Home Banking Healthy Profits Suggest That the Russian Banking Sector Is Well on the Road to Recovery

Healthy Profits Suggest That the Russian Banking Sector Is Well on the Road to Recovery

by internationalbanker

By Hilary Schmidt, International Banker


It seemed inevitable. As countless sanctions were relentlessly piled on Moscow following its decision to invade Ukraine and as the ruble sunk to its weakest-ever level, one could have been forgiven for assuming a comprehensive throttling of Russia’s economy—and its banking sector—would imminently take hold. And yet fast forward a year, and Russia’s lenders have bounced back in a barely believable fashion, as the sector returned to profit again in 2023. But with further punitive measures from the West still a highly likely proposition, Russia’s banking sector is not out of the woods just yet.

Russia’s banks scored their best result on record for January by earning aggregate profits of some 258 billion rubles ($3.4 billion), according to the central bank’s (Bank of Russia’s) figures published on March 22. Profits then swelled a further 14 percent to 293 billion rubles in February, a month that also saw retail deposits grow by 2 percent month-on-month and corporate deposits by 1.1 percent. Furthermore, corporate and retail loan portfolios expanded by 1.5 percent and 1 percent, respectively, while Russian banking liquidity assets totalled a solid 18.9 trillion rubles. Even nonperforming loans (NPLs) were well contained during January. The corporate NPL ratio, for example, was virtually unchanged from December’s 6.5 percent, while retail NPLs were a marginal 0.1 percent higher at 5.2 percent, and the riskier unsecured lending segment saw the ratio reach 8.9 percent, just 0.2 percent higher month-on-month. And only 0.7 percent of banks’ mortgage-loan portfolios have turned sour.

The central bank also reported that banks had made sufficient provisions for bad debt. “This is an adequate level sufficient for covering 26% of clients’ funds in and 58% of individuals’ funds. Another RUB8.6 trillion of liquidity, sufficient for covering 12% of clients’ funds, may be raised by banks with the Bank of Russia on the security of non-marketable assets. Consequently, available sources of liquidity cover up to 37% of clients in rubles,” the report confirmed, also noting that the liquidity cushion of $60 billion that banks housing Russian customers’ foreign-exchange accounts hold “is also at an adequate level, with around 49% of clients’ funds and 29% of currency liabilities covered”.

Taken as a whole, such figures point to the tremendous recovery staged by the banking sector from the initial shock it experienced after the sanctions were imposed in March 2022, particularly those that extricated the country’s most important banking institutions from SWIFT (Society for Worldwide Interbank Financial Telecommunication), the globally used interbank payment and messaging system. The figures also mark a dramatic turnaround from February-June 2022, a five-month period in which Russia’s banks lost a massive 1.7 trillion rubles ($22.1 billion), of which 900 billion ($11.7 billion) was shed in April alone at the nadir of the turmoil.

But the latter half of the year saw the banking sector claw back much of the ground it initially ceded in the wake of the sanctions. By October, Fitch Solutions reported that the risk of a sector-wide crisis had eased in the near term. “The structure of the Russian banking sector, which is heavily weighted towards large, state-owned banks, and relatively solid capital buffers have mitigated the initial shock to the sector from sanctions,” the rating agency stated. And the year ended on a surprisingly bright note when it was reported that the sector had registered a small overall profit for the 12 months of 203 billion rubles.

Much of the sector’s resilience during last year’s tumult can be credited to the Central Bank of the Russian Federation. Under the stewardship of its chair, Elvira Nabiullina, hundreds of failing private lenders and zombie banks were wound down for good during the previous decade, meaning that the sanctions implemented last year did not have the penetrative impact on the fortified sector that was widely feared. And even after the imposition of sanctions, Nabiullina quickly responded with stringent capital controls and tight customer withdrawal limits that helped stave off the threat of bank runs and contagion risk. A 10-percent rate hike was also instrumental in defending the ruble’s value in the days and weeks following the invasion.

But given the volatile geopolitical situation in which Russia finds itself, substantial risks to the downside remain. Fitch also stated in October that headwinds for Russian lenders could intensify this year. The rating agency noted that “further financial sector sanctions being imposed on Russia in 2023, alongside a more determined enforcement of secondary sanctions” posed medium- and long-term threats to banking-sector profitability, particularly via investment, private consumption and growth channels.

Indeed, late February saw the United States and the United Kingdom implement sanctions against more Russian banks to coincide with the one-year anniversary of the conflict, with more than a dozen Russian banks targeted, including Credit Bank of Moscow, the country’s largest non-state public bank. The European Union (EU), meanwhile, cut off more Russian banks from SWIFT, including online lender Tinkoff Bank and private bank Alfa-Bank, both of which are deemed by Russia to be systemically important financial institutions. Tinkoff confirmed, however, that the new punitive measures would not be particularly consequential for its 26 million-plus customers. “We…have developed an infrastructure solution that will allow clients to seamlessly transfer [foreign] assets to a new, non-sanctioned company within one to three weeks,” its brokerage arm, Tinkoff Investments, explained.

Nonetheless, further moves by Western authorities could continue to worsen the situation for Russian lenders this year, as evidenced by the recent pressure being applied to Raiffeisen Bank to shutter its still-significant operating presence within Russia. Austria’s second-biggest lender is arguably the most active Western bank still operating in the country and is proving particularly essential for payments and euro transfers. “We have been asking banks to keep closely monitoring the business in Russia, and ideally, reduce it and wind it down as much as possible,” a European Central Bank (ECB) spokesperson told Reuters on March 23 as part of the bank’s policy to urge all eurozone institutions to do the same.

In response, a Raiffeisen spokesperson said it was still mulling its options for its Russia operation, “including a carefully managed exit”. An Austrian Ministry of Finance spokesperson also noted that while relations with Russia are permanently changed, “most” international companies remain in the country—banks included. “There is substantial trade going on between Russia and the rest of the world in commodities like grain, fertilisers, oil, gas, nickel and other metals, which…require payments.”

Looking ahead, Fitch predicted in October that client loan growth would slow from 18.8 percent year-on-year in 2021 to 7.0 percent in 2022 and then fall dramatically by -9.0 percent this year. “This indicates a precipitous drop in credit growth, which rose to 15.8 percent in January 2022, the highest growth rate since 2015,” Fitch reported, adding that banking-sector assets would shrink from 92.0 percent of gross domestic product (GDP) in 2021 to 90.7 percent and 77.5 percent in 2022 and 2023, respectively. “As aforementioned, we foresee a lag between the introduction of sanctions and credit growth turning negative, mirroring the experience of 2014-17, in the aftermath of Russia’s invasion of Crimea.”

But Russia’s central bank has a decidedly rosier outlook, anticipating that Russian commercial lending will, more or less, return to pre-conflict normalcy later this year. According to Nabiullina’s forecasts, the sector’s combined net profits in 2023 will exceed one trillion rubles, which would still be only half of 2021’s reported two trillion rubles. But Nabiullina also expects Russian retail deposits with banks to surge by more than 7 percent this year and corporate deposits by around 15 percent. Moreover, mortgage and consumer lending will expand by around 15 percent and 10 percent, respectively. With construction a flagship industry in Russia, the buoyant mortgage outlook will bode particularly well for the economy of the world’s largest nation, particularly given the support it receives via state subsidy programmes, although Nabiullina has warned that there is a modest risk of a credit and real-estate bubble forming and expressed some concern over the declining quality of mortgages that could warrant tighter regulations being applied. The central bank chief also sees corporate-lending growth slowing from 14 percent last year to 10 percent in 2023.

As for Russia’s most important state-owned lenders, such as SberBank, VTB Bank and Gazprombank, Fitch suggested that Moscow should focus on supporting them as much as possible. Such lenders “collectively account for almost 60 percent of total banking sector assets. In our view, supporting these banks will remain a priority for the Kremlin”.


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