INTERVIEW: Moody’s expects banking stability in Russia

MOSCOW, Dec 6 (PRIME) -- Macroeconomic conditions for operations of Russian banks and their creditors have stabilized and will remain moderately favorable in 2018, but the central bank has to tighten control and become more independent, Vice President and Senior Credit Officer at the Russian branch of Moody's Investors Service Limited Olga Ulyanova said on Wednesday.

“It may sound sudden considering the number of banking license revocations in the past few years, but we believe that the central bank still needs to tighten its supervisory activity and make it more independent toward those banks, which are now treated more easily due to implicit political reasons,” she said.

Ulyanova also said that the central bank should gradually turn from supervision based on formal criteria to insight control based on professional judgement. There is no sense for the central bank to impose provisioning policy if some large state-owned banks have long kept their provisioning at an evidently low level, she added without mentioning the banks’ names.

FORECAST

The country’s banking sector is generally stable, but the gap between strong and weak market participants is large, and the gap is likely to widen if inflation is low, the expert said and added that large banks having sufficient capital cushions are to take advantage of a new credit cycle.

The economy has turned to a modest, but stable growth, Ulyanova said.

“Inflation has hit lows of below 4%, a record for Russia’s modern history, and along with the key interest rate close to the expected 7%, it will form high positive real interest rates in the economy to create a unique situation, where a saving strategy effectively competes with households’ consumption strategy and companies’ investment strategy.”

In conditions of low economic growth and low inflation, only truly effective projects are able to create added value, Ulyanova added.

“It can partially explain low demand for credit resources, especially from medium and big companies. Demand will accelerate very gradually, and we expect that banks’ credit portfolios will add around 7% on the average in real terms in 2018 following actual stagnation of 2017.”

FROM QUANTITY TO QUALITY

Macroeconomic stability will result in banks’ more stable asset quality; however, the share of non-performing loans will still be high at over 10%, according to Moody’s.

“In 2018, we project a rise in the sector’s capital adequacy supported by good profits. Although loaning margins will decrease next year, the factor will be partially offset by lower loaning losses,” Ulyanova said.

The funding structure and the liquidity of the banking sector will remain at a comfortable level, while state support of the biggest banks tends to expand further, Ulyanova said.

In Moody’s opinion, the supervision regulator will “move from quantity to quality,” as it will be mainly focused on medium and large banks, whose problems may lead to a snowball reaction in the whole sector.

“We would like to hope that ‘proactive supervision’ will finally start working, which means that banks’ problems are discovered and solved at early stages to prevent panics of clients and counteragents and massive liquidity outflows.”

“The most obvious achievement is that the regulator has at last started solving problems accumulated by big banks. This really is a minefield able to spur macroeconomic and social tension and launch a domino effect, but ‘mine neutralization’ is necessary to make the banking sector healthy.”

OTKRITIE FC BANK, B&N BANK

“It is tremendously difficult to make the bailed-out banks profitable… Even if an administrative resource is used for such banks, it may not be enough to put them back on their feet… at least in the next two or three years,” Ulyanova said.

She added that in conditions of low inflation bailing out through a capital input is more effective than a previously used bailing-out mechanism through long-term cheap credits issued by the Deposit Insurance Agency (DIA).

“However, the advantages of replacing the DIA with the Banking Sector Consolidation Fund are not obvious as there is still a conflict of interests problem. The new mechanism makes the central bank a regulator, a creditor and an owner… We doubt that the roles may exit independently,” the expert said.

In October, Central Bank Deputy Chairman Vasily Pozdyshev said that the regulator is unlikely to return funds spent to bail out Otkritie Financial Corporation (FC) Bank and B&N Bank via the Banking Sector Consolidation Fund, a newly-designed toolkit to provide extraordinary support to large privately-owned banks.

RULES OF GAME

Global investors usually work with only several biggest Russian banks, and cooperation is badly restricted by Western sanctions, Ulyanova said.

The central bank’s moves do not add certainty to the rules of the game with some banks punished and others escaping punishment for same things, she added.

“It is difficult to guess the moment when problems of a bank are notified and disclosed by the regulator together with regulatory measures it plans to use,” she said.

“Global counteragents still have questions not to the size of the sector, but to its non-transparent corporate structure, weak credit underwriting, and a strong influence of political factors, which may support a financial institution today and cause its problems tomorrow.”

End