Russia: Banks will shrug off sanctions
Euromoney Limited, Registered in England & Wales, Company number 15236090
4 Bouverie Street, London, EC4Y 8AX
Copyright © Euromoney Limited 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Russia: Banks will shrug off sanctions

Sector profitability holding up; central bank adds dollars to liquidity provision.

Alexey Ulyukaev-envelope
Economy minister Alexey Ulyukaev said in mid-September further bank recapitalizations by the National Welfare Fund were possible

Russia’s largest banks, and especially number-one lender Sberbank, are well positioned to weather enhanced western sanctions, say analysts.

Sberbank was added to the list of Russian state-owned banks barred by the US from raising long-term funding in its capital markets on September 12. At the same time, both the US and the European Union – which included Sberbank in its previous round of sanctions in July – cut the maximum maturity of funds available to blacklisted banks from 90 days to 30 days.

The move revived concerns about public sector banks’ liquidity and cost of funding, particularly with interest rates rising in Russia. “Banks now have to refinance themselves locally, which is more costly and in the medium term will likely eat into profitability,” says Gunter Deuber, head of CEE bond and currency research at RBI.

Analysts note, however, that Sberbank’s very strong domestic funding base – the bank holds around 46% of all deposits in Russia – makes it less reliant on wholesale markets than other state-controlled lenders on the sanctions lists, such as VTB Bank and Russian Agricultural Bank (RAB). Sberbank’s loan-to-deposit ratio stood at just 112% in September, compared with 133% for VTB.

Policymakers will want to demonstrate to the west that the Russian banking sector cannot be crushed and they are capable of managing the stress that is building up
Gunter Deuber

Sberbank also benefits from a much lower cost of funding than the rest of the Russian banking sector, points out Natalia Berezina, financial institutions analyst at UralSib Capital in Moscow. “Despite offering lower deposit rates than most other banks, it has a relatively high share of current accounts because it is seen as a safe haven,” she says.

This flight to quality effect has been particularly noticeable over the past year, she adds, due to the decision by the Central Bank of Russia (CBR) to revoke the licences of several smaller Russian banks as part of a clean-up of the sector.

Its status as the guardian of Russia’s savings also gives Sberbank leverage to resist pressure to lend to riskier companies, say analysts. “Sberbank can make a strong case for the need to be more cautious than other banks in its approach to lending,” says Olga Naydenova, bank analyst at BCS Financial Group in Moscow.

That is seen as particularly significant in the current environment as Russian companies cut off from international markets are forced to turn to the domestic banking sector for funding. Russian policymakers have provided substantial capital support to public sector banks since the start of the sanctions regime, and Berezina notes that the government “will probably want to see some action to support the economy in return for its assistance”.

Further reading
Russia-Ukraine special focus

Sberbank announced plans in August to convert R500 billion ($13 billion) of subordinated debt owed to the central bank into preferred shares, which will count as core tier 1 equity. The same month also saw the Russian finance ministry dip into the country’s National Welfare Fund to finance a R239 billion conversion of subordinated debt issued to VTB and RAB into equity.

Russia’s largest privately owned banks are also trying to balance increased demand from local companies for financing – overall corporate lending increased by 17% in August – with restrictions on their own funding options. While not officially under sanctions, the sector has effectively been locked out of international capital markets since July by the hefty premium that would be demanded by external investors and nervousness around the possibility of further sanctions.

Plans by Alfa Bank, Russia’s largest private lender, for a subordinated Eurobond sale this autumn were greeted with scepticism by debt capital markets bankers. Smaller rival Promsvyazbank’s soundings for a $300 million syndicated loan also drew a negative response, coming as they did in the wake of the bank stepping up lending to sanctioned oil firm Rosneft.

Analysts note, however, that Russia’s leading lenders are much better placed to deal with constraints on international funding – and internal economic stagnation – than at the start of the global financial crisis. External financing for the banking sector stands at 11%-12% of total assets, according to BCS, compared with 20% in 2008.

Similarly, says Deuber, a tightening of lending standards in recent years means post-Lehman levels of asset quality deterioration are unlikely to be repeated. System-wide non-performing loans (NPLs) have risen sharply this year to reach 4.8% of the total by September. Despite an anticipated slowdown in overall lending, however, RBI is forecasting NPL ratios to reach a manageable 6%-7% by end-July 2015.


Russian banks’ profitability is also still high by European standards. Overall return on equity (ROE) came in at 13.6% for the second quarter of 2014 and is widely forecast to remain at double-digit levels through to the end of the year, while Sberbank is tipped to continue to outperform the sector. The number one bank posted an ROE of 20.8% for the three months to end-June.

What is more, notes Deuber, Russia’s central bank has repeatedly demonstrated that, while it is happy for smaller banks to fail, it will “stand four-square” behind the larger ones. He adds: “In the current environment this principle is likely to be even stronger than in the past, as policymakers will want to demonstrate to the west that the Russian banking sector cannot be crushed and they are capable of managing the stress that is building up.”

The CBR in mid-September expanded its provision of liquidity to the banking sector to include foreign currency with the introduction of a rouble-dollar swap facility. Other options for support include unsecured lending by the central bank or allowing banks to issue bonds to each other for use as collateral, both methods that were utilized in the last financial crisis.

Economy minister Alexey Ulyukaev also said in mid-September that further bank recapitalizations by the National Welfare Fund were possible. Several private sector lenders are also eligible for conversion of their subordinated debt into preferred shares but have so far declined the opportunity.

Gift this article