Russian banks posted aggregate net profit of RUB635bn ($10.1bn) in January-September 2016, jumping five-fold year-on-year, according to a banking sector report by the Central Bank of Russia (CBR).

As Russian banks turn to profitability, the outlook on the sector brightened in the second half of 2016. The asset quality of Russian banks will improve in 2017 as the Russian economy pulls out of recession, Moody’s Investors Service said in September. 

Last month, the banks slowed down transfers for provisions for bad loans, which grew by 6.6% y/y to RUB358bn versus 23% y/y growth for the same period last year, according to the CBR’s October 17 report.

Nevertheless, the crediting activity has yet to recover with total lending contracting by 0.9% month-on-month in September, out of which loans to the real sector declined by 1.3% m/m. However, retail loans recovered slightly growing by 0.3%.

“The data somewhat disappointed with respect to lending activity, as corporate loans declined after several months of slight, tentative growth, which highlights the prevailing high interest rate environment,” Sberbank CIB said on October 18. Growth in retail loans also slowed after a strong August showing, the bank notes. 

Still, banking margins continued to grow, with return on assets and equity (ROAE) increasing to 9.3% in nine months and 15% in September alone. At the same time, asset quality improved and the share of the non-performing loans declined to 6.8% of total loan portfolio.

Net of sector leader and Russia’s largest bank Sberbank (ROAE reached 24% in September), the sector still improved its ROAE from 2% in August to 8% in September, UralSib Bank underlined.

“We believe that single-digit ROAE remains a realistic assumption for the sector net of Sberbank until the year-end,” the bank forecasts.

Deposits, adjusted for the foreign currency revaluation rose by 0.4% in the corporate sector and 0.5% in the retail sector.

“The stable deposit growth in September coupled with the renewed contraction of corporate lending resulted in a comfortable liquidity position of the banking sector,” Gazprombank commented on October 18.

According to the bank's estimate, the liquidity shortage (funds deposited in the CBR less funding of the CBR and finance ministry in the sector) contracted from RUB580bn to RUB190bn y/y as of end of September.

“Margins continued to move higher amid a local boost in retail lending as well as lower provision charges,” Gazprombank noted.