Against all odds

• Despite unprecedented pressure exerted by political and economic factors, the Russian banking system has proven its stability. The sector may register profits of around RUB 100 bln in 2020, while in 2023 this indicator will hit RUB 950 bln. ACRA considers banks’ continuing ability to maintain interest and commission income as the key factor in stability. The losses recorded in the first half of this year were mainly the result of exchange rate and interest rate fluctuations, which was a one-off event and, other things being equal, is unlikely to happen again in 2023. Financial performance was also impacted by the creation of reserves, the size of which in 2023 ACRA does not expect to be as large.

• The quality of bank assets remains under control. The quality of the sector’s loan portfolio has not changed, partly thanks to restructuring. The share of overdue loans in the corporate segment declined from 6.7% to 5.7%, while in the retail segment it grew from 3.9% to 4.1%. In ACRA’s opinion, amid slow recovery of economic growth, the quality of the portfolio will worsen slightly, with delinquencies growing by 0.6% for the corporate portfolio and 0.3% for the retail portfolio.

• The corporate loan portfolio and retail loan portfolio are returning to growth. The size of receivables from non-financial companies grew by more than 10% in the second half of the year, which was partly due to refinancing loans provided by foreign banks to Russian borrowers. The main driver of growth in the retail segment is mortgages (+7% in 2022). ACRA expects growth of unsecured lending to accelerate in 2023, yet corporate and mortgage lending will grow at a slower rate.

• The capitalization of the Russian banking system is generally stable, despite the losses that were recorded in 2022. The suspension of the macroprudential buffer, as well as a number of other regulatory relaxations against the backdrop of a slowdown of asset growth, support the capitalization of most banks that are ACRA’s clients. The Agency believes that in 2023, capital will be used mainly to support asset growth rather than cover losses.

Table 1. Performance of key indicators of the Russian banking system in 2019–2023

¹1+ day past due loans according to the Bank of Russia’s accounting standards.
² Asset valuation reflects the amount of individual items calculated according to the Bank of Russia’s data.
³The capital estimate reflects the difference between items of assets and liabilities calculated according to the Bank of Russia’s data.

out of the woods?

The outgoing year posed unprecedented challenges for the Russian banking system. Political and economic events led to the manifestation of all key types of risks at the same time (market, credit, operational, and liquidity risk), which became the most serious test for the country’s banking sector since at least 1998.

At the same time, despite sharply negative expectations in H1 2022, the banking industry managed to prove its financial stability and ability to weather very severe crises. In February 2022 the consensus forecast of analysts published by the Bank of Russia in relation to GDP growth was -8.4%, yet this value improved to -2.9% by December. Furthermore, GDP declined by 2.7% in 2020, which is a comparable indicator.

Another factor that ensured the stability of the banking sector was the regulatory easing provided by the Bank of Russia in terms of the reflection of losses from trading operations in capital (in H1 2022, this loss amounted to 12% of banks’ capital as of February 1, 2022), as well as reserves for problem assets.

ACRA assumes that even without these concessions, the sector generally confirmed that it was able to cope with the risks that materialized. In particular, the Agency notes that as of the end of nine months of 2022, income that banks generated from traditional activities — interest and commission income — was comparable to the same period in 2021. In ACRA’s opinion, this indicates both the stability of the business models of most banks, as well as borrowers’ consistent ability to pay.

At the same time, the outgoing year leaves questions, the answers to which will determine how the sector develops in 2023. Among such questions, ACRA includes an assessment of the actual quality of assets and the impact of the recognition of possible problems on the volume of additional reserves. This factor, in turn, will determine the financial results of 2023 and, as a result, will affect the level of capitalization of the industry.

Continued growth of corporate lending may come up against a persistently unfavorable operating environment, which will be associated with a further decline of GDP and weak growth of investments in fixed assets. In terms of retail lending, the population’s growing demand for credit and banks’ efforts to boost unsecured lending portfolios may be restrained by regulatory measures of the Bank of Russia. The dynamics of mortgage lending will show what is more relevant — preferential rates or accessible house prices. 

When offering answers to the above questions, ACRA notes that Russia’s banking system will keep the quality of assets under control in 2023 and deliver RUB 950 bln of net profits. At the same time, the corporate portfolio will grow by around 10% and the retail portfolio will expand by 15%. The capitalization of most banks should enable them to handle deferred risks, should they materialize. However, a large number of banks may need to raise additional capital resources in order to take advantage of new opportunities to develop.

WHAT IS THE ACTUAL QUALITY OF THE LOAN PORTFOLIO?

As in 2020, the worsening situation in the economy did not lead to an immediate increase of the share of problem assets in banks’ portfolios — from February 1, 2022 to November 1, 2022, overdue debt, on the contrary, decreased by 1%% in the corporate segment (-4% in absolute terms) and increased by 0.2% in retail (+11% in absolute terms).

To some extent, the performance of the portfolio was driven by restructuring, as a result of which at least 17.9% of the corporate portfolio and 12% of SME loans were novated, with a significantly lower amount of restructuring in retail (1.2%).

Analysis of the financial standing of banks’ borrowers and an assessment of the quality of the portfolios of leasing companies with ACRA ratings, as well as asset quality assessments carried out by the Agency’s clients, indicate that (at least with the help of restructuring) borrowers and lessees were able to adapt to the changing conditions for doing business. This is also evidenced by the fact that in Q3 2022, a number of banks not only reduced their additional creation of reserves, but also proceeded to dissolve them. Taking the above into account, ACRA believes that the industry has managed to cope with the impact of the economic shock on the quality of the loan portfolio.

Figure 1. Dynamics of overdue debt

* Debt of National Bank TRUST was assessed using data as of February 1, 2022.
Sources: Bank of Russia, ACRA

Assessing the deferred influence of this shock, above all ACRA notes that the experience of 2020–2021 demonstrated the weak predictive power that the volume of restructurings has for assessing real change in the quality of portfolios.

Considering this experience and the fact that a significant part of the restructurings in 2022 was not associated with a decrease in the solvency of borrowers, ACRA does not believe that the portfolio of restructured loans will become a source of significant credit risk in 2023.

At the same time, the Agency assumes that the share of overdue debt in banks’ loan portfolios will exceed the 2022 metrics in 2023. This assessment is partly based on expectations that the current economic downturn will last longer than the downturn of 2020.

The Russian economy grew by 4.7% in 2021 following a 2.7% drop in real GDP in 2020 due to the impact of COVID restrictions and lower oil prices. To some extent this made it possible to avoid the development of a trend similar to those that took place in 2008–2009 (main GDP decline was recorded in 2009 and amounted to 7.8%) and 2014–2016 (+0.7%, -2% and +0.2%), when the quality of the portfolio continued to deteriorate even after the acute phase of the crisis ended.

Figure 2. Restructuring in 2020 and 2022, RUB bln

* Data for 2020 and 2022 was provided by the Bank of Russia for the 33 and 18 largest banks, respectively
Sources: Bank of Russia, ACRA

According to ACRA’s estimates, real GDP will continue to decline in 2023. A protracted economic recovery suggests that pressure on asset quality may persist due to tougher business conditions.

At the same time, significant deterioration of the quality of assets is unlikely. In ACRA’s opinion, in general the corporate sector is adapting to the new conditions rather well which, in particular, also applies to the types of activities that have been directly affected by the negative consequences of sanctions.

ACRA expects the share of non-performing loans in banks’ corporate portfolios to reach 4.2%, excluding non-core assets. At the same time, ACRA does not rule out the possibility of this indicator increasing to the same level as at the end of 2021.

It is less clear how the quality of portfolios will change in the retail segment (primarily in unsecured lending). The volume of restructurings here turned out to be less than in 2020, which allowed banks specializing in this product to create a significant amount of reserves without compromising financial stability. The situation in the labor market and changes to the welfare of the population will have a contradictory effect on the quality of the retail portfolio. At the same time, the level of overdue loans in retail, as well as in the corporate segment, will grow in 2023 and reach 4.3% by the end of the year.

Assessing the influence of external factors on the quality of the retail portfolio, on the one hand ACRA expects unemployment to remain consistently low in 2023, which will support borrowers’ solvency.

On the other hand, the negative trend in changes to the real wages of the population creates grounds for increased borrowing, which may lead to an increase of the debt burden and the number of borrowers whose solvency is particularly sensitive to inflation and changes in the labor market. In view of banks’ continuing high appetite for growing this segment, the Bank of Russia has already begun limiting growth in its most risky areas, which will limit potential deterioration of quality.

Expected changes to the quality of the portfolio will require that credit institutions create additional reserves. ACRA estimates that coverage of overdue debt by the provisions of banks that are clients of the Agency grew moderately and reached 1.75. Given the fact that banks rather actively created reserves amid stable portfolio quality, ACRA believes that coverage may decline to 1.6, which would match the value at the end of 2021.

In these conditions, reserves may increase to around RUB 850 bln in 2023. In addition, a certain amount of provisions will be created for blocked assets (taking into account ACRA’s assessment of the volume of these assets and the expected 10-year ‘installment plan’ that the Bank of Russia is ready to provide to credit institutions).

WHAT WILL THE SECTOR’S PROFITS LOOK LIKE?

The influence of sanctions on financial markets, as well as expectations of a deterioration of asset quality resulted in the banking sector recording a net loss of around RUB 1.5 tln (or 12% of capital as of February 1, 2022) as of H1 2022.

Despite the significance of these losses, throughout the year, ACRA noted that a considerable number of banks were able to generate a profit and thereby confirm that exposure to actual risks is only partly systemic and is determined, among other things, by the specific nature of the business models of individual credit institutions and their exposure to one-time factors.

In H1 2022, in particular those factors were losses from trading operations related to the volatility of interest and exchange rates and sanctioned banks’ limited opportunities to hedge risks.

In the current conditions, the negative impact of market risk on financial performance was the main source of the industry’s losses —around 13% of capital held by banks as of February 1, 2022. At the same time, losses from the materialization of credit risk amounted to less than 11% of capital.

In the second half of the year, there was both an improvement of the overall financial performance of the sector and an increase of the number of credit institutions. As a result, already in the third quarter of this year banks achieved profits of RUB 700 bln. Furthermore, the traditional sources of operating income — interest and commission income — were the factors for generating profit. According to the Bank of Russia, the banking system’s losses from the start of the year until the end of October declined to RUB 400 bln (profit in October was around RUB 300 bln).

Figure 3. Breakdown of net profit for 9M 2022, RUB bln

* Net interest income
** Net commission income
Sources: Bank of Russia, ACRA

Taking account the current financial performance of banks that are clients of ACRA, the Agency expects the industry to reach profits of around RUB 100 bln for 2022.

The stability of interest and commission income is a significant factor indicating that the industry remains stable. Banks’ NII for three quarters of 2022 amounted to RUB 2.9 bln, which is only 3% lower than in the same period last year (RUB 3 bln). Banks’ NII in Q3 2022 was 3% larger than in Q3 2021. NCI for January to September 2022 was RUB 1.14 bln vs. RUB 1.12 bln for the same period in 2021.

The stability of traditional banking income creates good conditions for increasing profitability in 2023. Despite ACRA’s expectations that the key rate will continue to be lowered (to 6.5% by the end of 2023), projected growth of the credit portfolio will enable banks to increase the volume of interest income. The relatively longer maturity of assets compared to liabilities will allow banks to maintain margins amid falling rates and the simultaneous need to compensate for the outflow of client funds recorded in 2022, which will constrain the lowering of bank deposit interest rates. NII may grow by around 10% thanks to these factors.

At the same time, ACRA expects the growth of commission income to be less stable. Lower economic activity may serve as a factor that negatively affects the number of transactions in the corporate segment. Growth of commission income will be supported by retail lending, which generates commission income when loans are provided. Predicting an acceleration of the growth of the retail portfolio, ACRA expects that retail will become the main driver of commission income growth, and thanks to this, the size of commission income will grow by 4.5% in 2023.

ACRA’s profit forecast also factors in a neutral assessment of income from trading operations, which reflects the decline of the foreign currency component of the banking sector, as well as the low likelihood of the exchange rate fluctuations of 2022 happening again.

Outflow of personnel, mainly from IT, as well as the need to invest in replacements for software and banking equipment, may lead to a moderate decline of operational efficiency and this will have a negative impact on financial performance. In addition, as previously mentioned, the volume of additionally formed reserves will stand at around RUB 850 bln.

ACRA’s analysis shows that the banking sector’s net profit will reach RUB 950 bln in 2023. This prediction may not materialize due to deductions to create reserves. If banks are able to maintain the cost of risk at the 2021 level, pre-tax profit may exceed RUB 1 tln by a wide margin.

Figure 4. Banking system profit in 2022–2023, RUB bln

Sources: Bank of Russia, ACRA

are there any factors for further growth of the corporate portfolio?

This year is characterized by rather paradoxical corporate lending dynamics. Against the background of a sharp increase of interest rates, as well as general deterioration of the operating environment, the issuance of loans showed the worst result since 2019. For example, the volume of loans issued in May 2022 was the lowest since April 2019.

Given the projected decrease of investments in common capital by 2% (even taking into account higher government spending by the end of the year; in 2020, the decrease was 0.2%), the overall increase of the size of the corporate portfolio could be expected to be moderate by the end of 2022.

However, the corporate portfolio began to show impressive growth in June, having increased by 13% in January–October in total. In ACRA’s opinion, this growth stems from the following reasons.

One reason is the general recovery of lending, driven by a decrease of both the key rate and the degree of uncertainty. Evidence that the Russian economy is able to avoid an apocalyptic scenario have allowed banks to assess credit risks adequately and offer affordable lending terms to clients.

Another reason for the rapid growth of the corporate portfolio may be the intensification of activities related to import substitution and the development of businesses aimed at overcoming sanctions (for example, parallel imports).

The third and perhaps most important reason is the refinancing of loans provided to Russian companies by banks from unfriendly jurisdictions.

According to the Bank of Russia, by the end of H1 2022, the total debt of the non-financial sector to foreign lenders amounted to about RUB 12 tln (of which loans amounted to RUB 11.8 tln). In ACRA’s opinion, the practice where Russian subsidiaries of foreign banks reflected the bulk of issued loans on the balance sheets of parent companies was quite common until 2022. As of February 1, 2022, the total volume of corporate loans issued by non-resident banks’ subsidiaries amounted to about RUB 2 tln (including PJSC ROSBANK that changed hands in 2022). During the year, foreign banks repeatedly announced a reduction of the volume of lending to Russian companies, whereas the latter did not report a reduction of debt to foreign lenders. This situation confirms the idea that a significant amount of loans has been transferred to Russian banks.

Figure 5. Corporate lending dynamics in 2019–2023

Sources: Bank of Russia, ACRA

In the forecast of corporate lending dynamics for 2023, ACRA relies mainly on possible changes in the economic situation in the Russian Federation during this period. The key factors expected by the Agency are GDP decline in real terms, a reduction of fixed-price investments in fixed assets, a moderate increase of fixed-asset investments, a drop in industrial production, and neutral changes to retail trade turnover. All these factors limit the potential for further growth of the corporate portfolio.

ACRA notes that, regardless the growth of the corporate portfolio in H2 2022, the issuance of new loans remains at a relatively low level: the volume of loans issued in July–October 2022 was 31% lower than in the same period of 2021. As the economic situation in the country stabilizes, banks will ease their credit policy for the clients who are residents of the Russian Federation, which may drive loan issuances up next year along with the corresponding portfolio growth, despite weak macroeconomic indicators.

Although the impact of debt refinancing in the non-financial sector on the size of the loan portfolio of Russian banks will diminish, this process will still support the growth of the banking industry’s portfolio.

Overall, ACRA expects the corporate portfolio of Russian banks to grow by about 10% in 2023.

how to build up the unsecured portfolio without ALERTING the regulator?

Against the background of increased uncertainty, a number of banks limited their consumer lending offers both in H1 2022 and in September–October 2022. In particular, in the period from the end of February 2022, the lending dynamics were affected by macroeconomic risks and a decrease in demand caused by soaring interest rates, while the autumn decline was instead associated with the difficulties of lending risk assessment in the new conditions.

In spring, the level of new loans decreased to long-term lows, whereas in fall, the impact of growing risks on credit activity was rather mild. In general, banks regard the risks of unsecured lending as manageable: the profitability of such products makes it possible to compensate for the deterioration of portfolio quality. In addition, a significant proportion of consumer loans have short maturities, which allows banks to rebuild the loan portfolio quickly by modifying the terms of new loans. It is worth noting that both in 2020 and in 2022, the Bank of Russia abolished add-ons to risk weights, thus allowing the banks focused on unsecured retail lending to create an additional safety cushion and form significant reserves without any risk for capitalization.

Figure 6. Retail loans issued in 2021–2022 (excluding mortgages), RUB tln

Sources: Bank of Russia, ACRA

In ACRA’s opinion, despite continued lending activity in H2 2022, the change to the portfolio of unsecured loans in the banking sector as a whole will be almost neutral for this year. However, as soon as 2023, this segment may demonstrate quite significant growth. As mentioned above, banks are striving to increase the volume of consumer lending mainly because new loans generate a significant share of commission income. Given the ambiguous prospect of corporate lending in the conditions of an unstable economy, banks will focus on growing the retail segment and can ease their lending standards while focusing on demand from retail customers.

According to the Agency’s estimates, demand for consumer loans will be high in 2023: ACRA expects a further decline of real incomes (-1%), which will push retail clients to increase borrowings to maintain their consumption standards. In addition, the effect of deferred demand may appear.

The Bank of Russia has already begun introducing constraints on lending to the most risky segments. In Q1 2023, the volume of new loans with a debt service-to-income ratio exceeding 80% and a repayment period of more than five years must not exceed the established share of the total volume of loans. However, in ACRA’s opinion, this constraint will not be an obstacle to banks’ growing activity. Their ability to increase risky, and therefore the most profitable products will now directly depend on how much they will be able to expand the issuance of products that are not subject to restrictions by increasing advertising costs and other expenses.

Overall, in ACRA’s view, the growth of the unsecured lending portfolio may exceed 15% by the end of next year. However, as the growth rate increases, the likelihood of stricter regulation of the segment grows as well.

WHich is more important: PREFERENTIAL MORTGAGEs OR AFFORDABLE HOUSING?

Mortgages will continue to grow in 2023, but at a more modest pace. ACRA expects a 13% increase in the volume of the mortgage portfolio next year, with projected growth of about 16% by the end of 2022. The decision to extend the preferential mortgage program until July 1, 2024 with an increase of the preferential rate from 7% to 8% will support mortgage loans. This option is a compromise against the backdrop of weighty arguments both for and against preferential mortgage programs and it will not lead to sharp fluctuations in the real estate market.

The future of preferential mortgages is one of the main factors for forecasting the situation in the mortgage market in the medium term. Banks were particularly interested in extending preferential mortgage programs amid increased credit (non-mortgage) risks and losses incurred in 2022 from financial asset revaluation and additional reserves. The extension of preferential programs will certainly support mortgage loans aimed at purchases in the primary market, which somewhat stalled in autumn. According to ACRA’s calculations, in October this year, the share of primary real estate in total mortgage loans decreased to 32%, i.e., to the average level of 2021 (although after the Bank of Russia increased the key rate to 20% at the end of February 2022, demand for preferential mortgages soared, and the share of primary real estate reached 62% in May 2022). It should be noted that in the fall of 2022, even the risk of termination of preferential programs no longer had the same effect on the growth rate of mortgage lending as in 2020–2021. At the same time, the outgoing year was no exception in terms of the traditional growth of mortgage loans at the end of year. In addition, some borrowers are trying to obtain a mortgage loan at the still valid, more favorable, preferential rate (7%).

Figure 7. Mortgage loans issued in 2021–2022, RUB tln

Sources: Bank of Russia, ACRA

Theoretically, preferential mortgage programs have a positive socioeconomic effect in terms of increasing housing affordability, which is only possible if real disposable incomes grow steadily (ideally, outpacing the growth rate of real estate prices). However, the introduction of preferential programs at the beginning of 2020 has led to the opposite effect — a decrease of housing affordability (Fig. 8). The ratio of the price per square meter of residential real estate to the average per capita income in Russia as a whole and in Moscow in particular is growing, moving in spirals.

Figure 8. Housing affordability in 2019–Q3 2022

Sources: Unified Interdepartmental Information and Statistical System, ACRA

Many people would like to improve their housing conditions, but the level of real estate prices prevents them from doing this. According to ACRA’s calculations, since the start of preferential mortgage programs, the square meter price of apartments sold in the primary and secondary markets in Russia has increased by 70% and 52%, respectively (and by 71% and 72% in Moscow, respectively). Thus, the positive effect of low rates has been neutralized. In addition, the sale of apartments at tempting near-zero rates has turned out to be a factor of non-market pricing in the residential real estate market. This has obviously supported sales (developers are currently experiencing difficulties in implementing their sales plans, and more and more developers are asking their creditor banks to ease the agreed covenants) and mortgage loans, but at the same time led to an artificial raising of prices by 20–30%.

Eventually, borrowers wanting to improve their housing conditions (regardless of the high debt burden) and banks wanting to maintain the growth of new loans began to extend the term of mortgage loans for primary housing (during the period of preferential programs — from 18.6 to 25.5 years or by 37%). This solution was acceptable if the borrower’s income is not sufficient for approval of the required amount and/or to cover monthly payments. In addition, the maximum allowable age of borrowers at loan maturity has been increased. Some borrowers have also become more active in purchasing more affordable apartments of a lower class and/or on lower floors⁴.

⁴ On the primary market, the price difference between higher and lower floor apartments can reach 15–20%, especially in large cities.

This was a clear indication of the booming demand, which began to level out in the fall of 2022. Unreasonably high prices against the background of a decrease of real disposable incomes and increased risks in the economy led to a slowdown in primary market sales. In this regard, even despite the effects of preferential programs and the risk of their cancellation, since October 2022, 20–30% discounts have been observed in the residential real estate market, as well as a decrease of the number of purchases. According to ACRA’s calculations, the volume of transactions in the primary housing segment is declining more actively (-30% year-on-year) than the secondary housing segment (-19% year-on-year) because the primary market is overheated. In addition, the secondary real estate market is becoming more attractive due to lower prices (currently, by about 25–30% (national average), whereas before the introduction of preferential programs, prices were 15–17% lower) and due to the absence of the objective need for repairs and furniture expenses.

Mortgage market stabilization is also facilitated by stricter requirements of the Bank of Russia for the amount⁵ and source of the initial mortgage payment, which is aimed at improving the quality of mortgage loans and reducing the risk of borrowers losing their mortgaged real estate⁶.

Given the above, as well as the significant decrease of the investment attractiveness of real estate for speculative purposes, it is not worth expecting active growth of the mortgage loan portfolio in 2023 like in the past. At the same time, higher housing affordability based on steady growth of real disposable incomes amid sufficient supply of residential real estate may stabilize the market, but this is possible rather on the long-term horizon.

⁵ On September 19, 2022, the Bank of Russia announced that an addition of 2.0 (irrespective of the debt service-to income ratio) to the risk ratio for RUB denominated mortgage loans granted under shared construction agreements would be effective from December 1, 2022.
⁶ A number of borrowers who did not have funds to pay for even 10–20% of their chosen housing took out consumer loans, thus aggravating their debt burden.

capital: excessive, insufficient or adequate?

In the analytical commentary A house built on the rock or the sand? released in June 2022, ACRA estimated the total volume of excess capital relative to minimal required capital (excluding capital buffers) of the Russian banking sector at more than RUB 5.5 tln. At the same time, the amount of credit losses that could lead to a violation of the N1.0 ratio by a large number of systemically important credit institutions (SICIs) ranged from 5% to 10%. The commentary also showed estimates of the impact of both credit and market risks on the industry’s financial performance. Since the maximum amount of the recorded loss was about RUB 1.5 tln, it could be concluded that at industry level, the reduction of the capital buffer was quite moderate.

The Bank of Russia’s easing mitigated the impact of this loss. Banks were allowed to reflect profitable transactions in their capital and not reflect unprofitable ones. In these conditions, there was a multiple discrepancy between the financial result of the industry shown in the profit and loss statements of banks and the result used to calculate capital adequacy ratios.

In addition, the dissolution of the macroprudential buffer contributed to a decrease of the total volume of risk-weighted assets (RWA) and the actual release of capital. Taking into account the moderate impact of the net loss on capital position, the decrease of RWA following the regulator’s easing, and the low growth rates of the loan portfolio, a situation could arise where aggregate capitalization could even increase despite all the challenges faced by the industry in 2022.

At the same time, ACRA notes that even a full recognition of PNL statements' net loss in base capital and provisioning of blocked assets would not be the factors behind a significant decrease in capitalization at industry level: the decline of aggregate capital adequacy would be less than 2.5%. Moreover, if the loss from trading operations is recognized, the capital buffer, excluding additions, may amount to RUB 4.7 tln. This allows ACRA to agree with the position of the Bank of Russia that currently the industry does not need additional capitalization to maintain financial stability. However, it should be noted that credit institutions’ exposure to these factors was heterogeneous, so that changes in their capitalization metrics were also heterogeneous. That is why some banks are making efforts to maintain their capital position this year and will continue to increase it in 2023.

In H2 2022, the question of whether the banking industry’s capital is enough to cover actual and potential losses became less important than the question of whether bank capital is enough to support the emerging growth of assets, primarily in the corporate segment. Since the Bank of Russia has allowed banks not to comply with macro-additions for five years, ACRA is of the opinion that the capital reserve in the industry as a whole is sufficient to maintain the expected growth of the corporate portfolio, excluding the impact of refinanced loans.

The Agency noted above that the potential volume of loans provided by foreign lenders to borrowers from the non-financial sector amounted to about RUB 12 tln at the end of H1 2022. To refinance this volume, the banking system’s capital should be increased by up to RUB 1 tln (the total amount depends on whether banks comply with macro-additions to the adequacy standards). However, the actual impact of this refinancing on capital will be significantly less, given that a notable portion of the refinanced loans was provided to borrowers with a risk level equal to the sovereign risk of the Russian Federation. Moreover, the amount of RUB 12 tln was not provided solely by borrowers from unfriendly countries and therefore should not be refinanced in its entirety.

On the other hand, the number of unsanctioned banks that can transact with creditors from unfriendly countries is limited, while sanctioned banks had the bulk of excess capital as of January 1, 2022 (the buffer was only RUB 1.3 tln on the specified date if these banks are excluded). In this regard, ACRA assumes that there will be targeted capitalization of individual banks (similar to that carried out by Bank GPB (JSC) using the National Welfare Fund).

Along with the refinancing of external loans, it is possible that in 2023, more borrowers will change their lenders in the Russian banking system. This may affect the portfolios of subsidiary banks of foreign credit institutions, which, despite the fact that they continue to operate in the country, may be limited in their ability to carry their business as before. Although the total volume of the corporate portfolio of such banks is relatively small (as of February 1, 2022, the portfolio was about RUB 1.6 tln, excluding PJSC ROSBANK), the need for its refinancing may also require other credit institutions to allocate a certain amount of their own funds.

Given the above, ACRA is of the opinion that, although the industry as a whole remains stable in terms of capitalization, the differences between credit institutions in the size of the loss absorption buffer and their ability to utilize this buffer for various purposes under sanctions may significantly change the landscape of the industry

In particular, an increasing number of credit institutions will be involved in lending to large borrowers, including those from the public sector. Because of this, even those banks whose capitalization did not deteriorate in 2022 may benefit from the regulator-approved non-compliance with macro-additions or request their shareholders to make additional capital injections. Some credit institutions may change their business models and place more emphasis on lending (as well as other services) to large companies, which, among other things, will require banks to develop additional competencies.

In general, ACRA expects significant changes in the corporate lending market landscape, which may become the most important component of the structural transformation of the banking industry.

Loans issued by banks who want to withdraw from the Russian market and by some large sanctioned banks will be assigned to unsanctioned creditors who have a stable capital position (or have capital replenishment capabilities). Such banks also include large banks that are not SICIs.