Russian finance: Moscow’s cash cows

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Russia’s consumer lenders are the modern face of Russian finance, and could prove resilient to the current crisis.

This summer, Russia’s biggest banks have been in the spotlight as never before. Cut off from the international financing on which they had become heavily dependent, first by market sentiment and then by European Union sanctions, the country’s leading lenders are facing a capital and liquidity crunch.

While the plight of state-controlled banks such as Sberbank and VTB has dominated headlines in recent months, little attention has been paid to the risks facing Russia’s consumer finance lenders.

This is slightly surprising, given that the sector has been by far the fastest growing in the country over the past five years. Homegrown players such as Tinkoff Credit Systems (TCS), Home Credit Finance Bank (HCFB) and Russian Standard Bank (RSB) have simultaneously ridden and fuelled Russia’s consumer boom, distributing credit cards by the hundred thousands and issuing unsecured loans in minutes in malls, stores and stations.

But while this aggressive expansion model has proved hugely profitable in the upturn – TCS posted a return on equity of 44.8% in 2013 – it has left its proponents looking very vulnerable as Russia’s economy grinds to a halt. Bad debts have already risen sharply across the sector. Both TCS and HCFB saw their non-performing loan ratios jump in the first half of this year to 12.4% and 16.4%, in the latter’s case contributing to an after-tax loss of R4.4 billion ($118 million) for the period.

What is more, unlike more traditional banks, consumer-finance players are unlikely to be able to depend on support from the Russian authorities if things do go wrong. Policymakers have made it clear they view the sector with mistrust and would like to see it reined in. Stringent regulation has been repeatedly threatened, and a first round of restrictions, including caps on interest rates for consumer loans, will come into force on January 1.

New generation

It would be a mistake to write them off just yet. These are not old-fashioned, opportunistic lenders that have succumbed to the temptation to make a quick buck in a bull market, but a new generation with sophisticated business models and a high degree of flexibility.

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Sector leaders have adapted rapidly to changing economic conditions and rising bad debts. HCFB has already seen a substantial improvement in default rates on products issued since the introduction of tighter underwriting standards in mid-2013, while TCS managed to add 420,000 new active accounts in the first six months of this year despite a thorough overhaul of its underwriting and collection policies.

Meanwhile, the fundamentals of all the main players in the sector remain exceptionally strong. Even after recent rises in bad debts, provisioning remains ample, and capital adequacy ratios are among the highest in Russia.

Most importantly, these lenders are less vulnerable to funding issues than many of their larger peers. All have developed substantial deposit collection capabilities and HCFB’s loan-to-deposit ratio of 130.4% is among the highest in the sector.

The consumer sector remains one of Russia’s few relative bright spots.

Retail sales, which suffered in the early part of the year, posted modest increases in June and July. Car sales are down by a quarter from 2013 but are still among the highest in Europe. Unemployment remains low at 4.9% and wages continue to grow.

As a local banker says, the sector is facing "a speed bump, not a crisis".