Russian bank profitability is healthy, but there are fears around asset quality in consumer banking, and the regulator is taking a tougher line on money laundering and liquidity problems.

On the surface at least, all is well with Russia’s top 100 banks. Total profits in this year’s ranking (for financial year ending December 2012) were up 21% compared with the previous ranking, at $29.2bn, bringing an aggregate return on Tier 1 capital of 24.2%. Meanwhile, banks have been strengthening their capital position. Total Tier 1 capital in the top 100 rose by 35%, bringing the aggregate capital-to-assets ratio to 8.63%, from 8.48% in the previous ranking. Only eight banks recorded losses, totalling $353m, compared with 12 banks losing an aggregate $606m in the previous ranking.

Top 100 Russian Banks

Consumer credit in particular is booming – six of the top 10 banks by return on assets (including the top two) and six of the fastest growing by assets are all specialists in consumer lending. Nine banks with an established focus on consumer credit recorded an aggregate return on assets of 4.64%. In addition, two recent start-ups, Svyaznoybank and MTS Bank – both connected to the mobile telecommunications sector – entered profit for the first time.

However, regulators are nervous about the pace of growth in consumer lending – three consumer credit banks more than doubled their assets, while four others presided over asset growth of more than 50%. In response, the Central Bank of Russia (CBR) introduced higher capital requirements for banks with high lending rates, and the Russian duma (parliament) passed legislation to enforce better standards of due diligence before credit cards can be issued. Many consumer lenders say their risk management is already among the most sophisticated in the Russian banking sector – a claim supported by non-performing loan (NPL) rates that are often lower than average. But impairments are rising, and provisioning for NPLs varies widely.

Corporate banking squeeze

Yet the consumer banking sector may not be the main source of risk. Corporate banking faces a difficult competitive landscape. The giant state-owned banks Sberbank and VTB enjoy a dominant position in the deposit market that provides them with a cheaper and more stable funding base with which they are able to squeeze privately owned competitors. All of the top three largest losses in this ranking were recorded by large privately owned banks with significant corporate loan books that are clearly struggling to compete. Two of them (Uralsib and National Reserve) are among the top three losses for the second year in a row.

The corporate banking sector is also home to Russia’s many 'pocket banks' that primarily serve companies linked to their own shareholders. Some elements of the sector are even less savoury, and new CBR governor Elvira Nabiullina, who took office in May 2013, seems to be taking a tougher line on money-laundering. In November 2013, the CBR revoked the licence of Masterbank, citing “significant misreporting of data, poor asset quality, primarily on loans granted to individuals associated with the owners of the bank”, and the failure to comply with anti-money-laundering regulations. Masterbank appears at 46 in The Banker's ranking based on 2012 data, but will of course be removed from next year’s ranking.

Even where there are no allegations of rule breaking, the CBR is becoming less tolerant of weak business models. Investbank, based in Kaliningrad and coming in at 79 in the ranking, was shut down in December 2013 on the grounds of poor asset quality, insufficient loan loss reserves and misreported data. It too will drop out of the ranking next year. A series of other banks outside the top 100 were placed in administration on similar grounds in the final weeks of the year, often after seeking liquidity support from the CBR. Corporate depositors and the interbank markets were reportedly turning their backs on any bank they feared might be in the CBR’s sights.

An analysis of loan-to-deposit (LTD) ratios demonstrates that Russian banks in the second tier and beyond are often very reliant on the interbank market. To avoid distorting the data, The Banker excludes both interbank deposits and loans from the LTD ratios, as these can be liquidated swiftly to provide liquidity (in the case of loans) or to drain it (in the case of deposits). There are 20 banks in total for which interbank deposits account for more than a quarter of all deposits (and up to 80% in one case), but more than half of these banks are foreign owned, so the interbank deposits most likely come from their parents.

Similarly, most of the top 10 highest loan-to-deposit ratios are among foreign-owned banks that can draw on parent funding or wholesale funding backed by the parent’s high credit rating. But Russian-owned banks with very high LTD ratios will need to keep careful control over their liquidity, especially as the CBR intends to introduce the Basel III liquidity coverage ratio in due course.

The Banker's Top 100 Russian banks ranking, 2014 originally appeared in the February 2014 issue of the magazine. The full results of the ranking are available on The Banker Database. Find out more about the database, register for a free trial or subscribe today.

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