Credit Institutions



  • The resource base profile of Russian banks remains stable. The key source of liabilities are funds of clients accounting for around 63% in the total funds raised. Reducing utilization of funds from corporates and the Bank of Russia with concurrent increase of liabilities to government agencies were the key trend of 2017.
  • Competing for cheaper funding would be the key factor of changes in the liabilities profile. According to ACRA estimates, net interest margin (NIM) of banks would be under pressure in 2018. In addition, deposit yields would decline faster than the funding costs in the coming years. Such situation would force banks to compete for relatively cheap sources of liabilities.
  • Banks’ seeking to cut funding costs would result in an intensified competition for deposits of individuals. The average costs of attracting short-term (for less than one year) funds of individuals was 6.02% in 2017, while the respective costs for funds of non-financial companies equaled 8.08%. Longer-term funds “cost” 7.08% and 8.79%, respectively.
  • Creditworthiness of small and medium-size banks would come under the highest pressure. The expected changes would create risks primarily for credit institutions with low diversification of their resource base. According to ACRA estimates, dependence of Russian banks on the largest funding source is higher for smaller banks. Small and medium-size banks with substantial dependence on funds of individuals may face both resource deficit and drop in profitability. Decline of NIM of credit institutions ranking 100th to 200th by assets would exceed 40 bps in 2018, while ACRA expects NIM of the entire banking system to decline by 30 bps.
  • Financial resources deficit may push banks to intensify bond issues. In particular, individuals whose funds will go to the securities market through individual investment accounts, investment life insurance instruments, and unit investment funds might drive demand for such bonds.

Funding structure of Russian banks remains stable 

The overall funding structure of Russian credit institutions saw no significant changes since early 2017: clients’ funds remain the major source of liabilities as at November 1, 2017 accounting for 62.9% of total liabilities versus 62.5% as at year-start.

According to the Bank of Russia data, client funding gradually replaces regulator’s funds, and government and regional financial bodies are the main source of such resources more than ever. Inflow of funds from the above sources is primarily based on active raising of cash by VTB Bank that increased the amount of funds of government agencies (Federal Treasury, in the first place) by almost RUB 1 trillion from January to September 2017. Funds of corporate clients demonstrate net outflow following the performance for the 10 months of 2017. 

Table 1. Dynamics of specific liabilities (RUB bln, if not specified otherwise)




10M 2017

Funds of individual clients, total




% of liabilities




Funds of corporate clients




Incl. government and regional bodies and agencies




Deposits of individual clients




Funds of banks




% of liabilities




Funds of the Central Bank of the Russian Federation




% of liabilities




Source: Bank of Russia data, ACRA estimates

Funds of individuals deposited with banks increased to RUB 560 bln in January-October 2017. This figure exceeds the cumulative gain for the same period of 2016 (around RUB 100 bln); however, overall interest of population in increasing deposits remains weak and is below the figures seen in 2013-2015.

Table 1. Inflow of client funds in 2013-6M2017, YOY

Source: CBR data

Not only inflow of client funds but also deteriorating standing of specific banks forced the banks to use funds of the Bank of Russia. As at July 1, 2017, net outflow from the banking system was in excess of RUB 2 trillion, and after the Bank of Russia interfered to solve the situation with FC Otkritie (that received over RUB 1 trillion from the Bank of Russia in July and August 2017) and B&N Bank (that raised over RUB 150 bln from the Central Bank in September 2017), the total system’s dependence on funds of the regulator has increased.

Individuals’ deposit maturity has decreased due to interest rate changes. ACRA notes a substantially lower profitability of fixed-term deposits in the last 12 months, which mainly affected deposits with a maturity of over one year. As a result, the interest rate curve changed and the population increasingly tends to place their savings for relatively short periods.

Figure 2. Interest rates dynamics for deposit of individuals

Source: Bank of Russia 

Liabilities with maturity of over three years (around 40% of the total) remain the largest source of funding raised from legal entities. In addition, almost 75% of deposits with such maturities are foreign-currency denominated.

Interest rates on foreign currency deposits are in gradual decline; however, this process has no dramatic effect on the maturity profile. Interest rates for short-term ruble deposits also go down, with yields for deposits of over 1-year stayed practically unchanged.

Raising funds from legal entities may become unprofitable and unreasonable for banks 

According to the Bank of Russia data, foreign currency deposits of individuals are the least “expensive” among various sources of client funds (excluding demand deposits) followed by foreign currency deposits of legal entities and ruble deposits of individuals and legal entities. At the same time, according to ACRA estimates, the effective interest rates for funds raised from both groups of clients are almost the same.

Although non-financial organizations have a large amount of funds in their foreign currency accounts, any attempts by banks in accelerating utilization of this funding source may be unreasonable amid current environment.

Although ACRA assesses the probability of new ruble devaluation as low if no shocks in the global crude oil market occur (we expect USD/RUB exchange rate at 59 as at end-2018), the risk of higher volatility are still significant. By increasing their net short FX position, banks may face losses that would invalidate any benefits from relatively cheap foreign currency funding.

The average costs of raising new ruble deposits from legal entities stood at 7.3%-8.3% in September 2017 (according to the Bank of Russia data), which lowers their appeal as a funding source. Although ACRA believes that deposit yields for legal entities will decline faster than that for individuals, the feasibility of using them (as well as foreign currency funding) may be low regardless of changes in the interest rates.

We note relatively high duration of such liabilities, which would preclude the banks from quickly decreasing their aggregate value in case of interest rate cuts. In addition, competition for corporate depositors may be limited due to a certain crisis of confidence in sustainability of the financial system as a whole and of private banks, in particular.

After witnessing the risk of sudden loss by a number of private banks of their ability to independently run the business, corporate clients may be less willing to place funds with such credit institutions (particularly amid interest rate cutting). Government-owned banks seen as less exposed to the default risk would have a competitive advantage allowing them to pull corporate depositors from private credit institutions.

The latter, in turn, would be forced to seek other sources to replenish their resource base (primarily retail deposits). As a substantial increase in available funds of individuals is unlikely, one might expect a significantly more intensive competition for deposits of individuals between banks. This would narrow the gap between costs of attracting legal entities and individuals: competing for funds would become a factor constraining reduction of rates.

Issuing bonds is an alternative way for increasing liabilities, and the success of this method may be supported by the increasing interest of population in using investment life insurance and individual investment accounts as well as unit investment funds.

Diversification of liabilities of Russian banks limits their ability to adapt to changes

According to ACRA estimates, the level of resource base concentration of Russian banks remains high. The share of banks with the largest source of liabilities accounting for more than 60% of the total stood at 62% (ACRA splits these sources to funds of individuals, funds of legal entities, interbank liabilities (including those raised from the Bank of Russia) and bonds (debt securities)). In terms of the above indicator, 60% is a threshold used in the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, and, in ACRA’s opinion, represents a risk factor, if exceeded.

The Agency notes that diversification of funding sources goes down together with the declining amount of assets. It is worth noting that it is typical of Russian banks at large to use one of the liabilities sources as an anchor. The share of credit institutions with any such source exceeding 50% of the total liabilities was above 80% in 2017. The above suggests that diversification of funding sources is not the key factor in the funding strategy. A bank’s market position, its ability to offer attractive terms for placing funds, and counterparties affiliated with the specific credit institution are more important factors.

Analysis of liabilities profile shows that the importance of clients’ funds as the major funding source rises as the assets of a bank decline. At the same time, while sector leaders focus more on deposits and current accounts of legal entities, smaller banks rely more on funds of retail clients.

Figure 3. Share of funds of individuals in the liabilities structure of banks grouped by asset value

Source: ACRA estimates

Banks outside of the top 200 group now return to a more active use of funds of legal entities as a funding source. In our opinion, a contracting client base and an increased dependence on funds of companies affiliated with credit institutions could explain the above trend. The fact that the importance of funds on current accounts of corporate clients increases for smaller banks also supports the above. More telling is that a relatively high dependence of top 50 banks on fixed-term deposits of legal entities (which are long-term and expensive) would force exactly this group to invigorate the competition for funds of retail clients.

Figure 4. Share of fixed-term deposits of legal entities in the liabilities structure of banks grouped by asset value 

Source: ACRA estimates

ACRA notes an equally low dependence on interbank funding for both the largest banks and banks outside of top 200 in terms of assets. The largest credit institutions with comprehensive access to clients’ resources have no need to use funds of other banks; for small banks, however, interbank funding is not quite affordable. At the same time, funds of other credit institutions account on average for more than 20% in total liabilities of top 100 banks.

As to the securities market, it was still fragmented in 2017 due to a limited number of banks issuing bonds. According to ACRA estimates, only 57 banks have issued bonds and only two of them use bonds as their major source of liabilities. The top 50 banks by assets accounted for almost the entire volume of issued bonds.

The share of financial resources accumulated by the largest financial institutions of Russia remains high. Legal entities and individuals had more than 60% of their funds placed on accounts with the five largest banks. Top 10 banks by assets control over 80% of the total client liabilities.

Banks with low-diversified funding sources may face both shortage of funds and plummeting margins

In Agency’s opinion, in the next 12 months, the asset growth rates in the banking sector will be moderate. ACRA does not expect investment and consumer activities to grow significantly, which may limit the demand for credit resources. In such conditions, the aggregate financial needs of the industry would increase only slightly; however, some factors may force banks to adjust their funding profiles in support of margins and financial stability.

A limited demand for new loans caused by the current economic environment and growing competition in the segment of key corporate customers (in both the assets and liabilities sides of the balance sheet), may result in lower margins in traditional banking segments and stimulate banks in their search for low-cost funding.

According to ACRA estimates, the maturity of the loan portfolio of Russian banks is much higher than the maturity of client deposits. Under normal conditions, this indicates to a relatively fast decline in the costs of resource base as compared to income assets. However, current non-market factors may restrict the ability of banks to push down funding costs.

A gradual transition from the structural liquidity surplus to shortage may become one of such factors, with an inevitable growth of competition among credit institutions for funding resources. Non-financial institutions running for higher risk premiums on their deposits with private banks may also affect funding costs.

Coupled with the analysis of liabilities profile of Russian banks, the above factors allow us to arrive at the following conclusions: 

  • Credit institutions, more prone to the risk of high concentration of funding sources, have been active in raising retail funding;
  • Low diversification of funding sources and high dependence of resource base on retail deposits characterize small credit institutions rather than large ones.

Such banks have limited abilities to replace their sources of liabilities as their access to corporate deposits and funds of other banks is restricted to some extent.

ACRA also notes that top 20 Russian credit institutions have raised about 80% of all retail deposits. The above volume may be further increased only if the current interest rates remain unchanged. That would exercise additional pressure on the margins of those banks whose ability to diversify resource base and sources of operating income is limited.

Therefore, as forecasted by ACRA, a stricter competition for retail funding may push down the ability of minor credit institutions to raise funds using the sources most traditional for them.

As high-quality borrowers are scarce and interest rates go down, banks’ abilities to maintain loan portfolio margins will remain weak in the next months. Therefore, ACRA deems probable that the returns of banks ranked below top 100 may plunge in 2017–2018, which would affect their financial stability.

See ACRA research titled Stagnant net interest margin to hold back creditworthiness of Russian banks, published on November 30, 2017.

One potentially negative effect of lower value of liabilities for such banks may be an accelerated drop in net interest margins (NIM).

According to ACRA estimates, the NIM may decline by 30 bps (from 4.8% to 4.5%) in 2018. Higher dependence of banks ranked below top 100 on the retail funds and lower costs of retail funding may lead to a decline of NIM by 35-40 bps. A partial loss of client base caused by a higher competition may aggravate such decline.

In particular, a decline from 49% to 44% in the share of retail funds at banks ranking among top 100-200 in terms of assets and a joint effect of the above factors may, according to ACRA estimates, result in a 45-50 bps NIM drop for such banks.

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Natalia Porokhova
Senior Director, Head of Sovereign Ratings and Forecasting Group
+7 (495) 139 04 90
Maria Mukhina
Operating Director
+7 (495) 139 04 80, ext. 107
Valeriy Piven
Senior Director - Head of the Financial Institutions Ratings Group
+7 (495) 139 04 93
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