The Belarusian banking sector weathered the financial turmoil of 2011 with relative ease. However, increased competition, privatisation and a tricky economic climate means future growth will be tough.

Just like the rest of the country, the Belarusian banking sector has faced significant upheaval over the past 18 months, and the crisis which gripped its economy in 2011 did not leave the financial institutions untouched. Many institutions suffered losses under International Financial Reporting Standards as a result of the hyperinflationary status assigned to Belarus, according to figures from Austrian bank Raiffeisen.

At the same time, drastic currency devaluation also led to a major weakening of capital adequacy ratios (CARs) in Belarus, which fell from 20.5% in January 2011 to 14.9% at the end of November, according to the International Monetary Fund (IMF). As a result, some banks failed to comply with the minimum of 14% during the first two years of operation and 10% thereafter, according to Andrei Baiko, deputy head of the National Bank of the Republic of Belarus’s (NBRB's) banking supervision directorate.

Despite these setbacks, as well as broader turmoil, practically frozen foreign-exchange markets and a massive outflow of deposits, all banks remained operational, thanks in part to a resolution of CAR issues via an injection of Rbs14500bn ($1.74bn) into the state-owned banks (amounting to 5% of the country's total gross domestic product [GDP]) and top-ups by the parent companies of foreign-owned subsidiaries, which helped boost the CAR to 24.7% by the beginning of 2012.

In fact, Belarus's banking sector did not have such a bad 2011, remaining profitable, and in some cases, improving on results from previous years. Return on equity climbed to 14.9% in 2011 from 11.8% in 2010, while return on assets stayed steady at 1.7%. Meanwhile, loan-to-GDP ratios increased from 60% to 66%, while assets across the sector as a whole more than doubled in ruble terms, though they shrank by almost a quarter in comparison to the euro.

State dominance

Belarus's banking sector itself remains extremely concentrated (of 31 banks, the top five hold 80% of the market) and dominated by state-owned banks, in particular Belarusbank and Belagroprombank, which respectively made up 38.8% and 24.8% of the market as of 2011, according to data from the NBRB and Raiffeisen. Belarusbank also holds about 50% of all retail savings, and accounts for 90% of retail lending (the latter as a result of its position as the only bank to provide state-subsidised loans for housing), and according to Tatyana Kozlova, head of Belarusbank’s financial and economic department, 50% to 55% of all credit cards in circulation in Belarus originate from the bank. Belarusbank is central to corporate banking as well, with 40% of loans and deposits.

The state-owned banks have a close relationship with the government and are currently responsible for financing numerous projects via state-directed lending programmes. This is not always a blessing, however; where foreign-owned banks can choose who to lend to and what risks to take, state-owned banks must finance state-owned programmes across entire sectors while providing social services and meeting other obligations such as the provision of services across the whole country, says Mr Baiko, meaning that profits and returns on equity are significantly higher among internationally owned banks compared with the sector average.

But international institutions are not necessarily content with the status quo. “Our national bank likes to say there is no difference between foreign and Belarusian-owned banks, but in reality there are some state bank advantages, although there are also obligations,” says Dmitry Frolov, deputy chairman of the board at Russia's VTB, adding that in particular, some of the country’s largest firms are particularly close to the Belarus-based institutions. For Mr Frolov and his peers, however, this disparity may not exist for much longer.

In June 2011, the Belarus government announced plans to reform the country's financial sector. These plans include the establishment of the state-controlled Development Bank of the Republic of Belarus (DBRD), which is planned to take over the lending programmes currently handled chiefly through Belarusbank and Belagroprombank.

The European Bank for Reconstruction and Development cautiously welcomed this development in its 2012 country assessment, commenting that the DBRD should “introduce greater transparency to the directed lending programmes, help account for their fiscal costs and strengthen competition in the banking sector as a whole, provided access to the directed lending programmes is competitively rationed”.

It should certainly free up time and money for the state-owned banks, says Mr Baiko, who adds that the NBRB is “looking to create a flat regulatory environment”.

Competition heats up

Neither side appears to be shying away from increased competition. “Our bank is a universal one but it is also commercial, and our main goal is profit,” says Belarusbank’s Ms Kozlova, while its chairperson, Siarhey Pisaryk, stresses the need for the bank to move swiftly in order to take advantage of emerging opportunities.

But the state-owned banks may not be entirely ready for the nimbler foreign contenders, warns Andrei Dzhumkov, director of international operations with Belinvestbank. “There is now huge competition for customers, and the Russian-owned banks are very active in trying to increase market share. It’s a new environment for the Belarusian banks… Only now are they trying to analyse their mission and purpose and specialise. We will see tough competition, and this is only the beginning,” he says.

The private banks’ foreign owners are more than willing to plough money into their subsidiaries to gain market share, according to a state-owned bank official who spoke on the condition of anonymity. “Our main problem is that they’re ready to decrease prices, and have access to cheaper funding from their home owners.”

And such strategies for foreign banks are paying dividends; the state-owned banks are seeing their dominant market share steadily eroded. In the 12 months to 2011 alone, this market share dropped from 70% to 65%. This may be beneficial for the sector as a whole, however, according to an IMF country report published in May 2012 which described Belarus's financial sector as “small and inefficient” and added that a greater role for private banks would improve its effectiveness.

A possible side-effect of tougher competition could be consolidation in the country's banking sector, says Mr Dzhumkov, who forecasts a reduction of as much as two thirds. “I expect mergers and acquisitions, and the numbers of banks in the market to get smaller. To my mind, 15 is enough for a relatively small market such as Belarus.” Ms Kozlova, on the other hand, takes an opposing view. “Is there room in the market?” she asks, rhetorically. “Of course the answer is yes, there is room for newcomers.”

Looking west

Even if it is not through new market entrants, there certainly is appetite for an increase of foreign capital in the Belarusian banking system, as part of the government’s ongoing process of privatization, although the precise source is a point of consternation. In particular, some firms are keen to avoid further Russian influence on an environment in which the country already plays a huge part. In fact, plans to sell a controlling stake in Belinvest were delayed by problems finding a buyer from the crisis hit eurozone.

And VTB's Mr Frolov says a greater European presence is unlikely to materialise for some time to come. “There are not enough Western banks here, and that won’t change for another five or 10 years,” he says.

Whatever the market does end up looking like in coming years, no one should expect to see spectacular growth, says a spokesperson for Priorbank, the Belarusian subsidiary of Austrian bank Raiffeinsen. “Going forward, we expect banking sector growth to continue at a slower pace as a result of tighter economic policies,” he says. And slower growth, the IMF warns, is likely to lead to a rise in non-performing loans, putting an additional strain on reserves of capital and possibly paving the way for a new round of recapitalisations. Uncertainty, then, is rife. What is certain is that banks, both private and state-owned, will have to plan carefully for success.   

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