Crisis Сhecks Solidity of Russian Banks

13 october 2015

Sanctions, sharp devaluation of the national currency, growth of crisis phenomena and high economic uncertainty have become a real test of solidity for Russian banks. For many of them, the current crisis has superimposed problems unsolved after the crisis of 2008-2009, which actually deprived them of room for maneuver because of lack of "safety cushion" in the form of capital and liquidity. In the first half of 2015 the banking system was between two fires. From the internal factors due to the exacerbation of previously accumulated structural problems related to the high level of debt load, and with a decrease in the quality of obligations services in the corporate and, especially in the retail segments. From the external factors - due to prolonged and significant fall in oil prices and a sharp rise in key rate by the Bank of Russia to 17% in December 2014.

Measures taken by the Bank of Russia in late 2014 and the first half of 2015, were necessary for the rapid and effective suppression of developing crisis phenomena and for preventing the most negative scenarios in the banking sector. The weakening of the reserve requirements for a variety of lending operations allowed banks to avoid the creation of a significant amount of reserves, reducing the pressure on the capital. Taken together with other measures and a large-scale recapitalization of the largest banks it allowed a number of banks to demonstrate the slowed deterioration of the main financial indicators in the financial statements. However, the "accounting" solution will help to hold off small disturbances. Risks and problems of Russian banks that are not yet fully reflected in their financial statements continue to be relevant, and their expression in financial indexes is a matter of time.

In making an assessment of possible scenarios of surmounting the crisis it becomes evident to experts that short-term measures to support the banking sector might not be enough. In this connection it is necessary to maximize productive use of time left to adapt to new economic realities. Development and implementation of an effective strategy of development of the banking sector is the most effective and meaningful addition to the program of state support that sooner or later, in the current crisis conditions need to gradually be reduced due to the growth of the budget deficit.

Yet by the end of 2015 it will be necessary to organize the work on a new strategy for the development of the financial sector for the medium and long term perspective, in which it will be necessary to consider as the changes in the Russian economy so the new challenges that the banking sector can face. In the new strategy it is advisable to reflect the objectives and tasks that key stakeholders face, including economic and social objectives of the Russian Federation Government which will soon be presented in the updated strategy for socio-economic development of the country up to 2030, the position of the controller, the opinion of the banking community, needs of businesses and customers of banks and other market participants.

Experts of the Analytical Center for the Government of the Russian Federation and Oliver Wyman having studied the situation in the Russian banking sector, suggested a number of possible measures, which are designed to solve currently aggravated structural problems that are typical for the Russian banking sector, and to provide the regulator and financial market participants with the required plan of actions aimed at creating effective tools to ensure financial stability. Proposals set forth in the review "The crisis and financial stability. The strategy of transformation of the banking sector" take into account the best international practices and are the extension of tools of assurance of the financial stability that already exist and are actively used in the Russian Federation, and in some cases to supplement the existing tools.

Experts note the following features of the situation in which Russian banks have to work for today:

·         The first half of the year was characterized by the appearance of new global sources of risk - the threat of large-scale collapse of bubbles in global financial markets and the increased volatility;

·         Under current conditions, every new drop in oil prices will inevitably lead to another round of devaluation of the national currency and the subsequent acceleration of inflation;

·         The increase of allocations into reserves, which in many banks exceed net interest income does not allow them to reduce interest rates following the key rates;

·         Due to the economic uncertainty, the aggregated investment risks exceed the potential return;

·         Noticeably stronger financial results of Sberbank of Russia camouflage depth of the problems in the banking system;

·         The share of the overdue debt in the banking system to the end of the year may reach a record-breaking 7.5%;

·         The continued contraction in consumer and investment demand gives no hope on improvement of the financial situation of the majority of corporate borrowers;

·         Banks are forced to keep high interest rates to cover losses from the growth of overdue debts;

·         Many banks are caught in a vicious circle, where the rise in interest rates leads to the growth of bad debts, losses due to which, in turn, are not covered by current revenues;

·         In order to maintain an acceptable level of capital adequacy additional support may be necessary, in addition to the already allocated 1 trillion rubles;

·         The aggravation of problems associated with the deterioration of the quality of assets and the lack of capital will inevitably lead to an acceleration of consolidation of banks;

·         A feature of the current crisis is the revocation of licenses of fairly large banks;

·         In contrast to the largest banks that receive state support for most of the other banks in the top 100 the crisis is yet to come;

·         The debt-ladened people with low incomes appeared to be the most vulnerable in the crisis, which was one of reasons of the sharp deterioration of the situation of retail banks;

·         The most difficult situation with overdue debts is recorded in the agricultural sector and in the construction sector, which is most susceptible to the crisis phenomena;

·         Loan originations to small and medium businesses for the I half of 2015 fell by more than a third, while the share of overdue debts significantly exceeded the peak of the previous crisis;

·         The collapse in the mortgage market has been avoided thanks to the launch of the program of subsidizing of mortgage interest rates;

·         The funds of the Bank of Russia continue to occupy a significant share in banks' funding;

·         The deterioration of the financial situation of a large number of enterprises and the lack of available circulating assets led to a drop in the growth rate of corporate deposits.

Details - in a review “Crisis and financial stability. The strategy of transformation of the bank sector”.