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WorldOctober 1 2013

Belarus banks hit more turbulence

With inflation still high following a financial crisis in 2011, there are growing signs that Belarusian banks may need to brace for a further round of currency depreciation and asset quality deterioration.
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Belarus banks hit more turbulence

Belarusian banks were badly bruised by the country's economic crisis of 2011, and after a year of recovery the sector is again bracing for a downturn as the former Soviet republic's current account deficit yawns wider, growth sputters and the Belarusian rouble steadily loses value.

“We've been through two downturns in the past five years and we are getting ready for a third,” says Krzysztof Spyra, a member of the supervisory board of Idea Bank Belarus, a unit of Poland's Getin Holding that has been expanding aggressively in the consumer loan and instalment business in Belarus. “It seems that part of the model here is a crash and burn every two years. Still, we survived the other two downturns and we'll do the same again,” he adds.

The gloomy outlook for the banking sector stems from Belarus's macroeconomic problems. Economic growth for 2013 is expected to come to only about 2%, after a lacklustre expansion of 1.5% in 2012. Inflation is still stubbornly high at about 20%, although down from 59% in 2012, and the country is running into export difficulties. In the first six months of this year, the current account deficit came to $3.1bn compared to a $752m surplus in the same period of 2012. The International Monetary Fund expects Belarus to run a current account deficit of 5.6% of gross domestic product (GDP) this year.

There is also rising political uncertainty following a dispute between Belarus and Russia over the collapse of a potash cartel that provided crucial foreign exchange for Minsk. The Belarusians have arrested Vladislav Baumgertner, the head of Uralkali, the leading Russian potash producer, souring relations with its closest political ally.

Stagnant lending

Traditionally, the Belarusian government, which accounts for about 70% of the country's economic activity, would boost demand by increasing lending from the country’s state-owned banks. However, loan growth is only about 20% in nominal terms, cancelled out by inflation which has left new lending essentially flat.

“The health of the banking sector is closely related to the health of the economy,” says Vladlen Kuznetsov, who analyses Belarus for rating agency Moody's. “If exports fall it could be more difficult for companies to service their debts.”

Belarus gained some breathing space in 2011 thanks to a Russian-led bailout that pumped $3bn into the country, as well as by selling its share of the country's main gas pipeline to Russia's Gazprom for $2.5bn.

Last year, its exports were boosted thanks to the sale of refined petroleum products, but Russia has clamped down on that trade. Belarus's traditional exports of heavy machinery have also slumped thanks to growing competition in Russia, which recently joined the World Trade Organisation while Belarus remains outside. Russia’s own economic growth is comparatively modest.

Banks did have a solid 2012, due in part to the government’s earlier liquidity injection of $1.7bn into the two dominant state-owned banks, Belarusbank, the country's largest, and Belagroprombank, the second largest. Loans grew by 37% and the sector notched up a return on equity of  12.7% and had a capital adequacy ratio of 20.8%, according to Raiffeisen research.

Troubled outlook

But the outlook for 2013 is more troubled. At the end of last year, Alexander Lukashenko, the country's authoritarian president, decreed a rise in the average wage to $500 a month, while the central bank lowered its bank reserve requirement, stimulating domestic demand at a time when exports were faltering.

The resulting slump in the rouble, which has dropped from about 8500 per $1 at the beginning of the year to about 9000 in September, has driven some domestic savers to convert their assets into foreign currency. Olga Ignatieva of Fitch says that local currency deposits fell by 9% in July while foreign currency deposits rose by 6%.

There is a risk of a much steeper fall in the rouble if Belarus fails to find adequate external financing this year. That weakens banks' capital ratios due to asset inflation and could also affect loan quality. Banks have been forced to respond by increasing the rate offered for deposits; Belarusbank is offering three-month term deposits at an annual interest rate of 42%. That compares to the central bank's benchmark rate of 23.5%.

Loans in roubles have very high rates – a one-year loan at Belarusbank carries an interest rate of 45%. In the past that fuelled a run towards foreign currency loans, but the central bank has acted to cut off that supply. Retail foreign exchange loans were banned in 2009, and late in 2012 the central bank restricted the availability of foreign currency loans to companies, except for import and export industries and for investments.

Declining asset quality

This could have an impact on bank profitability. Moody's expects return on equity to fall by about seven percentage points, and for problem loans to rise. Officially, non-performing loans come to only 4.5% of outstanding loans in Belarus, but ratings agencies suspect that the true total is higher, especially when corporate lending is taken into account. Retail borrowers have a very good record of paying back their loans, helped in part by a government subsidy scheme for mortgage loans amounting to 1% of GDP.

“The discipline of Belarusian borrowers is really excellent,” says Mr Spyra at Idea Bank. “They pay off their debts with honour.”

The larger problem is with lending to state-controlled companies, which accounted for 65% of banking system assets as of the end of 2012, according to Moody's. Many of these loans are given at below market rates subsidised by the government. The ratings agency expects problem loans to increase to 8% to 10%, driven by weaker exports and domestic economic activity. That will also force banks to top up their loan-loss reserves from about 4% at the end of last year to 10% of gross loans by 2014.

A foreign banker notes that the central bank works very tightly with the government in setting its requirements and lending targets, a sign of Mr Lukashenko's tendency to try and steer the economy by hand. State banks, which account for 65% of the banking sector, also tend to be large lenders to export industries, creating another problem in light of the country's sagging foreign sales.

Foreign banks, which have seen their market share rise steadily from only 17% in 2008, have focussed much more on retail lending and on the country's small private sector, which generates less than one-third of economic output. Russian banks represent the largest share of foreign ownership, accounting for more than a quarter of the sector.

“A considerable share of foreign investments in our banks is from Russian financial institutions, which makes Belarus a strategic market for Russian banking capital,” says Vladimir Novik, a board member at Belarusbank.

External support

The growing Russian presence is a sign of the tightening economic integration between the two countries, which have formed an economic union, the Common Economic Space (CES), along with Kazakhstan. It also lends stability to the banking system, as Russian subsidiaries in Belarus can be supported by their well-funded corporate parents.

“Russian banks are not going to withdraw from the Belarusian market,” says Ms Ignatieva at Fitch. “The main factor for Russian banks being in Belarus is the trade turnover between the two countries. So far they are supporting their subsidiaries.” In a sign of Russia's interest in the Belarusian market, Alfa Bank registered its Belarusian subsidiary earlier this year after acquiring two smaller Belarusian banks.

The other significant foreign bank in Belarus is Priorbank, an affiliate of Austria's Raiffeisen, with a 5% market share.

The picture becomes more complicated when it comes to support for Belarusian banks. Although the government did help its banks in 2011, its means are more constrained now, thanks in part to its membership in the CES.

That grouping has taken a cue from the EU and set a budget deficit threshold of 3% of GDP for its members, and a public debt limit of 50% of GDP.  Although Belarus is below those limits, a government effort to recapitalise the banking system could set off another bout of high inflation. As of this year, CES has set an inflation limit for its members which now comes to 10.8%, far below Belarusian inflation.

Mr Novik insists that there is no expectation of a capital infusion for Belarusian state-owned banks over the next two years, but if there is, “the government is always ready to provide financial support in case of need”.

Analysts are more doubtful. “The government's capacity to provide systemic support to banks is low and we expect it will diminish over the next 12 to 18 months,” says Mr Kuznetsov at Moody’s.

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Read more about:  Central & Eastern Europe , Belarus