Russian banks face widespread losses, says Moody's

By bne IntelliNews March 5, 2015

bne IntelliNews -


The protracted downturn and high interest rates will severely pressure asset quality at Russian banks and lead to widespread losses, Moody's Investors Service said in a special report. The ratings agency, which foresees a GDP decline of 5.5% in Russia in 2015, believes that the combination of worsening asset quality and higher costs of funding in the high interest rate environment will lead to losses for most of the banks.

The aggregate loss in the banking sector could amount to RUB1.5trn to RUB2trn, accounting for 20%-25% of the capital in the sector. Bad loans are expected to rise from 9.5% as of the end of 2014 to 15% of the total loan portfolio in 2015, with the cost of risk rising to 8% and the net interest margin declining by 80bp-120bp.

Stress tests by Moody's estimate that without state support, capital sufficiency could decline to below the 10% minimum to 8.15%, and to 5.6% in the worst-case scenario of the cost of risk of 12.5%. A government injection of RUB1trn of capital through the federal OFZ bonds programme will support capital sufficiency at the minimum level of 10%, but the additional capital buffer will be eroded and the overall effect neutral.

At the end of February Standard & Poor's  issued a research paper titled "Government support is critical to the stability of the Russian banking sector", in which its negative outlook on the sector was maintained. The agency warned that the sector is facing the biggest challenge since 2009 and possibly tougher than the previous one in terms of worsening of asset quality.

Banking profit in 2015 is seen as close to zero, while most banks will suffer losses. Bad loans in S&P's base-case scenario are seen jumping to 17%-23% in 2015 vs 8% estimated in 2014. The negative scenario of prolonged recession, negative oil price dynamics, and toughening of sanctions would lead overdue and restructured loans to rise to 35%-40% of the total loan portfolio.

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