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DatabankDecember 20 2013

Russian consumer lenders maintain outperformance

Competition and non-performing loans are rising among Russia's consumer lenders, but their profit performance is still well ahead of the rest of the Russian banking sector
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Russia consumer lenders – total impairment charges (2012)

The Russian duma (parliament) was debating legislation in December 2013 that will introduce new regulations for consumer credit, amid growing concerns that the market could be overheating. The regulations will require, among other things, that credit cards are dispatched to customers only after full identity and creditworthiness checks, including verifying the customers’ details with a credit bureau.

However, consumer lending remains by far the most profitable activity in the Russian banking sector, to judge by 2012 results (see chart 1). The aggregate return on assets for 14 consumer banks on which The Banker has data was 3.39%. That includes several early-stage projects such as Svyaznoybank, MTS Bank and Cetelem that are still generating very low or negative returns owing to start-up costs. By contrast, the aggregate return on assets for the rest of the top 100 Russian banks that The Banker tracks is just 2.02%.

Several of the banks tracked in this list are not pure consumer lending operations – VTB24 is the general retail banking arm of VTB, providing services to small businesses and high-net-worth individuals as well as the mass market. VTB24 launched a separate mass market brand, Leto Bank, in 2012. National Bank Trust is gradually converting from corporate to consumer lending, while the Russian subsidiary of Hungary’s OTP is heading in the other direction, adding treasury services to its consumer bank offering. And the largest retail bank in the country, Sberbank, is included in the list of non-consumer banks, because it is not yet possible to track its consumer banking as a separate data field. Cetelem, Sberbank’s 70:30 joint venture with France’s BNP Paribas, may begin to operate more of Sberbank’s consumer banking activities over time.

The push by Russia’s two largest banks, and companies such as Svyaznoy and MTS that have commanding positions in the telecoms sector, will intensify competition and pressurise margins in consumer banking. The major fear among the Russian authorities is that banks will stray too far into risky lending to customers who lack reliable income or are already overleveraged.

Consumer lenders certainly carry much higher impairment charges than their non-consumer peers – a still manageable 3.13% of total assets in 2012, compared with 0.55% for conventional banks. However, impairment numbers alone disguise a wide range of asset quality, as some consumer lenders are very conservative in their provisioning for non-performing loans (NPLs). Tinkoff Credit Systems reported NPL coverage of more than 160% in the third quarter of 2013. By contrast, Renaissance Credit’s impairment ratio is noticeably higher than peers at more than 8%, while the bank reported NPL coverage of just 71% at June 2013. In December 2013, ratings agency Standard & Poor’s put its B+ credit rating on Renaissance Credit on negative outlook, citing worsening loan quality.

What may cushion consumer credit banks from tighter lending margins is their success in generating ancillary fee income, especially from credit cards. Aggregate net fee and commission income among consumer lenders in 2012 was 2.12%, compared with just 0.97% for non-consumer banks.

For more analysis, look out for our top 100 Russian banks ranking in the February edition of The Banker.

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