In first six months of 2021, Russian banks almost doubled their profits to Rbs1.2tn ($16.5bn) from Rbs630bn during the same period in 2020. The operating environment for Russian banks has remained largely benign during the Covid-19 pandemic.
As a result, the Central Bank of Russia (CBR) revised up its full-year profit forecast for the banking sector profit to Rbs2tn (the sector made Rbs1.6tn in 2020).
Corporate and household demand for banking services during the pandemic has been stimulated by generous state support, as well as record-low interest rates. A state-subsidised programme has helped drive a surge in demand for mortgages.
During the Covid-19 crisis, the CBR was able to supplement fiscal stimulus provided by the government with countercyclical monetary policy.
As of July 1, year-on-year growth in corporate credit across the banking sector was 9.6%, mortgages grew 33.2% and consumer credit rose 17.1%. This explosive growth in banking portfolios has boosted profitability, but also increased risks.
Structural changes
As banks’ assets have grown, there have been key structural changes in terms of funding. Low interest rates on retail deposits have led to capital outflows from the banking sector into the stock market. And five million new retail investors opened brokerage accounts in 2020, more than all previous years combined, according to the Moscow Exchange.
Deposit outflows continued during the first six months of this year, with total household deposits decreasing 0.8% from January to June. Yet, diminishing retail deposits have been substituted by an increase in government funds.
At the start of the year, federal and regional government funds were consolidated by the treasury and placed in top domestic banks.
A state-subsidised programme has helped drive a surge in demand for mortgages
State funds now account for 8.3% of total banking sector liabilities, rising to Rbs9.4tn on August 1 from Rbs4tn on January 1.
The bulk (82%) of these funds are held by the top five banks: Sberbank, VTB Bank, Gazprombank, Alfa Bank and Russian Agricultural Bank. As budget expenditure typically spikes in the last two months of the year, temporary hikes in liquidity requirements of these top five banks are likely.
Liquidity risks are also rising for smaller banks. Historically low interest rates have encouraged retail clients to switch savings from fixed-term deposits into current accounts. Although this trend increased liquidity risks, it also raised banks’ profitability because they have paid close to zero interest on current accounts.
For smaller banks, net interest margins rose 3.6% in the first quarter of 2021 to 3.9% in the second quarter. The number of profitable banks increased from 58% of the sector last year to 72% in the first half of this year.
Household debt
At the same time, credit risks on retail portfolios are rising. Many Russian households have sought to maintain their standard of living during the pandemic by increasing their levels of debt.
A surge in consumer lending has outpaced households’ nominal income, pointing to greater levels of indebtedness among the wider population. In the first half of 2021, the average nominal wage increased by 9.4% year-on-year, according to federal statistics service Rosstat, while credit to households rose 22% year-on-year, according to the CBR.
Moreover, in an effort to boost profitability, many banks — particularly smaller lenders — have relaxed their underwriting standards.
Limited competition in the Russian banking sector has allowed larger banks to cherry-pick customers and leave riskier clients to smaller operations. More than 30% of consumer loans that originated in the second quarter of 2021 were issued to borrowers whose debt-to-income level exceeded 80%, according to the CBR.
The non-performing loan (NPL) ratios on banks’ consumer portfolio remain low at the present time, however, as the overall portfolio is growing so quickly. The NPL ratio on consumer loans stood at 4.5% of the aggregate consumer credit portfolio as of August 1, far below the 11% it reached in 2016.
Nonetheless, CBR officials have expressed concerns about rising credit risks. An increase in capital requirements has been deemed insufficient to discourage banks’ risk-taking behaviour as high profitability allows financial institutions to easily absorb higher costs of capital.
As a result, the central bank has submitted a bill to the Russian Duma in March to allow the regulator to cap new consumer credit issuance if it needs to. The bill is expected to pass into law later this year.
Nuriya Kapralou is an independent economic research consultant.
