third quarter that will see Rbs460bn (US$14.38bn) injected into banks to sure up their capital adequacy ratios, helping them withstand rising bad loans and to kick start lending to the real economy. The programme, which will be implemented principally via the country’s state banks, will see Russia spend Rbs150bn in 2009 and Rbs310bn in 2010 on recapitalising bank balance sheets. The funds will be raised by an OFZ treasury bill sell off.
Russia's central bank chairman, Sergei Ignatyev, has said the chances of the country facing a second wave of banking crisis are “negligible”, but he has nevertheless made bad loans and stagnation in the credit markets his main priority.
“We now believe that the catastrophic scenario has been avoided and that the second wave of the crisis will be smoothened,” said VTB's Dmitriev. “While it is certainly too early to claim that banks are out of the woods, they are definitely doing their homework with both operational changes and close work with clients to collect debt and/or work on restructuring.”
For the future, Russian banks are seen focussing on corporate sector lending, which is both shored up by the central government and also offers high margins with short-term risk exposure.
“Russian banks have the opportunity to make profits in corporate lending,” said Dmitriev. “They will cut down on mortgage lending, since unemployment is set to rise and there is still major asset deterioration in Russia in terms of the housing market.”
“Inflation is falling, bringing down interest rates,” said Gibault. “The economy appears to have bottomed and with money supply and deposit growth showing signs of revival, banks are likely to start going back into crediting again, although in the short term, State banks will continue to be the key drivers of lending activity.”
The state run corporate market comes with an explicit government guarantee. In June, Russian Prime Minister Vladimir Putin told state banks to boost lending by more than US$15bn over the next three months to help the economy. And in July he instructed state bank VEB to lend Rbs75bn to Gazprombank, the banking arm of Russia's gas export monopoly Gazprom.