Ben Aris in Moscow -

Russia's consumer lending market has been booming for years, but there are signs it could be running out of steam.

Russia's retail lending market has been white hot for several years now, but a series of surprises in the last month suggest the engine of consumer demand is starting to run out of steam.

The growth in consumer lending stalled last year, but a sudden slowdown in taking out car loans surprised analysts last month. And on the other side of the counter a growing number of consumers are failing to pay back the loans that banks have been so eager to offer them.

Neither problem is severe – yet. Analysts point out that there is still plenty of growing room, as the average Russia still has far less debt than his Western peer. The bad debts are a sign of coming trouble, but the level of non-performing retail loans is still small and manageable.

The consumer credit business has more or less doubled every year since Russky Standart introduced the product in 1999 and will reach an estimated $80bn of business by the end of this year – still half the average level of borrowing in Central Europe, says MDM Bank.

Yet lending to punters who want to buy a new car seems to have plateaued much faster than expected and last month's results caught analysts by surprise.

"The 33% year-to-date growth of the auto loans market is the weakest growth rate in the retail sector," says Natalia Orlova, a bank analyst with Alfa Bank. "Our take is that the poor results are temporary and growth will accelerate in the second half of the year following the simplification of loan distribution. However, auto loans are still likely to underperform the rest of the retail lending market."

Bad debt, bad figures

Bad debt is also rising fast. Various government agencies have been warning of this problem since it first hit the radar when Home Credit, Russia's second biggest consumer lender, had to drastically increase provisions at the start of this year.

The big guns came out in the middle of October to sound the alarm when Central Bank of Russia (CBR) Chairman Sergei Ignatyev said that non-performing household loans had risen to 2.7% of total loans extended from 1.9% over the first eight months of this year. Economists believe that between 5-6% of all Russian retail loans are delinquent, compared with 4-5% in the US, according to the American Bankers Association.

"Although this is a worrying trend, the level of household credits remains low as it remains a rather new phenomenon in Russia," says Peter Westin, chief economist with MDM Bank. "In 2005, total household credits amounted to 5.6% of GDP versus an average 16% of GDP in Central Europe, the Balkans and the Baltic states. This implies that non-performing household loans currently amount to between 0.2-0.3% of GDP - a manageable level."

And that is if the official figures are accurate – something no one takes for granted. Westin says that fast growing emerging markets are prone to get these numbers wrong, often with disastrous consequences, and calls on the CBR to redouble its supervision efforts.

"The system remains vulnerable," adds Westin.

Even Russky Standart has run into trouble. At the end of August, Russia's premier bank rating agency RusRating downgraded the consumer Wunderkind one notch because of, "high credit risks of the leading consumer lender and the decrease of profitability in the sector."

The margin on retail loans has fallen from 16-17% in mid-2005 to 13% as of August, according to the agency. At the same time, the bank's bad debt level has also been rising along with everyone else's, but Standard & Poor's say Russky Standart's very high profit margin still more than covers the shortfall.

"With the share of overdue debts of 5-10% and an effective interest rate of 50-60%, profits cover absolutely all Russky Standart's risks," an analyst at Fitch Ratings said.

Part of the slowdown in consumer credits is attributed to the rapid growth of "true" credit cards, as opposed to the widespread debit cards that draw on a current account.

The volume of credit-card purchases was lagging consumer credits by $2bn at the end of last year, but a 300% growth rate means plastic card payments had closed the gap by the middle of this year.

The one place where consumer borrowing is still accelerating is in mortgage borrowing, which has ballooned: the total volume of mortgage loans outstanding has risen from $2bn at the end of 2004 to $6.2bn by July this year.

Here, though, the rapid growth in residential real estate prices has suddenly stalled.

While the cost of a square metre in Moscow has doubled in the last year and topped $4,000 at the start of October, making Moscow the most expensive city in the world for accommodation, according to the respected website IRN.ru, the rate of growth in prices seems to have plateaued, slowing from 3% a week to 1% by September, according to experts. There are some anecdotal reports of sellers even dropping prices recently.

A speculative bubble has driven the rapid growth in property prices, but no one is sure just how big that bubble is: estimates of buying for profit, rather than for use, range from fifth of all Moscow apartments to three quarters depending on whom you talk to.

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