28/7/2014: Western Banks Exposures to Russia

Last week I posted two charts detailing largest FDI exposures to Russia. Here is a chart, courtesy of Bloomberg, showing banks exposure to Russia by country:

21/5/2014: Few Slides Covering Russian Banks

Few slides from my bigger and newer Russia Deck - these covering Russian banks:

 In the above, note the nonperforming loans... Ugly does not even begin to describe Ukrainian situation. Russia's NPLs, however, are benign by comparative to rest of the FSU...

 Summary as is in both above and below...

15/1/2013: Some data and ideas on Russian economy

Russian economy quick summary of some latest stats and some disconnected ideas:

• Q3 2012 real GDP +2.9% y/y down from +4% in Q2 and +4.9% in Q1 2012.
• Expected Q4 2012 GDP growth +2.5%
• November 2012 GDP growth of +1.9% y/y inflation-adjusted
• Q1-Q3 2012 GDP +3.5% y/y
• Q3 2012 consumption +5.1% y/y down from +6.9% in Q2
• Expected full year consumption growth +4% y/y.
• Consumer confidence down to lowest in 18 months (since Q2 2011) in Q4 2012 at -8, Q3 2012 reading was -6.
• Industrial production is up +1.9% y/y in November, manufacturing activity +4%, manufacturing PMI at lowest level in 14 months in December at 50.0
• Services PMI down to 56.1, from 57.1 in November
• Composite PMI at 54.1 - a 4 months low.

Inflation is still a major headache for the Central Bank Rossii, with the level above the target, despite being close to historical lows:

• Headline inflation at 6.6% in December against 6.1% y/y in 2011, making 2012 the second best year in terms of inflation in over 20 years.
• Food inflation is 4.4% for 2012, tobacco up 21.2%. 6% crops failure due to drought in 2012 is taking the blame. Non-food inflation was 5.6% and services inflation at 5.4%.
• Meat and poultry led food inflation (+8.3%), brad and eggs prices up 6.2%.
• Alcoholic beverages prices were up 10.1%

Some consumption trends - food:

• 2012 per capita food consumption (local currency) = +8.7%; forecast compound annual growth rate (CAGR) to 2016 = +10.2%
• 2012 beer volume sales = +2.8%; forecast CAGR to 2016 = +2.9%
• 2012 mass grocery retail sales (local currency) = +24.4%; forecast CAGR to 2016 = +28%

All good news for Irish exporters as food represents a strong component of our exports to Russia (see latest data here).

Central Bank raised inflation target for 2013 from 2012-set 4.5-5.5% for 2013 to 5-6% set on December 29th. 2012 target set in December 2011 was 5-6% range.

Capital outflows remain a problem in 2012:

• 2012 capital outflow stood at $56.8bn - the fourth highest yearly outflow since collapse of the USSR, with $9.4 billion outflows in Q4 2012, up on Q3 outflows of $7.6bn and Q2 outflows of $6.4bn, but down on massive $33.3bn outflows in Q1 2012.
• Net outflows were now recorded every year since 2007.
• Banks recorded an inflow of $23.6bn in 2012, in part pushed up by privatization of Sberbank ($5.2bn)
• Net outflows in non-banking sectors of economy amounted to $80.4bn in 2012.

I do expect moderating capital outflows from Russia in 2013 and still expect strong capex in Russia. Ruble valuations are likely to remain strong despite the Central Bank interventions. At any rate, the CB is likely to moderate interventions in the currency markets as it moves to inflation targeting by 2015 from current FX targets.

On the net, I am still bullish long-term on Russian Government (and corporate) bonds:

• Recent decisions to open rubles-denominated bonds sales to foreign investors via Euroclear Bank and Clearstream International will continue pushing yields down. Renaissance Capital estimated recently that OFZs (ruble-denominated state bonds) yields can fall 50-80bps in 2013
• In 2012, OFZs returned 1.12% against 0.38% for Brazil, 1.36% for India and 0.03% for China.

13/10/2012: Europe's Banks are now Global Growth Zombies

Back in 2011 the IMF was concerned that in the current crisis, the European banks will withdraw / deleverage from/out Asia Pacific and other emerging regions, thus reducing the supply of credit there. 

I thought the concern to be completely misplaced. My view is currently for accelerating maturity of the credit and financial services markets in the middle income economies and emerging markets, leading to increasing independence of these regions from funding from the West and rising self-sufficiency of internal markets. In contrast to the IMF, I posited the proposition that the deleveraging of the European banks out of Asia Pacific will (1) lead to enhanced credit activity in the region itself, as regional players exploit economies of scale from buying out European operations assets, and 2) result in the reduced supply of credit in Europe, as Asian and other middle income economies' banks focus more their efforts in internal Asia Pacific markets, while using Latin American and African markets as the platforms for deploying home-grown expertise in financing rapid growth activities.

I said this then… and the evidence is coming in now to show that I was right. Today's data from the Euromoney Credit Risk analytics shows that European banks are pulling out of the merging and middle-income markets, globally, and that "the real surprise is not the pace of retreat but the speed at which the gaps are being plugged".

Per ECR: "As [the European banks] slink home to shore up capital and preserve their dwindling reserves of credibility, they leave yawning gaps that are in most (but not all) cases quickly and happily filled by non-European rivals. …Is this, in terms of long-term global reach and relevance, curtains for Europe’s battered banks, and if it is, will anyone really miss them?"

Here's some evidence: 

• "In the first eight months of 2007, the last calendar year of growth before the financial crisis, the global syndicated loans market was dominated by European banks. Eleven filled the top 20 rankings, according to Dealogic, with five in the top 10 alone. Scroll forward five years and only two names, Barclays and Deutsche Bank, sneak into the global top 20."
• "In the first eight months of 2007, nine European lenders jostled for position at the sharp end of the pan-Asia Pacific syndicated loans markets. By 2012, just two names, HSBC and Standard Chartered, featured in the top 20, and both, it can be argued, are emerging markets specialists with their roots and futures fixed firmly in Asia."
• "The most notable national absence involves France’s leading standard bearers: the likes of BNP Paribas, Société Générale and Crédit Agricole, names that once bestrode Asia, particularly in areas like trade and project finance. In just five years, all three have disappeared almost entirely from every conceivable bank ranking."
• "In Africa, the pace of [European banks] extraction is slower but just as systematic. In Latin America, some European names are selling off the silverware piece by piece; others simply cannot appear to get out fast enough."
• In Africa's banks league tables, "just three European names sneak in, while the top-20 table is a cultural sprawl of names and geographies. Four African banks – against none in 2007 – make the rankings, along with lenders from Japan (three of them), Russia (one), and the Middle East (three). Perhaps the most compelling two names, however, squeeze quietly into the table at eighth and 15th: China Construction Bank and Industrial and Commercial Bank, Beijing’s third-largest and largest lenders by market cap respectively. This is the first time over the past five years that any Chinese lender has made it into the top 20 in the pan-African syndicated loan table, but given Beijing’s apparently unstoppable rise and the seemingly inexorable waning of Europe’s financial star, surely not the last."

But the departure of European banks is being compensated for by growth of domestic finance:

• "Europe’s mass departure has been treated with a mixture of unrestrained glee and raw opportunism across Asia; whenever a European financial asset has been on the block, buyers – mostly Asian – have flocked to buy it. …Western lenders, reckons RBS Capital Markets, sold $12 billion worth of equity stakes in emerging markets in the 24 months to end-June 2012 – and over half of that sell-off has taken place in Asia."
• "In January 2012, HSBC sold its credit card business in Thailand to Bank of Ayudhya for $115 million." 
• In May 2012, "Malaysia’s CIMB completed a deal to buy most of RBS’s Asia investment banking and cash equities business for $142 million.. giving the group instant global scale."
• Dutch ING is "seeking to shed assets as fast as it possibly can: it is currently trying to sell its €43 billion Asian funds business, it has already divested a majority stake in its Chinese life insurance joint venture, Pacific Antai, to China Construction Bank, and is now looking to exit its 26% stake in an insurance joint venture with Indian battery producer Exide Industries."
• ANZ is absorbing its $550 million acquisition of the bulk of RBS’s Asia retail banking assets, and the Australian banking group "is hungry for more deals."

European banks' deleveraging – lasting from mid-2009 to the present day – has been led "… by what critics called short-sighted regulators in Brussels, Paris, Frankfurt and London desperate to boost liquidity to avoid a repeat of the financial crisis":

• Basel III rules insist on tier-one capital levels of at least 9%. 
• Political pressure is "brought to bear on, say, French banks by French politicians to ensure that French banks, first and foremost, lend French money to French clients. The same reverse-protectionism move is being played out by lenders in the UK, Belgium, Spain and the Netherlands. Pressures were put by the UK government on nationalized RBS and Lloyds to lend more to British companies, while Belgium’s KBC, which has received state aid, has sold non-core assets to focus more on its home market. Spanish Santander and other big banks are buying Spanish government bonds, according to dealers, while ING’s biggest exposure is the Netherlands, some analysts say."

The contrasting story is now with the US banks, with little evidence of these aiming to deleverage by reducing their emerging markets exposures:

• Citi "remains a top 10 player in the syndicated loans market in the first eight months of 2012 in both Latin America and Asia Pacific, just as it was in the same time period five years ago, while retaining its number one position in Africa syndicated loans."
• "JPMorgan, Citi and Bank of America Merrill Lynch filled out the top three spots in global syndicated loans for the first eight months of 2007; fast forward five years and those same players now rank first, second and fourth, separated only by Japan’s Mizuho."
• "Non-US developed-world banks are also boosting their presence in key markets at Europe’s expense."

Asia Pacific story is now also playing out in Eastern Europe and Latin America:

• "A few non-European lenders are pushing into the eastern half of Europe in search of bargains" 
• Russian Sberbank "…snapped up Volksbank International, the CEE and central Asia division of Austria-based Oesterreichische Volksbanken, for €505 million ($710 million)." 
• "… in 2011, SocGen sold its booming consumer finance, ProstoKredit, to Eurasian Bank, owned by three Kazakh and Russia oligarchs."
• Latin America "…is a region crammed with outperforming economies as well as banking groups transformed, in less than a decade, from lepers to would-be global leaders, notably the likes of Itaú Unibanco and BTG Pactual, both Brazilian, and Davivienda and Grupo de Inversiones Suramericana (Grupo Sura), both Colombian. All are ramping up their presence around Latin America, mostly at the expense of retrenching European names."
• "RBS was the first to cut and run, exiting Brazil last year, followed in short order by its withdrawal from Chile, Venezuela, Colombia and Argentina."
• Grupo Sura in 2011 completed a deal "to buy the entire Latin American operations of ING, in another blanket deal."
• HSBC sold its operations in Costa Rica, El Salvador and Honduras in September last year to Davivienda for a shade over $800 million. 
• "Spain’s Santander, one of Latin America’s biggest banking groups… shed its operations in Colombia, where it was a peripheral player, pocketing $1.225 billion."
• "In September, Mexico’s Grupo Financiero Banorte (GFB) announced it was formally running the rule over pension fund assets owned by Spanish lender BBVA in Chile, Colombia, Mexico and Peru. BBVA is open, even eager, for a sale; in a statement to the Mexican Stock Exchange, GFB announced its intention to explore “opportunities to generate greater scale in the pension and retirement fund business”. BBVA manages $70 billion-worth of assets in the four countries, generating a combined profit of $300 million."
• "Again, deleveraging in Latin America appears to be the sole purview of twitchy European lenders. Scotiabank is quietly gaining strength in Latin America: the Canadian lender shelled out $1 billion last year to buy a majority stake in Colombia’s Banco Colpatria, its 20th acquisition across the region in the past six years. Citi remains solid across the region, while UBS, an investment bank more global than Swiss by nature, pumped $500 million into Grupo Sura before its ING raid."

The core problem with this is that quick deleveraging out of growth-focused regions spells diminished prospects for future profits growth for European banks and loss of access to rich deposits rapidly growing on foot of rising incomes in the regions outside sick Europe. As I warned a year ago, contrasting the IMF alarmist views, Asia, Africa, Latin America and Eastern Europe will probably be fine in the short run as European banks run for the exit. In the long run, these regions' banking systems are likely to be strengthened by the current processes. Instead, the real risk is for the European lenders who are likely to be relegated to the back water of credit growth - the stagnant pool of the euro area economies. 

Thus, the real question about the future is not 'What if Europe's banks stop lending in Asia?' (as posited by the IMF), but rather 'What if the Asian banks won't care for lending in Europe?'

7/10/2012: VTB and Sberbank relative position vis peers

Another interesting point from the Goldman note on euro area banks, relating to Russian banks - see chart below (you'll need to click to enlarge it):

Note that per my latest recent assessment of Russian equity markets, both VTB and Sberbank are relatively undervalued.

Original note is linked here.

14/5/2012: Russian Banks Credit Supply to SMEs

Moody's latest note on Russian banks, titled SME Lending in Russia: Growth Supports Profitability, but Cyclical Credit Risks Remain is available in Russian.

The note argues that since 2010-2011, Russian banks' origination of credit to SMEs has grown on the back of banks' strategic expansion within the SME sector that sees growth in lending to SMEs exceeding that for larger corporates.

"Overall, we believe that the banks' expansion of their SME portfolios and their plans to further this expansion are credit positive. The SME sector supports the banks' net interest margins, provides cross-selling opportunities and contributes to further diversification of banks' risks," explains Olga Ulyanova, a Moody's Vice President and author of the report. "However, if the economic cycle enters another phase of downturn, SME loans are likely to be the segment most vulnerable to weakened conditions, and credit losses might reach levels seen during 2008-09," adds Ms. Ulyanova. Doh, as Homer would say. See this note and this to check the likelihood of the Russian economy contracting...

On a serious note, of importance to anyone trading in Russian markets: Moody's said that relative to other asset classes, SME lending poses greater risks to banks credit profiles, due to:

1. Weak corporate governance and financial reporting practices of many SMEs; 
2. Their concentration and dependence on a small number of large customers and/or suppliers; 
3. Fewer refinancing options available to SMEs as opposed to large corporates; 
4. SMEs' elevated exposure to domestic currency fluctuations; 
5. Poor track record of SME loan recoveries, partly because of the low realisable value of collateral; 
6. Weak court and legal systems for settling debt; and
7. Weak enforcement mechanisms for court judgements.

I would agree with the above risks assessment. However, interestingly, Moody's reported that credit losses generated by SME loans originated after 2008-2009 crisis are currently running below those for pre-crisis vintages, "reflecting post-crisis economic stabilisation in Russia and the somewhat tightened credit underwriting procedures that the banks implemented".

Moody's identify key trends in Russian SME lending over the next 12-18 months:

• The total volume of bank loans to SMEs will exceed 10% of the country's GDP (compared with 9.3% at year-end 2011). 
• By 2015, SME lending will likely stabilise at around 15% of GDP, a level comparable with that of peer countries. 
• Net interest margins improvement is the core objective for banks diversification of lending to SMEs.
• Credit losses on loans issued in 2011-2012 to be contained within overall lower losses trend since 2010.