The Russian banking system: Has the bottom been reached or is the economy still in recession?

Pavel SAMIEV
Managing Partner
Russian National Agency for Financial Studies (NAFI)

In the first half of 2016 the Russian economy "shrank" and the fall affected all sectors of the economy. Moreover, the official forecasts about the end of the crisis were ambiguous. Despite this, experts forecast the recovery and growth of the economy in the current year. At the same time, the situation in the banking sector inspires "cautious optimism". So, at the end of the 2nd quarter of 2016 the banking sector has become profitable even without data from SBERBANK Russia (Figure 1).




In the 2nd quarter, 2016 the increase in the profitability in the banking sector was provided by the reduction of allocations to reserves (by 38% compared to the 2nd quarter of 2015) and a decrease in the expenses in relation to the interest rates by 9%.

Both factors have led to the stabilization of the macroeconomic situation and to the softening of the monetary policy, which had a positive impact on payments discipline of borrowers and on the funding costs.

The positive effect of these factors covered the decline in the net commission income (-14%) and a net loss from operations with foreign currencies (Figure 2).



Mortgage loans significantly strengthened their position: the growth rate of residential mortgage loans was more than 1.5 times higher than for the other loans for individuals. In the first five months of 2016, banks issued 322 thousand residential mortgage loans in the amount of RUB 550.4 billion, 48% higher than the results of January-May, 2015 while the other loans for individuals in the reporting period were increased by only 30% (Figure 3).



The growth of the mortgage market is large due to the state support program. Thus, 41% of all residential mortgage loans in January-May 2016 were sustained by the subvention program for interest rates.

However, in March-May, 2016 the share of mortgage transactions significantly increased based on the bank's own programs due to the lower interest rates.

With a high probability the subsidy loans program will not be extended for 2017, which could lead to a revitalization of demand for this product in the last months. However, the volume of loans issued under the state program in October-December, 2016 will not exceed 35-40% due to the faster growth of loans based on the bank's own programs as a result of aligning rates.

Another situation is observed in the retail deposit market: in the first quarter of 2016 the volume of the population deposits decreased by 3% compared with the growth by 25% in 2015. By analyzing the structure of the market we see the growth in the share of long-term foreign currency deposits, and depositors prefer large private banks.

Retail deposits remain the most important source of funding for the banking sector and their share at the end of the year could reach one third of the total liabilities.

Thus, in the first three months of 2016, the total volume of retail deposits decreased by RUB 0.7 trillion, to RUB 22.5 trillion (Figure 4).



The volume of foreign currency deposits fell by 9.9% and the ruble deposits by 0.1%. Such dynamics of deposits was influenced by the currency revaluation: during the same period the USD fell against the RUB by 7.3% and the EUR - by 3.9%; so we can talk about the stagnation of the market rather than its reduction.

On the contrary, during the period April 2015 - April 2016 the volume of deposits showed an active growth: the deposits in rubles increased by 16% and in the foreign currency - 22%.

In the context of the ongoing economic slowdown and inflationary risks, Russians are trying to keep their savings and transfer them from RUB into USD and EUR.

In 2015 the share of foreign currency deposits in the total deposits increased from 26% to 29% (Figure 5).



At the same time the long-term deposits (over 1 year) are gaining in popularity: from April 2015 to April 2016 the growth rate reached 59.2%, while long-term deposits in rubles grew only by 3.2%.

In the segment of short-term deposits the other trend can be observed: over the same period, deposits in rubles grew by 27%, while in foreign currency they fell by 16%.

The lending market of the legal entities decreases its activity: the growth rates of the lending market of small and medium-sized businesses have decreased for the second year.

Moreover, the fall of the lending market for small and medium sized enterprises was accelerated: if in 2014 the reduction of issued loans was by 5.6%, in 2015 the market fell by 28.3%.

The lending of individual entrepreneurs has decreased even more: the volume of lending's in this segment declined by almost twice, and the share in the total loans fell from 8.3% to 6% y-o-y.

According to the Bank of Russia, in 2015 a tendency of the passing portfolio from risks loans of small- and medium-sized businesses to loans for large companies was noted. Thus, the portfolio of loans for large businesses increased by 17% in 2015, not least due to the revaluation of foreign currency loans.

The main explanation of this tendency is due to decline in demand for loans from entrepreneurs. In such a situation of economic downturn companies are forced to optimize their costs and to use their own funds for business development.

In 2015, banks tightened the norms of risk assessment and the quality of the loan portfolio of small- and medium-sized enterprises are also rapidly deteriorating.

The devaluation of the ruble at the end of 2014, the fall of the income and purchasing power of the population, as well as the economic downturn have significantly destabilized the financial situation of small and medium-sized enterprises.

The share of overdue loans for the year has almost doubled: from 7.7% to 13.8%

Small- and medium-sized businesses are highly dependent on the market conditions, so in case of a deepening recession in the economy, the rate of deterioration in the portfolio will remain high, and the share of overdue debt may reach 17-18% by the end of 2016.

Thus, the situation in the Russian banking sector at the moment, as well as in the economy as a whole, depends on the current trends, a part of the market segments showing a strong growth, while others continue to fall.

Pavel SAMIEV
Managing Partner, the Russian National Agency for Financial Studies (NAFI)

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