Ben Aris in London -
A little clarity can be discerned from the smoking ruins that's Russia's economy since the global financial crisis hit. Unfortunately, the news isn't good.
"Russia's crisis is the mirror image of the American one," Uralisib's CFO Konstantin Vaysman told bne in London. "Theirs started with toxic debt and then turned to a liquidity crisis; ours started with a liquidity crisis in September and now the toxic debt is going to come."
The rapid slowdown in the Russian economy will hit the banking sector hard in the first half of next year as previously solid debt begins to go bad. The credit crunch coupled with a dramatic economic slowdown means the quality of bank's assets is already starting to deteriorate fast.
One of the biggest drivers of the crumbling state of debts is the speed of the change. Retail borrowing has been caught out as the government went out of its way to suppress reports of the crisis until recently. "Only a month ago people had no idea of what was going on and were spending as freely as ever. The jobs cuts and freeze on lending as come as a complete surprise for many," says Ivan Svitek, CEO of Home Credit Finance Bank (HCFB), Russia.
Between October and November some 80,000 Russians suddenly lost their jobs, according to the Russian Ministry of Health, and analysts predict that the dole will surge from 6.1% to 7% of the population by the end of the year. Meanwhile, a recent survey by the Levada Centre found that one-third of Russians have outstanding debts and 11% are trying to pay these debts off just as their household income is falling, thanks to the crisis. The Duma is getting ready for the worst: lawmakers are rushing through the first ever law on personal bankruptcy, as currently there is no legal way for a bank or company to recover a debt if an individual defaults on their obligations.
Corporate loans are also starting to sour. Overdue corporate loans also rose sharply in October, up by RUB51bn (€1.39bn) to 1.6% of gross loans against RUB20bn in September, according to the most recent central Bank of Russia results released at the start of December.
And the worst is yet to come. Many banks like Uralsib and HCFB say that the level of NPLs is still manageable. However, everyone is expecting them to rise and hit the bank sector hard at the start of next year. "A few weeks ago I was telling people that the Russian economy was fundamentally strong and the bank sector sound. Now I have had to eat my words," says David Nangle, Renaissance Capital's senior bank analyst during the Adam Smith Bank conference in London at the start of December. "The outlook for the next 3-12 months is now very vague. Visibility is poor and the asset quality of the banks is deteriorating fast."
Rising non-performing loans (NPLs) have been a concern for a while, but until September their numbers have been small and easily accommodated by the fast growing banks. However, in the last two months they have risen from under 1% to just under 4%, according to UralSib. The range amongst banks is wide: some strong state-owned banks like Sberbank have seen the numbers double, but are still below 3%, while other retail-oriented banks are rumoured to have a quarter of their loan book delinquent.
Whatever the true numbers are, clearly banks are in a lot of pain. For example, Rencredit, the third-largest consumer-oriented bank in Russia, has suspended its lending operations completely and has just lost its place as credit bank to IKEA. "Whatever your NPLs are now - they are going to double," predicts HCFB's Svitek. "So far we have seen little change and we have tightened our lending conditions, but the growth [in NPLs] is going to come - that is for certain."
The danger is that if too many debts go bad, then otherwise healthy banks with strong balance sheets could find themselves in trouble through no fault of their own. In order to increases their provisions to cover this growing bad debt, caused more by a general economic malaise than any poor risk management, banks will be forced to eat into their capital and so weaken themselves further. "Do we need to recapitalise the whole sector? In general the Russian bank sector was well capitalised on a relative basis as the banks had capitalised themselves for growth," says Nangle. "In Ukraine and Kazakhstan - and indeed the west - the government has already bought into banks to boost their capital. There has been no talk of playing this game in Russia, but it could happen in the next 12 months.
No one knows how far the NPLs will rise, but it is possible to make some educated guesses about the different types of lending. Analysts believe that mortgages will be the least affected with NPLs on the order of 1-2%. Banks with a strong retail focus will see NPLs rise to the red line level of 5% or more. And the banks in most danger are the consumer finance specialist, which will see NPLs rising to over 10% of their portfolio, says Nangle.
Deposit flight slowing
The way to avoid the problem of rising NPLs is to keep new depsosits flowing into the system to provide funds to offset the bad loans. But money was draining out of the bank system in October.
Withdrawals from personal bank deposits in Russia in October leaped to 6% of the total balances - faster than the rate of withdrawals during Russia's mini-banking crisis in 2004 - and threatened to bring down the entire sector. Almost as damaging, Russians were swapping their money out of ruble accounts and moving it into foreign accounts, forcing banks to buy increasingly expensive dollars. Analysts estimate that the demand for dollars could jump to $70bn in coming months - from so-called internal capital flight - putting more pressure on the already weak ruble.
The good news was that by the start of December bank withdrawals had stopped thanks to fast action on the part of the government. The caveat is the reversal of the outflows was almost entirely due to the state pouring money into the sector. Underneath the positive statistics from November, Russians are still withdrawing money and the only banks in the country actually making loans at the moment are the three big state-owned banks.
The state and Central Bank of Russia (CBR) deposited RUB1161bn into the bank sector in October, but combined retail and corporate deposits were still down RUB608bn. "This means that Russian banking sector assets in October continued to expand only because of state support," says Alfa Bank's Natalia Orlova. "Jointly, the state's share in financing banking sector assets increased to 10.2% of the total in October from 5.8% a month ago."
Likewise, overall banks decreased their lending again in October, while the total amount increased, again due to a massive increase in lending by the state's two big banks: total corporate lending was up by RUB194bn, while VTB and Sberbank between reported individual increases in lending of RUB100bn and RUB165bn respectively. "This implies that the rest of the banking sector actually reduced corporate portfolios over the period and built up liquidity cushions. Given that the interruption of lending has already affected the real economy, we do not expect the banks' private funding base to recover soon, which will be the key impediment to growth in the coming years," says Orlova.
As a result of these suddenly violent lurches, the number of loss-making banks increased to 113 as of November 1 from 65 as of October 1 and almost all of banks profits from this year have already been wiped out. The combined banks losses trebled between September and October from RUB13.118bn to RUB48.967bn and the number of loss-making banks almost doubled from 65 to 113.
Government to rescue
The state has been propping up the bank sector with cash, but the calls for more drastic measures are rising and the Kremlin seems to be coming to the realization that even its massive hard currency reserves won't be enough to contain the damage. "In one month, we lost $100bn [of our hard currency reserves] and we didn't achieve anything for the banks, for the economy, for the companies," says Bella Zlatkis, deputy chairman of the board and member of the supervisory board at Sberbank. "It is not enough to give liquidity to banks. We are throwing this money into the dustbin. We need to recapitalise them."
Zlatkis' call for a UK- or Kazakh-style state rescue where the government buys equity stakes in the banks to inject fresh capital remains the minority view, but clearly the Kremlin has woken up to the fact this is exactly what it may have to do.
The trouble is, it's still not clear exactly how bad this problem will get. Much depends on how effective the government's current rescue efforts are. But things don't look good. One leading indicator is VTB Europe's Russian manufacturing PMI index that survey's business managers and asks them about their plans. The index fell off a cliff in October to its lowest reading in the poll's history to reach 39.8 (where 50 represents no change on the previous month).
The upshot is Russia will now almost certainly face another wave of instability in the New Year that will see more banks and companies fail. The game now is to prepare for the storm, but like most storm warnings no one is sure if this will be a storm, a gale, or something like the tornado that blew through the bank system in October. "We have no illusions that we can save all the banks with state support in this crisis," says Zlatkis. "[First Deputy Prime Minister and Kremlin point man for economic issues, Igor] Shuvalov and the top Kremlin officials have realised the reserves are big but it is not limitless and they won't last long if we keep spending money at this rate."
Send comments to The Editor
Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more
bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more
Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more