Tuesday, March 17, 2015

17/3/2015: Russian Banks Latest Stats: January-February 2015

Some interesting banking sector stats were reported this week by the deputy head of the Central Bank of Russia, Mikhail Suhov during the Russian Economic Forum in Geneva.  Here is a compendium of the latest banking stats reported by the CBR and in the Russian media.

Non-Financial Sector Credit

Russian retail banking lending to households fell 1.5% in February, down RUB165.4 billion with CBR expecting the trend to continue, stabilising at around 4-5% decline in household credit for the full year 2015. As of March 1, household credit outstanding stood at RUB11,060 billion.

According to Sukhov, household credit arrears rose 0.8 percentage points in the first two months of 2015 from 5.8% at the start of January to 6.6% by the end of February.

In January-February 2015, household credit declined by 2.1%, down RUB243.8 billion with RUB-denominated credit standing at RUB10,756 trillion against forex denominated credit of RUB304.4 billion.

Non-financial corporate sector credit fell 4.7% in dollar terms and 1.1% in Ruble terms. The figures do not reflect the latest CBR that lowered benchmark rate to 14% on March 13 from 15% previous. The CBR expects effects of the latest rate reduction to show in the aggregate data around May 2015.

Overall lending to the real sectors (excluding Government and financial sectors) fell 1.5% in February. Much of credit contraction is concentrated in a small number of banks, acceding to CBR deputy head.

Based on data from Finmarket, total real sector arrears stood at RUB730.4 billion, up RUB24.7 billion or 3.5% m/m. In January-February 2015, arrears rose RUB64.2 billion or +9.6%. As percentage of total banking assets, as of March 1st, real sector credit arrears were 6.6%, up 0.3 percentage points in February compared to January.

Sukhov also noted that current rate of increases in non-financial sector credit arrears is likely to continue, resulting in total arrears stabilising at around 7.5% for outstanding credit and 7% taking into the account new credit. CBR estimated 2015 total arrears increases of roughly RUB900 billion.

Bail-in Mechanism

Meanwhile, under the Financial Stability Board arrangement (FSB, set up in 2009 by the G20 group), the CBR is currently looking into establishing formal bail-in rules for the Russian banking sector and the system of bridging banks (licensed entities that act as bridging institutions temporarily holding banking assets in the case of bank shutdown). Bridge banks are supposed to take over assets of insolvent mankind institutions and hold these assets during the period of liquidation, allowing to extend the process of assets disposals to minimise the risk of fire sales. The bail-in mechanism proposed by the FSB includes automatic conversion of unsecured creditors (into equity and subordinated loans) to allow direct bail-in. However, the CBR has already stated that the automatic bail-in mechanism is not necessary for the Russian banking system at this point in time.

Forex Mortgages

Another interesting point raised by Sukhov in Geneva relates to the much-discussed in the recent past risk of forex-denominated mortgages held by the Russian banks. As a reminder, in December 2014, the CBR started a consultation with the banks on creating a mechanism for converting existent forex-denominated mortgages into RUB-denominated loans based on the exchange rate as of October 1, 2014. At the time, some analysts predicted that such a move would trigger significant write downs of banking sector assets. According to Sukhov, CBR currently sees no risk to the banking sector from forex mortgages conversions, with the number of banks exposed to such a risk being very small. The vast majority of such mortgages were issued prior to the Global Financial Crisis of 2008 with issuance of these loans slowing down very significantly after 2008.

Sector Consolidations

In 2014, CBR forced absorption of 7 Russian banks into bigger entities and the CBR is now expecting 2015 to be a much more active year for banking sector consolidation. Meanwhile, average T1 capital ratios for Russian banks remained above 12% in the first two months of 2015. As the result of organic changes in balance sheets, as opposed to sector players' consolidations via mergers and shutdowns, market share of 5 largest banks in Russia rose to around 52% in 2014 from roughly 49.5% in 2013. In 2015, the CBR expects market share concentration to increase to above 55%, potentially reaching 60% by the end of 2016.

Banks Profitability

This is consistent with the CBR view on the overall profitability across the banking sector. In February, banks' losses rose to RUB36 billion from RUB24 billion in January. However, Sukhov noted that the CBR does not expect banking sector losses to rise significantly over 2015, noting that some estimates of up to RUB1 trillion losses for 2015 across the Russian banking sector carry "very low probability" of materialising. Instead, Sukhov expects more polarisation across the banking sector, with greater concentration of losses. Sukhov's estimates for losses across the system of "one-two hundred billion rubles" is roughly half the estimate produced by CBR back in February (CBR forecast is for RUB300-400 billion in cumulative losses for 2015, against cumulative profit of RUB589 billion in 2014 and RUB990 billion profits recorded in 2013).

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