Analysts have dismissed the near-term threat of the Russian economy overheating - following the IMF’s recent warning and the oil price dip – citing positive inflation and loan trends. However, intensifying competition between banks raises the spectre of large-scale risky credit growth, a medium-term overheating risk, experts warn.
In April, the IMF counselled Moscow to tighten monetary policy, citing fiscal expansion, triggering fears that the economy’s historic boom-bust cycle – given the correlation between oil prices, nominal credit expansion and capital inflows – would haunt the economy once-more.
But analysts are less bearish. “The idea that the Russian economy is overheating is a myth. There has been [strong] corporate loan growth since 2011, but this is mainly refinancing...of existing loans. The Central Bank of Russia (CBR) rates have been kept at the same level in part to keep inflation in check,” says a Russia-focused bank analyst at a leading investment house. “There is no runaway inflation in Russia,” he says. May saw headline inflation at all time lows of 3.6%.
Fluctuating oil prices
Amid the intensifying eurozone crisis,Brent crude has plummeted by 20% since March to $93 per barrel, as of Wednesday. If oil prices continue to fall, lending growth will inevitably be affected, says Stanislav Ponomarenko, a Moscow-based credit analyst at Barclays Capital. “A significant oil price decline and the consequent devaluation of the rouble will create asset quality issues,” he says.
Banks are likely to increase provisions for non-performing loans (NPL) in coming months, which will impact bottom-line results, and increased market volatility could lead to trading losses. “We have a negative outlook on the banking sector in Russia as a result,” says Eugene Tarzinamov, vice president of Russian financial institutions at Moody’s.
“Indeed, if the rouble depreciates further, this could affect depositor confidence and exacerbate currency volatility,” says Tarzinamov. “Domestic depositors remain sensitive to a sharp rouble devaluation, and, in a crisis situation, are likely to pull out from Russian banks and convert their deposits into stronger currencies such as the dollar. This was seen in October 2008, when Russian banks lost around 10% of deposits in one month.”
But prices would have to fall substantially to about $60 per barrel to make its impact felt on banks’ loan growth, says Ponomarenko. If prices remain at around $90 per barrel, there will be little impact on lending growth, he says.
Margin compression, instead, will be triggered by increased competition, says the BarCap analyst. This jostle for customers – rather than the current softening of oil prices - could trigger credit-driven over-heating fears in the coming years, say analysts, citing increased demand for high-yield products, such as credit cards.
Accelerated loan growth
Led by the restructuring in state controlled banks, the banking sector in Russiais becoming more competitive while loan volumes have risen.
"Regulators are now becoming concerned with the pace of retail lending growth in Russia, when consumer loans posted 59% year-on-year growth as of end of May,” explains Ponomarenko. Loan growth in Russia is 29% year-on-year while deposit growth is only 22% for the same period. If the difference continues, capital adequacy ratios will fall and the banking sector will feel the strain. However, crucially, currency mismatches are less of a concern. "In 2008, FX lending consisted of 25% of the market. Today it has dropped to 19% and this is a continuing trend. The availability of FX derivative market also allows the banks to hedge their FX risk. As a result, banks and customers are safeguarded from FX volatility," says Ponomarenko.
If the oil price collapses - in a nod to the eurozone saga - Russian banks’ asset quality, profitability and liquidity will no doubt come under pressure. However, oil prices will need to fall to as low as $60 per barrel before triggering a systemic crisis. Instead, risky credit growth, driven by endogenous shifts in the banking system, could represent the biggest source of vulnerability, analysts conclude.
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| Source: Moody's |