In general, Russian banks successfully coped with the multiple outflows of client funds that took place in 2020. The reserve of internal resources and possibility of replacing some funding sources with others allowed banks to avoid liquidity problems. The main source of the resource base continues to be client funds, the volume of which increased by more than 16% in 2020.
In 2020, the issue of instability of balances in individual accounts continued to be particularly relevant. Around half of Russian banks recorded a decline in the volume of funds attracted for this category of the resource base. Outflows from deposits were mainly due to lower interest rates caused by the softening of the Bank of Russia’s monetary policy. At the same time, the system as a whole was able to increase the volume of funds raised from individuals, mainly due to banks that are among the largest credit organizations.
Instability of client funds may continue in 2021. Acceleration of inflation may reduce the real return generated by deposits, which will push depositors to search for alternative ways of investing their money. The need to preserve the stability of the client base at the expense of maintaining rates at a high level may serve as a factor in the decline of the profitability of banking operations. The Bank of Russia’s monetary policy and the increasing likelihood of further growth of the key rate in 2021 may also influence the situation.
Major banks are best protected against the risk of client fund outflows. ACRA’s analysis shows that as the size of a credit institution decreases, the diversity of the sources of its resource base declines. In addition, the leaders of the sector maintain the widest access to current accounts of retail clients, which reduces their sensitivity to the instability of the resource base.
The population’s fixed-term deposits are the main source of funding for almost half of Russia’s banks.* These banks are generally not the industry leaders and have a limited choice of funding sources. The persisting risk of consumers withdrawing funds from fixed-term deposits may limit a significant number of participants in the banking system in terms of their volume of active operations.
The sector’s dependence on funds provided by the state remains moderate. In January 2021, the share of these funds in banks’ accounts amounted to 4.2% of total liabilities, with the share of Bank of Russia loans equal to 4.3%, out of which almost 50% have been provided to Bank TRUST (PJSC).
* Hereinafter, the analysis is carried out on the basis of data from credit institutions that disclosed financial statements in accordance with the requirements of the Bank of Russia and operated as of December 31, 2020.
The banking system has coped with instability of client funds
Despite the fact that the events of 2020 in the Russian economy and banking sector did not lead to a radical change in the funding structure of credit organizations, they were reflected in long-term trends. As a result of periodic outflow of funds of legal entities and individuals, for the first time since 2014, there was a slight decrease in their share in the structure of banks’ liabilities — from 80.1% as of January 1, 2020 to 79.3% at the end of 2020, and to 78.3% as of February 1, 2021.
The lowest stability of balances of client funds was recorded from March to May 2020 due to the implementation of quarantine restrictions aimed at fighting the COVID-19 pandemic, and the associated increased demand from business and the population for cash, as well as amid uncertainty regarding the new system of taxing income from retail deposits.
In general, the Russian banking system successfully coped with the outflows of funds using internal sources of liquidity and deposits held with the Bank of Russia. The stable liquidity positions that the sector had as it entered the crisis, as well as existing mechanisms according to which the regulator provides additional liquidity, allowed it to avoid serious consequences of the outflows. In addition, the banking system demonstrated that it was able to substitute outflows of certain categories of client funds with inflows to others, due to which the aggregate increase in deposits as of the end of last year amounted to 16.5%. An increase in balances was recorded both in accounts of corporations and individuals.
Table 1. Changes in the structure of liabilities of Russian banks
| RUB bln (if not otherwise stated) | 2019 | 2020 | January 2021 |
|---|---|---|---|
| Client funds, total | 63,435 | 73,911 | 74,019 |
| % of liabilities | 80.1% | 79.3% | 78.3% |
| Corporate funds | 28,146 | 34,067 | 34,650 |
| % of liabilities | 35.5% | 36.6% | 36.6% |
| Fixed-term deposits | 18,043 | 20,437 | 19,993 |
| Current accounts | 10,104 | 13,630 | 14,657 |
| Funds of individuals | 30,412 | 32,834 | 32,171 |
| % of liabilities | 38.4% | 35.2% | 34.0% |
| Fixed-term deposits | 22,878 | 21,198 | 21,113 |
| Current accounts | 7,533 | 11,637 | 11,058 |
| Government funds | 3,662 | 3,987 | 3,960 |
| % of liabilities | 4.6% | 4.3% | 4.2% |
| Banks’ funds | 8,847 | 9,906 | 10,399 |
| % of liabilities | 11.2% | 10.6% | 11.0% |
| Bank of Russia funds | 2,451 | 3,598 | 4,095 |
| % of liabilities | 3.1% | 3.9% | 4.3% |
Source: Bank of Russia
The main factor behind the growth in funds from clients in 2020 was an increase in corporate funds (by RUB 5.9 trillion, or 21% year-on-year). The growth of this indicator was related to higher volumes of corporate lending since funds received by borrowers are usually placed in bank accounts before their subsequent use, as well as to the weakening of the Russian currency — adjusted for the change in the exchange rate, the increase in funds of legal entities in ruble terms would have amounted to RUB 4.84 tln, or 14.8%.
The foreign currency liabilities of corporate clients increased by 14.6% (deposits grew by 3.1% and funds in accounts grew by 48%, or USD 17 bln).
In 2020, the issue of instability of individuals’ funds was more relevant. It should be noted that there was no single trend in the change in the balances of this group of clients. As of the end of last year, the total volume of funds in accounts held by the population had increased by 8%. At the same time, funds in deposits declined by RUB 1.7 tln, while those in current accounts increased by RUB 4.1 tln (a record for the Russian banking system). Taking into account the growth of balances in escrow accounts, the total inflow of funds of the population in 2020 amounted to RUB 3.5 tln.
Figure 1. Dynamics of the volume of funds of business and the population in credit institutions of the Russian Federation in 2020–2021
Source: ACRA
Despite the fact that the decline in the volume of retail deposits to some extent affected the majority of Russian banks, this process was extremely uneven. This is evidenced by the spread of indicators of changes in the balances of funds in deposit accounts of the largest banks (from +4.3% to -50.5%).
Depositors could have used some of the withdrawn funds to finance securities market operations, and also as initial payments for mortgage lending. In addition, ACRA believes that an inflow of funds from fixed-term deposits into current accounts may be recorded in the sector due to the movement of interest rates as well as banks’ changing retail deposit strategies.
The decline in interest rates on retail deposits was the logical consequence of the Bank of Russia’s monetary policy easing and its lower key rate. Rates on deposits held by individuals (excluding those at Sberbank) with maturities of more than a year declined by 1.29 percentage points from January 2020 to January 2021.
At the same time, amid a decrease in interest rates on deposits, the cost of placing funds in current accounts (demand accounts) remained relatively stable. This trend has led to a narrowing of the spread between the rates on fixed-term deposits and rates on demand accounts (the latter reached their lowest values since 2018).
Figure 2. Change in the spread between rates on deposits of individuals and rates on demand accounts
Source: ACRA
In ACRA’s opinion, banks were able to stimulate the flow of funds from fixed-term deposits to current accounts by supporting rates for a number of products. Such accounts give credit institutions more flexibility in setting the cost of borrowing, which, given the declining key rate of the Bank of Russia, allowed them to quickly adjust interest expenses.
As a result of an active increase in funds of individuals in current accounts, most large Russian banks managed to achieve a net increase in the total volume of liabilities to this group of depositors. Although the situation was different across the industry, many non-leading banks also actively increased funds in current accounts. As a result, although around 70% of all credit institutions suffered losses on fixed-term deposits of individuals, 50% of banks recorded a total outflow of funds of this category of clients as of the end of 2020.
ACRA notes that in 2020, a fairly stable trend that had existed since 2014 where the share of individuals’ funds in the structure of bank liabilities increased was disrupted: from 2014 to 2019, this indicator increased from 28% to 38%, but by the end of 2020 it decreased to 35%.
Figure 3. Share of funds of the population in the total volume of liabilities of credit organizations
Source: ACRA
In fear of devaluation of the ruble, the population withdrew cash from their foreign currency deposits quite actively. At the end of the year, the total volume of foreign currency-denominated liabilities to the population had decreased by 4.5% (ruble-denominated liabilities had grown by 6.5%). Ruble deposits fell by 8.9%, but the outflow of funds from fixed-term foreign currency deposits amounted to 17.1%. At the same time, the volume of funds held in ruble-denominated current accounts increased by 55.3% and in foreign currency accounts — by 37.8%.
In early 2021, depositors continued to withdraw funds from their accounts: in January, the outflow exceeded RUB 650 bln. The situation in which deposit rates are not attractive for increasing deposits was aggravated by growing inflation, which was negative for the actual yields on deposits. Although January is usually considered a relatively ‘weak’ month in terms of performance and thus unsuitable for forecasting longer-term trends, based on this January it can be expected that the behavior of retail depositors will remain volatile in 2021.
The Agency believes that the situation with the movement of funds of individuals will ultimately be determined by the monetary policy of the Bank of Russia, which may change this year. On the one hand, growing prices in the consumer market create preconditions for raising the key rate, on the other, promoting economic growth and mortgage lending and achieving some other objectives are more difficult amid growing rates. The decision to raise the key rate taken on March 19 does not yet indicate an unambiguous trend of monetary policy tightening, but pushes up uncertainty in the behavior of depositors in the coming months of 2021.
It is worth noting that the need to finance the growth of retail and corporate loan portfolios may force banks to raise interest rates on borrowed funds even if the key rate remains at the current level. This will push down the profitability of banking operations. ACRA previously predicted a decline in NIM to 3.5% in 2021, however, the above scenario may become a factor that narrows profitability further.
The banking industry’s funding structure has not changed significantly
As noted above, client funds has remained the key funding source as they account for over 80% of banks’ total liabilities. The exception is the majority of subsidiaries of foreign banks, which actively raise funds from their parent entities.
Against the backdrop of the noted changes in the resource base, there is a relative improvement in the diversification of liabilities of Russian banks. In 2019, the share of banks, the largest funding source of which exceeded 60% of total liabilities,1 was about 62%, but by the end of 2020 this figure dropped to 54.7%. At the same time, the structure of the banking system’s liabilities remains quite concentrated on average: 62% of liabilities are funds raised from a single source.
1 The Agency considers the following sources to be the largest ones: current accounts and fixed-term deposits held by individuals, corporates, and banks, as well securities issues. As per the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the funding concentration is deemed above medium when the share of a single funding source exceeds 60% of total liabilities.
In ACRA’s opinion, the trend in which only industry leaders can achieve the highest level of diversification continues. On average, for credit institutions that are not among the ten largest ones, the share of funds raised from a single source is consistently higher that 60%. At the same time, the funding structure of the industry leaders (included in the top 20 in terms of assets) is characterized by the active use of current funds of individuals, which may be associated with payment of salaries to state employees, payroll programs, etc. Since the current funds of individuals tend to be a more stable source of funding, one can say that the smaller a bank is, the higher the risk of high concentration and, consequently, liquidity risk are.
The Agency also notes that the use of funds held by both individuals and legal entities in fixed-term deposits is most typical for banks that are not among the largest. In the context of lower interest rates, these banks are subject to increased risk of losing their resource bases. Although the reduction in the share of fixed-term funds of individuals in the total volume of liabilities affected all groups of banks, trends observed in 2020 confirm the conclusion that the risks of cash outflow from fixed-term deposits (in this case, primarily those of individuals) associated with a decrease in interest rates are higher for those credit institutions that have smaller assets. Industry leaders have more room in substituting such deposits with current accounts.
This trend was confirmed in 2020 by the fact that, among the 20 largest credit institutions, almost all banks showed an inflow of funds from individuals. There was no uniform trend among smaller credit institutions, however, on average, small banks recorded outflows.
Another specific feature of the funding structure of Russian banks is the growing dependence of smaller credit institutions on funds held by corporate clients in their current accounts. For small banks (outside the top 200), corporate funds are the main source of funding. Corporate depositors are generally a relatively unstable category of clients, which reduces the stability of the small banks that attract their funds. In addition, in ACRA’s opinion, these corporate clients of small banks are often their shareholders and associates. Being de facto insiders, such depositors may directly affect the sustainability of credit institutions, for example, when the financial condition of controlled banks deteriorates, they withdraw their funds from them, and such banks may have certain liquidity problems afterwards.
Table 2. Main funding source for banks depending on the size of assets (% of the number of banks in each group)
|
| Top 10 | 10–20 | 20–50 | 50–100 | 100–200 | >200 |
| Individuals, current accounts | 20% | 20% | 0% | 4% | 2% | 6% |
| Individuals, | 20% | 30% | 57% | 26% | 63% | 35% |
| Corporates, current accounts | 10% | 20% | 7% | 14% | 20% | 43% |
| Corporates, | 50% | 30% | 23% | 32% | 6% | 14% |
| Funds of banks | 0% | 0% | 13% | 20% | 9% | 2% |
| Securities | 0% | 0% | 0% | 4% | 0% | 0% |
Source: ACRA
On an industry scale, the most common main source of funds is the fixed-term deposits of individuals. Given that the Agency expects the volatility of account balances of this type of depositors to continue, the loss of a portion of the funding base in 2021 may affect a significant number of banking market participants.
In addition, since dependence on the fixed-term funds of individuals is more characteristic of banks whose access to alternative sources of funding (primarily medium-sized and small banks) is limited, the Agency expects that during this year a significant number of credit institutions will be forced to either seek additional funding sources or reduce the volume of active operations.
Dependence of the sector on government funds remains moderate
Throughout most of 2020, credit institutions managed not to increase their debt to the Bank of Russia and government bodies. Even in March–May last year, when the outflow of client funds was most pronounced, the average volume of funds raised from these sources slightly exceeded the indicators of 2019.
The situation began to change at the end of 2020, when banks started increasing the volume of funds raised from the Bank of Russia, which ultimately led to a structural shortage of liquidity. The maximum amount of banks’ debt to the regulator in 2020 approached RUB 4 tln (4% of total liabilities of credit institutions; Bank TRUST (PJSC) accounted for almost 50% of all liabilities to the Bank of Russia), which is the highest since 2016. In January 2021, the volume of banks’ liabilities to the Bank of Russia continued to grow and amounted to RUB 4.1 tln.
The Agency is of the opinion that the growth of banks’ debt to the regulator is largely associated with the increase in credit institutions’ investments in federal loan bonds (OFZs) and the use of the repo mechanism with the Bank of Russia to fund such transactions. Taking into account the plans of the Russian Ministry of Finance to continue issuing OFZs, ACRA expects the regulator’s share in the liabilities of Russian banks to grow further. At the same time, since the growth of such liabilities occurs in parallel with the accumulation of highly liquid assets (OFZs) by banks, the transition from a structural surplus to a shortage of liquidity does not necessarily indicate any potential problems Russian banks would experience in servicing their liabilities. In addition, the total number of credit institutions using funds of the Bank of Russia is small (three credit institutions account for over 90% of all liabilities to the regulator).
In the Agency’s opinion, the Bank of Russia’s consistent development of mechanisms that allow meeting both regular and emergency needs of credit institutions for liquidity eliminates, to a large extent, shortage risks, even in the context of increased volatility of customer funds.
Figure 4. Share of government funds and Bank of Russia loans in liabilities in 2020–2021
Source: ACRA
Declining interest rates have not resulted in a significant increase in bond issuances
The decrease in interest rates encouraged Russian banks to issue bonds to a certain extent. The total volume of bonds issued in 2020 increased by RUB 356 bln compared to 2019 and amounted to 2.46% of banks’ liabilities (2.4% at the end of 2019). Nevertheless, this growth turned out to be less than that of 2019 (+RUB 575 bln), and the share of bonds in liabilities is still lower than the share observed before 2014.
The number of banks relying on bonds as a significant source of funding remains small: only ten credit institutions have a share of bonds exceeding 5% of their liabilities. This financial instrument is the main funding source For only two banks in the sample.
Banks issued more bonds for individuals to maintain the account balances of retail customers in 2020. Still, such instruments are not of great importance as a source of funding for core business.
Taking into account the fact that the Bank of Russia raised the key rate in March 2021, and the reverse trend is unlikely, the reduction in the cost of funding will cease to be the driver of bond issuance. At the same time, the volatility of retail fixed-term account balances may push some medium-sized banks to issue bonds.
