Talk of the sudden collapse of
Russias banking system has receded for now. More
than a year on from a crash that many believed would wreak
untold havoc on the sector, operating conditions for banks are
tough, as access to credit remains scarce. But signs of an
economic revival and a thawing in international credit markets
are helping to ease the countrys bad-debt crisis.
Russian banks are still struggling with
losses as provisions for bad loans rise, consuming profits and
capital. But fears of a second wave in the autumn and of
non-performing loans (NPLs) hitting levels of 2030% have
largely been replaced by a resurgent optimism and increasing
confidence in the governments economic policies.
Despite the financial turmoil since last
year, no major Russian bank has gone bust, and there have been
minimal signs of depositor panic. This is in sharp contrast to
the countrys sovereign default in 1998 when many Russians
had their savings wiped out and many of the leading banks
Fawzi Kyriakos-Saad, chief executive
officer for Credit Suisse in Russia, the CIS and Turkey, says
Russians are benefiting from an unwritten contract with the
state, whereby citizens do not interfere in politics as long as
the Kremlin ensures social stability and increasing wealth.
The public reaction to
the governments handling of the crisis has borne out this
theory. Russians havent taken to the streets in protests
in any significant numbers, and the state has repaid them by
defending the rouble, protecting their deposits and preventing
any large banks or industrial giants from collapsing.
Banking systems in emerging markets
like Russia, Turkey and Lebanon are doing relatively well, and
Turkey does not have a problem with non-performing loans,
says Kyriakos-Saad. Russia has had issues surrounding
NPLs, but the banks at their own
initiative and with encouragement from the
economic ministry have been working with clients to get
them through a difficult time. The central bank and the
regulators have done a good job working with the banks and
preventing any large collapses.
Large and small
The latest official data put
non-performing loans at 5.4% of nationwide lending portfolios,
although bankers and investors say the figure is much larger.
Based on IFRS (International Financial Reporting Standards
principles, Russian bank UralSib believes that non-performing
loans have already exceeded 10%.
These numbers are still far off
pessimistic or perhaps deliberately conservative
predictions made by Alfa Bank chairman Pyotr Aven and Sberbank
chief executive German Gref that overdue loans could account
for up to 2030% of all loans in the system by the end of
Slava Rabinovich, managing partner of
Moscow-based hedge fund Diamond Age Capital Advisors, says
warnings about bad loans are overblown. Russian NPL
growth has already peaked at 11% versus prior 15% estimates and
will stand at 89% by year end versus 12% previously
forecast, he says. Loan loss provision charges are
anticipated to fall from 67% to 23% in 2011.
Russian banks were surprisingly decisive and resilient; bad
loans are now fully provisioned.
Russias central bank had previously
forecast 1012% of the total portfolio would be classified
as non-performing by the end of 2009 under what it called a
conservative scenario. Raiffeisen, the biggest foreign bank in
Russia, recently reported that its NPLs had risen to 7% while
state-owned VTB sees its bad loans reaching a possible 10% by
the end of the year.
The Russian banking system has held up
well compared to countries like the US and the UK, says Mattias
Westman, chief executive of Prosperity Capital Management. The
firm he founded is the largest portfolio manager operating in
The system may be enhanced by the
crisis as there has been no case of Russian banks losing their
money, he says. This may be partly attributable to
the low sophistication of the banking sector, which did not get
involved in the sub-prime sector.
Russias exposure to US sub-prime
mortgage and complex derivatives was low but the
resulting credit crunch has been felt across the board. The
closure of international credit markets translated into a
liquidity squeeze, which was due to massive growth in leverage
of Russias banking and non-financial sectors in the years
preceding the crisis.
Russias economy contracted by 10% in
the first half of 2009 as the lending drive by state-controlled
banks proved inadequate to offset the contraction in loan
portfolios at private institutions. Stock markets tumbled by
80% as companies struggled to refinance their debt.
Higher-than-expected world oil prices have
allowed the government to trim the size of next years
deficit and predict that by 2012 Russias economy will
return to pre-crisis size. The economy ministry believes Russia
is pulling out of recession, but analysts agree that access to
credit is crucial to that turnaround.
Central bank chairman Sergei Ignatiev
recently pointed out that Russian banks have not significantly
stepped up lending to the real economy this year, despite
official requests to do so. The credit activity of
Russian banks remains low. According to preliminary estimates,
the volume of the loan portfolio to non-financial organizations
and the population has barely changed in the first eight months
of the year, he told the Duma, lower house of parliament
While this may be true of state-controlled
banks, such as the countrys biggest lenders Sberbank and
VTB, lending activity is nevertheless picking up among Russian
private banks that were too scared to issue new loans earlier
The signs are that debt restructurings are
proceeding, and western banks are becoming more receptive to
new loan requests. Rusal, the worlds largest aluminum
maker, has broadly agreed restructuring terms with as many as
70 banks, promising to repay $5 billion by the end of 2013 and
to refinance its remaining debt for an additional three
Foreign bankers view the successful
conclusion to Rusals debt negotiations as a gauge of
Russias ability to manage the $475 billion in foreign
debt accrued before markets crashed in the second half of
MDM Bank is raising a $175 million
international loan from a syndicate of lenders. It is the first
time in more than a year that one of Russias
privately-owned banks has been able to obtain foreign
financing. Without international loans, private banks have been
reluctant to lend to local corporate clients.
The 87% rally in Russian stocks since
yearly lows in February has been driven largely by domestic
money, according to bankers. Despite the rare combination of
spectacular gains, and continued attractive valuations, global
investors with some notable exceptions still
arent yet buying into the Russia story.
There are many reasons for this
including corporate governance, concerns about liquidity,
Russias weak market infrastructure and political risk.
Russia trades at a significant discount to fundamentals
in both fixed income and equities, says Yuri Soloviev,
chief executive of VTB Capital, the investment banking
subsidiary of state-owned VTB bank.
While some of this can be attributed
to issues surrounding corporate governance, there is still a
lot of misunderstanding and misapprehension by international
investors which need to be allayed. We want to facilitate this
by creating a dialogue between them and the business elite and
the senior political establishment.
Retail banking and consumer lending still
represent a huge opportunity for domestic and foreign players,
says James Cook, chairman of Kreditmart, Russias largest
mortgage and consumer finance brokerage. There is still a
lot of growth ahead in consumer lending because consumer credit
in Russia is minuscule at 10% of GDP, while mortgages only
represent 3% of GDP.
Russias government is optimistic
that the countrys mortgage market will return to
pre-crisis levels within two years. Minimal mortgage interest
rates have risen to 14% while the rate of
mortgage defaults has shot up to 5% from 0.5%.
HSBC has said it will aggressively pursue
an expansion programme, three months after opening its first
four Russian branches in Moscow and St Petersburg. The
banks local unit, which had a charter capital of $224.6
million in 2008, has said it is not actively pursuing
Barclays in Russia
Hans-Joerg Rudloff, chairman of Barclays
Capital, says the UK bank will expand into investment and
private banking in Russia following its deal to acquire local
lender Expobank for $745 million last year. Barclays has since
rebranded Expobanks 36 branches and hired Nikolai
Tsekhomsky as chief executive from Russian state bank VTB to
head up its retail and commercial banking in Russia. Rudloff
says: This is an important step in the strategic
development of Barclays in Russia and integral to
Barclays ambitions to diversify internationally. We are
optimistic about the growth opportunities in Russia and remain
committed to the market.
The investment banking
While commercial and retail bankers
continue to plough through bad debt, their investment banking
counterparts are building up their businesses to profit from a
recovery in capital markets.
Soloviev says VTB Capital has recently
hired several teams of bankers from Dresdner Kleinwort, Troika
Dialog, Morgan Stanley and ING. VTB Capital, which has hired
over 500 bankers in the past year, has soared into second
position for arranging Russian and CIS loans.
Merrill Lynch and Credit Suisses
operations in Moscow have made senior hires while Russian
brokerages Troika and Renaissance Capital are expanding again
after personnel cuts of 40%.
Ed Kaufman, co-head of corporate and
investment banking at privately held Alfa Bank, says
Alfas investment banking team has recorded its best six
months on record. Alfas investment bank has
generated about $200 million in revenue for the first half of
2009 while costs are down over 30%, says Kaufman.
Fixed income and equities have been great, but the
pipeline for corporate finance deals is growing rapidly, and we
expect a good flow in the second half as well.
Big ticket deals involving Russian firms
expanding abroad may be back on the cards for bankers following
Sberbanks and Canadian auto-parts group Magnas deal
to take a 55% stake in German-based car maker Opel. Russian
prime minister Vladimir Putin said the agreement will be the
first substantial step in integrating the economies of Russia
and western Europe.
Domestic M&A has been quiet this year,
with the much-anticipated boom in the financial sectors
deal-making yet to materialize. Regulators, politicians and
central bank officials have said that consolidation of the
countrys 1,100-plus banks is inevitable, and that
hundreds of small banks cannot withstand rising bad loans and
In fact, the state news agency Prime Tass
reported that the number of operating credit institutions in
Russia had decreased only marginally to 1,078 in the eight
months to September 1. The biggest deal in terms of value was
the merger of MDM-Bank and URSA Bank, which closed in August
and was worth an estimated $1 billion.