Ben Aris in Moscow -
Russia's banks are coming under increasing pressure from the global slowdown, which is destabilising the sector and has already made it more prone to shocks from the outside. Many of Russia's biggest banks will need recapitalisating soon and many of the smaller ones are probably sailing dangerously close to the wind.
At ground level, not only is the Russian economy recovering, but it has been enjoying a full-on consumer-driven boom. Wages have continued to rise throughout the last four years - even in the depths of the 2008 meltdown - and unemployment is at an all-time low, which, as President Vladimir Putin pointed out in the summer, means the economy is running at full capacity. Spending is being driven by the recovery in consumer lending, which grew at a whopping 43%, according to the latest figures from the Central Bank of Russia (CBR) released at the start of October - well into "overheating" territory.
However, at the corporate level, things are very different. Overall, Russia's economy grew at the relatively robust 4.4% over the first half of this year, which is its maximum potential if you remove the foreign lending. But most of those gains are from consumer lending; corporate borrowing grew by a much more modest 16.9% in September, down from 22% a month earlier. "Divergence between retail and corporate lending has increased further. The loan growth trend became even more divergent in September than before. Retail loan growth stood at a strong 42% year on year in September, virtually unchanged from the 43% year on year in previous months. Meanwhile, corporate loan growth decelerated substantially from 22% year on year to 17% year on year in September, in line with slowing economic growth," Natalia Orlova, chief economist with Alfa Bank, said in a note in October.
Industrial production is slowing and companies aren't investing in new production, preferring instead to sell off inventory and conserve cash in case of a second wave of the crisis coming out of Europe. This is one of the main reasons the labour market is so tight at the moment.
The situation has been made worse by a Kremlin panic attack this summer: as the situation in Europe deteriorated, the government started actively preparing for a new crisis. It cut spending radically - federal budget spending growth was cut from 9% to 5%, or below the rate of inflation - which given the role of the state in the economy had the effect of pouring a bucket of cold water over it: GDP growth in August fell to 2.8%, which has recently been revised down further to 1.9%. Anything less than 4% is considered to be stagnation in Russia.
Lower budget spending in the second half of this year will shave off 1 percentage point from growth, Economic Development Minister Andrei Belousov said at the start of October. "Before the  crisis, budget spending accounted for 12% of the gross domestic product, but now it almost reaches 22%. We have set a goal of reducing it to 19% by 2015," Belousov said, adding that GDP must grow at least 4.0-4.5% for the country to fulfill its spending obligations and with 1.9% growth in August (in annualized terms), it is already running below this level.
This lopsided growth has hit bank capital adequacy as consumer lending outpaces deposit growth, which was up only 19% in September on year; cut off from international wholesale funding, local banks are struggling to fund their retail loan portfolios.
Borrowing on the domestic bond market is on fire, peaking in the first quarter of this year, with a record RUB179bn ($5.8bn) raised in March, following on from the RUB123bn in February. The boom continued in August and September with RUB89.5bn and RUB98.9bn raised respectively. However, only a handful of Russian companies can borrow internationally, and as a result most banks are eating into their capital to fund all this lending. "Funding growth remains an issue for most banks. Both retail and corporate deposit growth slowed in September to 20% and 17%, respectively. The deceleration in retail deposit growth seems to reflect an increase in the inflation rate on retail markets. On the corporate side, the slower growth rate owes to tighter control over budget spending in second half of this year versus the second half of last year," says Alfa's Orlova.
Central bank to the rescue
The CBR has been forced to take action and ramped up lending to banks as liquidity in the sector evaporated. As autumn set in, the CBR became the main source of funds in the banking sector - currently not a problem, as the state has built up considerable reserves and had equally considerable borrowing power held in reserve. "While the CBR managed to cut its exposure to banks by RUB50bn [in September], the Finance Ministry has boosted its deposits with banks by RUB100bn. As a result, total support to the banking system increased modestly to RUB3.5 trillion but remained at 7.5% of total assets," says Orlova.
State-owned VTB was the first notable bank to get into trouble after its crucial capital adequacy ratio fell to 9.8%, just below the mandatory minimum of 10%. And the pressure banks are feeling is widespread. In the boom years, Russian banks enjoyed asset growth of 40-50% and capital adequacy ratios of over 18%; now asset growth has fallen to about 20-25% and the sector's average capital adequacy has fallen to around 13.3%, the CBR said in October. According to bne sources, this means that some banks are already operating with dangerously low, or even sub-mandatory, capital levels.
State-owned retail giant Sberbank may be the next major bank to raise subordinated or perpetual debt or equity to shore up its capital base, say analysts. Alfa reckons that Sberbank's capital adequacy fell to 12.1% in September from 12.9% in August and 15.5% at the start of this year. The bank may have to issue new shares by the middle of next year if not sooner, having only just successfully sold a 7.6% stake to raise $5.2bn in September after much dithering.
The CBR is well aware of the problem and Deputy Governor Alexei Ulyukaev said at a conference in September that the gross debt of Russia's banking sector to the central bank is likely to double over the next three of years to RUB6 trillion-7 trillion ($192bn-224bn) to support the sector during the current difficulties.
At the same time, the CBR has taken a number of regulatory steps to shore up the health of the system and to better prepare it for any external shock, like a break-up of the Eurozone.
In September, the CBR announced it would hike reserve requirements for unsecured loans, because the speed of the consumer lending this year has raised worried the quality of new loans is deteriorating. The CBR is also accelerating its move to Basel III norms for calculating capital and wants to introduce these within the next two years, to inevitable howls of protest from the leading banks.
And the icing on the cake, probably the most effective measure the CBR can take to bolster confidence in the banking sector, was to announce an increase in the retail deposit insurance limit to RUB1m ($32,258) from the current RUB700,000. The increase in the amount covered by the insurance is one of the most effective tools the state has to improve the resilience to a shock to the system.
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