The Bank of Russia has published a report titled “On the Development of the Banking Sector of the Russian Federation in March 2020”. According to the report, before the economic situation started deteriorating, the Russian banking sector adhered to a conservative development model:
- The corporate and retail segments demonstrated moderate growth;
- Banks maintained a relatively high margin of safety with regard to capital and liquidity.
To a certain extent, these factors contributed to the growth of stability of the banking system on the eve of the current crisis. Nevertheless, by the end of the first quarter, the regulator recorded a decrease in the structural surplus of liquidity, as well as reduced demand of non-financial companies for monetary resources. All of this indicates that the overall situation in the industry has begun to deteriorate.
In ACRA’s opinion, the sector will continue to deteriorate for the rest of the year. If the base case scenario of ACRA’s macroeconomic forecast materializes, which implies, in particular, real GDP falling by 4–4.5% and real wages of the population declining by 6.4%, then the amount of overdue loans provided to non-financial companies may exceed 11% by the end of 2020 (7.8% as of January 1, 2020), and to individuals — 10% (4.3% as of January 1, 2020).
For more information about the development scenarios of Russia’s economy, see ACRA’s macroeconomic forecast “Questions and lessons from the 2020 economic crisis” from April 21, 2020.
The decrease in economic activity will adversely affect the growth of banks’ loan portfolios. ACRA believes that the volume of loans provided to legal entities will decrease by 2%, while the portfolio of loans to individuals will increase by 11% (+18.5% in 2019). The main factor in the growth of the retail portfolio will be an increase in mortgage lending, which will be partly due to the active expansion of the state’s support programs, and partly to a decrease in the volume of prepayments.
The creation of additional reserves needed to cover credit losses on overdue debts alone may approach RUB 2.5 tln, and this will be the main factor in the sector’s losses in 2020 (this volume of reserves stood at around 30% of the fixed capital of the banking system as of February 1, 2020). ACRA notes that the sector recorded overall growth in profitability in the first quarter of 2020, with ROE approaching 20% year-on-year. This will allow the negative impact of growing reserves on capital to be limited across the entire sector. However, it is also worth noting that the profitability of a large number of banks was considerably lower than this level.
Historically, the largest share of profit in the sector has been generated by major credit organizations and therefore small and medium-sized banks may be more exposed to the risks of reduced capital adequacy and incur losses. As a result, the total number of credit organizations may fall, both as a result of licenses being revoked from certain banks and due to a possible revival in M&A transactions.
Despite the outflow of funds from retail deposits in the first quarter, ACRA does not expect this trend to remain stable throughout the year. At the same time, the general public’s tendency to save money will dwindle, and in such a situation the role of the Bank of Russia’s liquidity provision instruments will increase. The regulator successfully managed banks’ demand for ruble liquidity in previous periods of crisis (2008–2009 and 2014–2015), and this gives us reason to believe that the ability of credit organizations to perform their obligations in full will be maintained.