The Central Bank of Russia (CBR) is reducing its support to the banking sector as the pressure there slowly subsides, with the regulator's lending almost halving in the last year.
The CBR has extended significant support to the embattled sector as it struggled to cope with a crashing currency, tanking consumerism, falling incomes and deposits, sky high interest rates and ballooning non-performing loans (NLPs) – to name just the most important problems.
The latest figures show that in the last two months the liquidity position of banks has improved and turned positive for the first time since 2013. The balances of bank funds on account with the CBR has been steadily increasingly, but more importantly, loans and other money it has made available to the banks has been reducing steadily since a spike in December 2014, when the ruble collapsed following a collapse in oil prices.
The central bank's main tool is repo auctions for an expanded list of securities that banks can put up as collateral to ensure they have the liquidity to operate, but since the global financial crisis began in 2008 the CBR has rolled out a raft of other mechanisms to help banks out such as simply depositing finance ministry cash in banks' accounts as well as non-orthodox lending. All these tools are being unwound now.
The CBR also forecast that the profit of the banking sector would more than double (2.5x) in 2016 compared with the result of the end of 2015, to reach around RUB500bn ($7.35bn), up from the previous forecast of RUB200bn-RUB400bn made in February. Russian banks made a total RUB190bn in 2015, almost all of which was made by Sberbank alone
The debt of banks to the CBR and Ministry of Finance has fallen to about RUB3.4 trillion against RUB7.7 trillion a year ago, or 7% of all bank liabilities, down from a peak of over 15%. By way of comparison, during the worst of the meltdown in 2008/9, the CBR lending accounted fro only 3% of all bank liabilities. This crisis has been a lot more painful than that of eight years ago.
Of the loans made by the CBR to the banking sector, RUB1.5 trillion were straight loans, RUB300bn were currency repo, and RUB0.5 trillion were finance ministry deposits. The banks still have to pay back the remaining loans, which analysts are expect to be returned in the second quarter of this year.
Still, the sector is not out of the woods yet. Although their liquidity has improved dramatically, banks are still suffering as there is little to invest into and their main business – lending – has collapsed due to the extraordinary high interest rates at the moment. At its latest policy meeting last week, the CBR decided to keep rates on hold at 11% despite falling inflation (7.9% in February from 12.9% at the end of 2015), although analysts expect the central bank to resume cuts at the next meeting at the end of April.
Without much business to do Russian banks are still struggling to make profits, although most, including embattled lenders like VTB bank, have returned to modest profit on their residual business and modestly improving net interest margins (NIMs).
Reserves of Russian banks set against possible losses will also decrease by RUB350bn-RUB400bn in 2016 as the share of non-performing loans begins to fall, comapred to 2015, the CBR's first deputy chairman Alexei Simanovsky said on March 21. The official noted that in 2015 the reserves were RUB1,350 trillion.