Despite turbulence in the banking system this summer, the overall forecast is good for the financial sector.

The official view of Russia’s mid-summer problems in the banking system was that it was merely “a certain nervousness” in the markets. Latterly, the president of Sberbank was quoted as describing the situation as “a zone of turbulence”. However, by mid-August 10 banks had had their licences withdrawn by the Central Bank of Russia (CBR) and an 11th, Guta Bank, was the reluctant bride in an arranged marriage with Vneshtorgbank (see table).

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A decline in the domestic securities market started in April, as a result of growing global emerging-market uncertainties and the effects of the ongoing Yukos saga, with Russian bond spreads widening by 100-200 basis points in the May to July period. Trading volumes in Russian municipal and corporate bonds also dropped by a factor of three in May, which knocked on into the tradable short-term debt market. These all had negative effects on the Russian banks’ liquidity and profitability.

Knock-on effect

Against this backdrop, the revoking of Sodbusinessbank’s licence by the CBR’s inspectors – following allegations of money laundering against the bank’s management – caused funding problems at CreditTrust Bank, a similar-sized bank that allegedly shared the same owners with Sodbusinessbank. This provoked a spate of rumours of a CBR hit-list of closures, which caused turbulence in the Russian interbank market, with banks reducing credit limits and deleveraging. Overnight rates peaked at 80% in June.

As a result, several privately owned banks collapsed, being unable to raise funds on the interbank market or from their client base in the face of large withdrawals of customer deposits. The largest of these was Guta, which had about $206m in individual deposits and, because of an active advertising campaign in Moscow, was well-known to the average citizen. Its closure was a trigger for deposit flight from other private banks as customers withdrew $860m from rouble denominated deposits in a two-day period in July.

Some experts, however, regard this figure as an underestimate because there was also a run on foreign currency deposits, which account for about 30% of the systems’s retail deposits. Alfa Bank, one of the top tier private banks, was affected more than the others – with a net outflow of customer deposits of $580m, including $200m in retail deposits. The bank’s principal owner, Mikhail Fridman, declared his support for Alpha both in public statements and by the placement of new deposits of $800m, which helped to stem the flow.

CBR action

In response to the situation, the CBR cut the reserve requirements twice from 9% to 7% to 3.5%, and reduced the overnight refinancing rate by 1% and purchased significant amounts of government bonds in June and July. These measures increased the system liquidity by about $5bn in June and July. The government also adopted a law in July guaranteeing retail deposits up to Rb100,000 ($3400) in banks not admitted to the retail deposit insurance system, which was introduced in December last year. These actions helped to stabilise the situation although consumer confidence remains fragile with memories of 1998 still fresh.

Favourable forecast

However, the picture is not all gloomy. The CBR has initiated a series of reforms including deposit insurance, transition to International Financial Reporting Standards (IFRS), new foreign currency regulations and initiatives on capital quality and business and ownership transparency, which, if followed through, will greatly enhance the banking system. The challenge for the CBR is to carry the market with it on these reforms.

Foreign investment in Russian banks has also continued. In August, GE Capital announced an agreement to acquire DeltaBank and, in October, BNP Paribas announced an agreement to acquire, via its Cetelem subsidiary, a 50% stake in the holding company, which owns Russian Standard Bank. A further increase in its holding is possible depending on developments at the bank. Both target banks specialise in consumer finance.

An increasing number of Russian banks are being rated by the international credit rating agencies (see ratings table download).

Our ranking of the Top 50 banks reflects calmer times, focusing on the annual results for 2003. At the end of 2003, the CBR reported that the banking system comprised 1277 banks, of which 32 were 100% foreign-owned and a further nine had majority foreign ownership. Aggregate assets of the Top 50 grew by 40.8% to $128bn, aggregate Tier 1 capital advanced 30.3% to $17.5bn and pre-tax profits increased by 16.7% to $3.1bn. The CBR reported that the total assets of the banking sector at year-end 2003 was $190.1bn thus the Top 50 banks in our listing account for 67.3% of total banking system assets.

The growth in the banking system reflects the buoyant nature of the Russian economy, in which GDP grew 7.5% in 2003 and is forecast to grow 6.8% this year on the back of strong earnings from the energy and metals sectors, largely through exports. Sberbank, as before, dominates the listing with 26.1% of the aggregate Tier 1 capital, 39.2% of the aggregate assets but only 18.0% of the aggregate pre-tax profits, down from its 33.6% share last year. However, Sberbank is likely to be the main beneficiary of this year’s banking turbulence.

This year only four foreign-owned banks appear in our listing, Citibank (12th), International Moscow Bank (19th), ZAO Raiffeisenbank Austria (26th) and Deutsche Bank (35th). This reflects both the development in strength of the domestic banks but also the more timely reporting of results by the banks. This year, 43 of the Top 50 banks reported to IAS or US GAAP, possibly in anticipation of the change to IFRS for all reporting in financial year 2005.

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