moscow sunset 16x9

Pandemic has slowed the completion of key bank reforms as regulators focus on emergency measures to prop up the economy.

Russia’s efforts to reform its banking system, which were nearing completion, have suffered a setback from the Covid-19 pandemic, which has forced regulators to slow down their clean-up of the industry.

In common with other jurisdictions, Russia’s regulators rushed out a raft of measures in March to support the economy during the pandemic, such as the temporary easing of capital requirements for banks. Certain companies and individuals were allowed to take loan payment holidays, and the state has provided some fiscal support.

The emergency measures will likely delay bank reforms, which were nearing their end, with thousands of smaller banks having been shut down and larger ones having been recapitalised some years back.

“They allowed the later introduction of Basel 3.5, also there are some relaxations in terms of systemically important buffers. It is logical that these buffers that were accumulated before the crisis can be used now,” said Elena Tsareva, equity analyst at BCS Global Markets.

She added that the measures are similar to those taken during Russia’s 2014-15 financial crisis, which saw the ruble plunge due to a mix of falling oil prices and international sanctions.

Ms Tsareva explained that among the measures taken by the the Central Bank of Russia (CBR) were to reduce deposit insurance rates to 0.10% from 0.15%, a significant decrease in risk weighted assets (RWA) ratios for some riskier mortgages, and for foreign-denominated loans banks have been allowed to use the March exchange rate for calculating RWAs although the ruble has recovered significantly since then.

“They also provided liquidity to the market with higher limits than previously. The banks have good cash positions,” Ms Tsareva said.

NPLs to rise

Nonetheless, the economic setback from Covid-19 is expected to see a renewed rise in bad loans.

According to data analyst CEIC, Russia’s Non Performing Loans (NPL) ratio stood at 16.9% in March 2020, compared with 17.5% in the previous month, though some estimates place the NPL ratio closer to 10%.

“We should see in three to six months the beginning of this situation worsening. Potentially, in the autumn we should see NPLs become much higher,” Ms Tsareva said.

The CBR is expecting bad loans to peak towards the end of the year. Banks are already making substantial provisions, with VTB trebling them and Sberbank increasing them eightfold, according to Reuters.

But at least Russian banks have entered this downturn in a stronger position. In a report on June 17, Fitch Ratings noted that the 11 systemically important banks (SIBs) complied with minimum capital requirements, including buffers, at the end of the first quarter. These requirements are 8% for core Tier 1, 9.5% for Tier 1 and 11.5% for total capital.

The economic setback from Covid-19 is expected to see a renewed rise in bad loans

Some of the main SIBs had modest cushions on their consolidated capital ratios. VTB’s consolidated total capital ratio was 12% while Gazprombank’s consolidated core Tier 1 ratio was 8.8%, Alfa had a core Tier 1 ratio of 8.5% and Rusag had core Tier 1 and Tier 1 ratios of 8.3% and 9.8%, respectively.

Breaching buffer requirements would see limits in dividend payments, but not in regulatory interventions, provided banks maintain minimum capital requirements on a standalone basis of 4.5% for core Tier 1, 6% for Tier 1 and 8% for total capital ratios.

CBR governor Elvira Nabiullina, who took over in 2013, has done much to rid Russia of poor-quality and in some cases fraudulent banks. During the 1990s the number of Russia banks peaked at more than 4,000, according to the Moscow Times, but by the beginning of this year that was reduced to 444. Russian President Vladimir Putin has stated that 300 is sufficient to service the economy.

To improve its banking system, Russia has adopted Basel III rules, is a member of the Basel Committee on Banking Supervision, and applies IFRS-9 accounting standards.

This article first appeared in The Banker's sister publication Global Risk Regulator.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter