Credit Institutions



  • The government’s stake in the entire banking system has risen to 70% by early 2018 vs 63% as at early 2017. The above figure has become the highest among all industries in the Russian market (the government owns 66% of the oil&gas sector). The government’s stake will tend to grow further through to privatization of the largest banks undergoing financial rehabilitation; such growth, however, would not be as significant as seen in 2017.
  • As a result, the nature and quality of competition would change: competition between government-owned banks for funding sources and borrowers would intensify ever more, and the reliability factor would become secondary for the competition.
  • Banking assets in the Russian Federation would see a 5.2% growth in 2018, which is below the 2017 figure. The aggregate loan portfolio would experience growth acceleration totaling 5.5%, which would be supported by declining interest rates and partial recovery in lending to corporate clients.
  • Cost of risk in 2018 would stay at the 2017 level equaling 1.6%. Gradual decline of the cost of risk would start after 2019, when creation of additional provisions to cover the existing problem loans would be largely completed. The share of overdue debt would remain at the current level equaling 5.2%-5.3% in the period to 2021. Transferring the business of lending to residential real estate developers to banks could become a factor for substandard borrowers increase in the portfolio.
  • Profit and returns in the banking industry would see no growth in 2018. Return on average assets (ROAA) would total 1% in 2018. Returns would stagnate in the long-term as well:  In the period to 2021, ROAA would not exceed 1.2%. As charges to provisions gradually decline, the shrinking net interest margin (NIM) would exert downward pressure on net income indicators.

Table 1. Evolution of the key indicators of the Russian banking system in 2015-2021

1 Funds and income.
2 1+ past due loans according to the Bank of Russia accounting standards.
3 Capital divided by total assets.

Source: The Bank of Russia, ACRA estimates

Increased domination of state-run banks remains the key long-term trend in the Russian banking sector

A substantial increase of the state’s equity stake in the banking industry has become one of the most notable results of 2017. According to ACRA estimates based on the RAS reporting of the Russian banks, government-owned banks and quasi-government banks (including banks under financial rehabilitation procedure in the Banking Sector Consolidation Fund (BSCF), banks financial rehabilitation of which is managed by government banks as well as banks owned by state-run companies4) accounted for around 70% of the total net assets of the Russian banking sector, while this indicator was around 63% as at early 2017, and approximately 61% as at early 2016. ACRA notes that concentration of government-owned banks among the top 20 banks is even higher: government banks and banks with state-run companies among their shareholders – in particular, PJSC “GAZPROM” (AAA(RU)) for Bank GPB (JSC) (АА(RU)) and Rosneft for Bank RRDB (JSC) (АА-(RU)) accounted for around 83% of assets as at end-2017. Increase of the state’s equity participation in the banking industry was mainly driven by transfer of the three largest private banks – «Bank Otkritie Financial Corporation» (PJSC) BBB-(RU) (under revision), Promsvyazbank, and B&N Bank, including banks they own or manage financial rehabilitation of – into the Banking Sector Consolidation Fund in 2017. License withdrawals from private banks of the top 40 list had also some though significantly less effect. 

As at January 1, 2018 such banks included Sberbank (AAA(RU)), VTB, VTB24, Bank GPB (JSC), JSC Russian Agricultural Bank (AA(RU)), «Bank Otkritie Financial Corporation» (PJSC), Promsvyazbank, B&N Bank, Rost Bank, Bank TRUST, BM-Bank, Bank RRDB (JSC), BANK “ROSSIYSKY CAPITAL” (PJSC), RGS-Bank, Russian National Commercial Bank (A(RU)), GLOBEXBANK, Svyaz-Bank (BBB+(RU)), SME Bank JSC (A+(RU)), Cetelem Bank, Fondservicebank, Roseximbank, Krayinvestbank, Novikombank, Peresvet, Pochta-Bank, Socinvestbank.

Figure 1. Share of the government interest in the Russian banking sector 

Source: ACRA estimates on the basis of data from the Bank of Russia, Interfax-100, ALMC

The forecast has been prepared in compliance with General Principles of Socioeconomic Indicators Forecasting.

In our opinion, the existing structure of the banking system would remain for at least the next three to four years, as this is an approximate period that may be required to complete the financial rehabilitation procedures and start privatization of banks that are now part of the BSCF. At the same time, if financial rehabilitation of «Bank Otkritie Financial Corporation» (PJSC) and B&N Bank would take a route of consolidating them into a single bank, this process may take five or more years due to organizational challenges, which would mean preserving the existing structure in the banking sector for a longer period. In addition, demand for such assets would affect the privatization outlook for these banks, which would depend on the overall economic environment as well as availability and terms and conditions of the sanctions regime. Promsvyazbank, however, is likely to remain a state-run bank for an indefinite period due to its refocusing on servicing the military and industrial complex and large government contracts. 

We believe that the share of government-owned and quasi-government banks is likely to tend to increase further up to privatization of the largest banks under financial rehabilitation procedure; this trend though is unlikely to be as significant as seen in 2017. The above will be driven by the following factors:

  • the Central Bank of the Russian Federation continues to take its “cleaning” measures in the banking sector, which would cause a decline in the number of private banks and, likely, an overall reduction of the total assets of the private sector in the banking system;
  • Spill-over of clients to banks of higher credit quality resulting from recent problems that the above mentioned largest Russian private banks experienced. The largest government-owned banks are often associated with high credit quality stemming from high probability of support from the state.

We believe that maintaining a substantial share of government interest in the banking sector bears inefficiency risks for the entire sector and could make it more sensitive to unfavorable changes in the operational environment, and, in particular, due to the following reasons:

  • Imperfect management of investments: Excluding specific incidents, the government tends to provide additional resources to banks that are most in need in order to maintain an adequate financial standing rather than to the most efficient ones. This way, the principle of saving weak players is followed, including at the costs of a dividend flow from significantly more profitable and strong government banks;
  • Lack of transparent and open criteria to assess performance of management teams (including from the point of view of the amount of public resources obtained, considering the reasons behind additional capital needs), that would be uniform for all government financial institutions;
  • Implementation of “prescriptive lending” practices to specific companies and industries in order to provide targeted support or to finance investment programs. More often than not, resources are provided to companies of admittedly weak financial standing with a muddled outlook for the timely performance of their obligations. In case of government-run borrowers, fiscal support mechanisms are de facto replaced by bank support, which eventually affects standalone creditworthiness of banks and shapes needs in additional support from the state.
  • Conflict of interest of the Bank of Russia acting concurrently as the regulator and owner of the banks that are under control of the BSCF.

As a result, the high share of the government interest in the financial sector leads to increased amount of contingent liabilities of the budget and the Bank of Russia in terms of banking sector support, which translates into substantial amounts of actually provided aid in the periods of economic turbulence.

Reliability factor to lose its significance amid increasing competition among state-run banks

Increasing participation of the government in the banking sector coupled with a sharp decline in the number of large private banks in Russia would, in ACRA’s opinion, cause the competition to change its nature and quality:  The largest state-run banks (including banks undergoing financial rehabilitation procedures managed by the BSCF) would compete against each other ever more actively for both funding sources and quality borrowers. Specifics of such competition between government-owned banks include their relatively uniform high credit quality driven by support from the state or the largest state-run companies (in particular, credit ratings assigned by ACRA to Bank GPB (JSC), JSC Russian Agricultural Bank, Bank RRDB (JSC) are in the AA category, and Sberbank in the AAA category). Thus, the reliability and creditworthiness factor, valued by the clients in Russia historically highly, would not play a crucial role with respect to the competition between the government-owned banks.

By the same token, competing on interest rates is difficult due to the declining net interest margin, and even within the group of state-run banks this would be in fact possible for Sberbank only. As a result, the key competitive efforts would be aimed at promoting additional products and providing additional services, leadership in technology, and driving brand loyalty in various client segments. As to acquisition of large corporate clients, informal contacts and ensuring comfortable service environment would continue to play the essential role.

Competitive environment in some areas of the lending business would also undergo changes following establishment of new specialized government banks: BANK “ROSSIYSKY CAPITAL” (PJSC) (BBB+(RU)) as the anchor bank for JSC “AHML” (AAA(RU)) for mortgage lending purposes, and transforming Promsvyazbank into the principle bank for servicing, and lending to, the defense sector. The fact that large state-owned banks would withdraw from servicing a substantial portion of the military and industrial complex (that demonstrates overall stability of publicly funded borrowers) as well as a significant competition escalation in the mortgage segment that still exhibits high margins and low risk would, in turn, make competition between the largest government-owned banks tougher in other sectors of the economy.

ACRA expects the banking sector to become less transparent and open with respect to some areas, and primarily in working with the military and industrial complex and engaging in government contracts, where a substantial portion of information regarding banks and their clients is likely to be subject to restrictions as set forth by the Russian government in compliance with the amendments to the law “On banks and banking activities” enacted in 2017.

In addition, ACRA projects that certain nervousness and reduced level of trust in the banking sector that arose amid license withdrawals and handover of banks to the BSCF would remain throughout 2018. 

Asset growth to remain moderate

ACRA projects the trend for asset growth in the Russian banking industry to remain in 2018; however, the expected growth would be at 5.2%, which is below the 6.4% recorded in 2017. Some acceleration in lending to individuals and corporates would be accompanied by interbank lending stagnation and slower growth of the securities portfolio. As a result, we do not expect the bank assets to GDP ratio to recover, which would again total around 93% in 2018.

Figure 2. Bank assets to GDP ratio to shrink further in 2018

Source: ACRA forecasts and estimates based on the Bank of Russia data

According to our forecast, the aggregate loan portfolio would experience growth acceleration totaling 5.5% in 2018 vs 4.5% seen in 2016, which would be supported by declining interest rates and partial recovery in corporate lending business. The demand for loans would be supported by continuing growth of the real GDP as well as by growth in specific sectors of the economy. Reduction of interest rates following the key rate cuts by the Central Bank of the Russian Federation would represent an additional incentive for the borrowers.

At the same time, risk appetite of the banks would remain limited; higher pressure from the regulator as to the asset quality would suppress the banks’ willingness to ease their underwriting standards. This would ultimately affect the eagerness of private banks to increase lending to non-financial companies.

Consumer lending would grow by 11.5% in 2018 and remain the most fast-growing segment, which is driven by the recovery of real income growth of the population that we estimate to total 1.0%-1.5% in 2018 versus -1.7% in 2017 as well as by interest rate cuts including unsecured loan products.

ACRA projects an accelerating growth of mortgage loans (by 12.8%), while other types of consumer lending would grow by 11.4%. The share of consumer lending in GDP would expand and reach 16% by 2021 (from 13% in 2017). 

See the ACRA December 22, 2017 research titled "Large businesses migrate towards bond market"

End of the nominal shrinkage in the corporate lending that saw a 0.2% increase in 2017 has become a distinctive feature of the year. Our estimates show that the portfolio of loans to non-financial companies would see an increase of slightly below 5%. The portfolio growth would be held back by slowing real growth of fixed investments and industrial output in 2018, which would limit demand from non-financial companies for credit resources, as well as by accelerating growth in bond issues. Lower interest rates would support growth of the nominal portfolio; however, increase in corporate lending would remain close to zero in real terms. Refinancing loan portfolios to non-financial companies would become the key business. The declining interest rates have yet had no effect on the debt costs for the non-financial sector: the spread between the effective rate for the large businesses and the bank rate became negative for the first time (-0.5% - -1% vs 1.5%-2% seen in 2012-2015). The above would prompt companies to extensively refinance their obligations in 2018 (primarily in the bond market) and would exert significant pressure on net interest margin (NIM) of the banking sector.

Figure 3. Consumer loans to grow faster than corporate loans

Source: The Bank of Russia, ACRA estimates and projections

In ACRA’s opinion, loss of client base by banks outside of the top 50 and reduced assets at their disposal would remain the industry trend in 2018.

Expansion of lending to SMEs has virtually stopped in 2013, which is related to general issues for development of this market segment. In addition, overdue debt has reached almost 15% of all loans issued to SMEs. The Agency projects that overall borrowing demand among SMEs would remain low in 2018, putting pressure on the ability of banks outside of the top 20 to expand their lending operations.

Cost of risk to remain high in years ahead

Despite changes in the structure and rates of loan portfolio growth, the share of overdue debt has remained stable in recent years. ACRA believes that this situation would continue in the coming years and expects the overall amount of overdue loans (by more than 1 day according to the accounting principles applied by the Bank of Russia) to total 5.2%-5.3% in the period to 2021. Using the ACRA methodology we estimate the share of problem loans to remain at 15% in 2018.

In the context of slow economic growth, the problem with the deficit of quality corporate borrowers would remain in the coming few years. Additional risks in the corporate segment may be related to the planned reform in the residential construction financing, and namely, replacing co-funding by the population with bank project financing. This could result in increased lending to high-risk industries (ACRA classifies residential construction as such) from the current 80%-85% of core capital.

In addition, the quality of loan portfolios would be affected by the fact that consumer lending, including unsecured lending, that generally exhibits higher default rates grows faster than the market overall. This way, the banking system would continue operating amid relatively high risk of borrower failures, while new issues would not allow for a significant improvement in asset quality. As a result, ACRA does not expect the overdue debt to return to the pre-crisis level of below 4% in the forecast period.

The cost of risk (CoR) describing the level of new provision charges amounted to 1.6% versus 0.3% a year earlier (a subnormally low level driven by liquidation of provisions by several largest banks in the end of 2016). A substantial growth in provisions occurred in the second half of 2017 driven by additional provisions to cover problem assets identified upon handover of banking groups of “Bank Otkritie Financial Corporation” (PJSC) and B&N Bank to the BSCF.

Figure 4. Overdue loans would remain at the current levels

Source: The Bank of Russia, ACRA estimates

We believe that CoR would remain at its current level in 2018 totaling 1.6%, which would be largely caused by additional provisioning to cover problem assets of PJSC Promsvyazbank that has been managed by the BSCF since end-2017. Overall toughening of the regulator’s approach to asset quality assessment and the inability of banks to significantly improve quality of new issues would be the key factors driving increased charges to create new loan loss provisions.

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

According to our estimates, cost of credit risk would start declining after 2018 when additional provisioning with respect to the currently existing potentially problem loans would be over. Owing to a more conservative provisioning policy followed by banks ACRA projects the coverage of overdue debt by loan loss provisions to increase in the period to 2022.

Amid shrinking NIM and gradual decline of provision charges earnings in the banking system would stagnate

Net income under RAS in the Russian banking industry has declined in 2017 versus 2016: Return on average assets (ROAA, as calculated by ACRA using Bank of Russia data) declined to 1.0% vs 1.1% in 2016, while return on average equity (ROAE) retreated to 9.0% vs 11.5% in 2016.

Lower earnings posted in 2017 were mainly driven by the three key trends: 1) the above mentioned significant growth in loan loss provisions; 2) net interest margin stagnation; and 3) declining operational efficiency manifested in higher cost to income ratio (CTI).

Figure 5. Net income growth would be minimal

Source: The Bank of Russia, ACRA estimates

Net interest margin growth was minimal for credit institutions5 as a whole and amounted to 4.0% vs 3.8% in 2016. By contrast, NIM calculated for the banking sector alone excluding non-banking credit institutions declined in 2017 to 4.4% versus 4.5% in 2016, with NIM for the entire banking sector excluding Sberbank totaling only 3.5% according to our estimates. The above dynamics has become more visible in Q4 2017 and represented a slower decline in funding costs as compared to interest rates on loans and securities.

5 ACRA estimates including non-banking credit institutions based on the Review of the Banking Sector of the Russian Federation published by the Bank of Russia.

According to ACRA projections, ROAA would stand at 1.0% in 2018 equaling the 2017 figure. We estimate that the net income figures would also remain relatively stable in the long term: ROAA would not exceed 1.2% in the period to 2021.

As the provisioning charges gradually decline, shrinking NIM would have a restraining effect on net income. Margin drop is a long-term factor representing the rapid inflation slowdown in Russia to below 3% and the on-going gradual rate cuts by the Central Bank of the Russian Federation as well as higher elasticity of lending rates as compared to deposit rates.

NIM developments in 2017 and a significant correction seen in the last quarter particularly (despite a number of supporting factors, such as replacement of funds of the Bank of Russia by capital) confirm our earlier expectations as to the banking system transitioning to a “new normal” which involves difficulties for maximizing interest margin and increased competition.

According to our estimates, NIM (as calculated for all credit institutions) would decrease from 3.8% in 2018 to 3.3% in 2021. NIM dynamics for the banking sector only (excluding non-banking credit institutions) would be similar yet the figures would be somewhat higher: according to the revised forecast that incorporates a more substantial than expected shrinkage of NIM in Q4 2017, we expect the margin to decline to 4.2%-4.3% in 2018. NIM as calculated excluding Sberbank (3.5%) shows that the banking sector is more vulnerable to this trend.

Figure 6. Gradual NIM decline to continue to 2021

Source: ACRA forecasts and estimates for all credit institutions, the Bank of Russia data

The margin structure would exhibit a faster growth of interest income from consumer loans, while interest income from lending to corporates and income from securities would decline. Changes in NIM structure would be driven by actual stagnation in the corporate lending business and low interest rates on debt securities amid the continuing growth in the most lucrative consumer lending segments (and particularly in mortgage lending).

Outstripping rise of operational costs versus operational income represents another factor that would create headwinds for net income in the forecast period. CTI dropped to 41.5% in 2017 versus the maximum value over the recent years of 47.7% recorded in 2016. However, CTI would continue rising and would reach almost 50% by 2021 despite the efforts by banks to adjust operational costs to new business environment.

Print version
Download PDF


Valeriy Piven
Senior Director - Head of the Financial Institutions Ratings Group
+7 (495) 139 04 93
Alexander Proklov
Director, Bank Ratings Group / Financial Institutions Ratings Group
+7 (495) 139 03 43
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
We protect the personal data of users and process cookies only to personalize services. You can prevent the processing of cookies in your browser settings. Please read the terms of use of cookies on this website by clicking on more information.