Moody's warns on Russian banks

By bne IntelliNews February 3, 2015

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Moody's Investors Service warns that Russian banks will become lossmaking in the protracted high interest rate environment, estimating that given the current key interest rate of 15% and the pace of bad loans growth, the banking sector will post RUB1 trillion ($14.6bn) of losses in 2015. In 2013 banking profit declined by 40% to RUB589bn, mostly because of reserves for bad loans, and previously Central Bank of Russia (CBR) officials have said it expects a RUB200bn-RUB300bn banking profit in 2015.

The rating agency sees the key interest rate of more than 12% as negative for the banking system, and believes that if the rate stays above that level for two quarters it will seriously undermine banking indicators. At a 15% key interest rate, interest income of banks is seen declining to RUB1.5 trillion and revenues to RUB2.3 trillion, which would not be sufficient to cover the need for bad loans reserves and administrative expenses, Moody's believes.

Bloomberg cited the estimate of privately-owned Alfa Bank that Russia's banking losses could reach as much as RUB2 trillion or about 25% of equity. The bank noted that since December the banks face severe pressures on both sides of their balance sheets, comparing the situation with 2008 and warning of more risks lying ahead. Alfa Bank estimated bad loans at 5% of total lending, double that during the 2008-2009 crisis.

The CBR will hold the next monetary council meeting on March 13. At the same time inflation, which so far has been the key benchmark for the monetary policy decisions, is seen by the ministry of economic development as remaining in double-digit territory and averaging 12% in 2015.

In the meantime the authorities are also mulling how to tackle the problem of the bad loans in the banking sector. Recently the creation of a “bad loans” unit in the banking system, as well as helping large industrial borrowers to refinance, were discussed by the government and the CBR.

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