Nabiullina rages against the banking machine
In 2013, Russia’s central bank became a mega-regulator, overseeing a slew of credit institutions, from banks, insurance agencies, investment vehicles, micro-finance houses to pawnshops. That makes Elvira Nabiullina the most powerful central banker in modern Russian history.
She has repaid the favour by engineering structural reforms in banking. Market players reckon another rationale for the CBR’s high real policy rate is to launch a surgical strike against weak lenders on life-support from previously-cheap central-bank funding, and whose structurally-weak funding sources and business models have made them vulnerable to takeovers.
Bankers are aghast at high funding costs, with one-week repo rates, before the rate-cutting cycle, hitting a high of 17%. Net income as a share of total assets is around 6.5%, a significant decline in sector profitability after years of rising credit growth and strong net interest margins.
For years, policymakers have accepted, in theory, that the Russian banking system needs a shake-up. During weak economic cycles, a bank M&A cycle has taken root. This sees troubled, smaller lenders merged into stronger institutions, driven by rich shareholders, typically tied to a specific sector such as construction or commodity exports.
“We are criticised for being too tough, rather than being too timid. It seems to me that we are taking the right and timely measures"
These businessmen are often attracted to the opportunity to tap cheap long-term financial support, rather than engaged in an effort to strengthen their banking franchises through identifying business-synergies on offer during acquisitions.
But this cycle might be different, thanks to the CBR’s supervisory vigilance under the current governor, and the fragility of the economy. Over the past few months, there has been a flurry of bank M&A announced activity amid an uptick in bad loans and rising capital costs. These include B&N Bank’s bid for a controlling stake in rival MDB Bank, Credit Bank of Moscow’s interest in Uralsib while Bank Vozrozhdenie is engaged in discussions to merge with Absolut Bank. Promsvyazbank has also agreed to buy a strategic controlling stake in the former.
What’s more, the CBR has reduced the number of lenders in the country and facilitated bankruptcies driven by related-party lending and mis-governance, including money laundering. Some 150 licences have been revoked over the past two years but there are still 720 lenders.
The July withdrawal of licences of four commercial banks linked to the fallen banker Anatoly Motylyov – alleged to have used deposits to finance personal business ventures – is a case in point. The CBR says the lenders have capital holes, while law enforcement agencies are looking into possible criminal transactions among senior management.
Motylyov has plenty of form in this regard, since his fallen lender Globex several years before was stuffed with corporate loans to shell companies linked to his embattled real-estate ventures. Analysts say, despite the CBR’s best efforts, it lacks the political capital to embark on a more aggressive clean-up with some in the judicial and law-enforcement system thwarting its efforts.
The governor disagrees. “We are criticised for being too tough, rather than being too timid. It seems to me that we are taking the right and timely measures. When you have to do tough measures, such as revoking licences, you have to be careful because depositors will suffer. The second issue is identifying those problematic lenders at the early stage – that is our objective now. We also want to upgrade the responsibilities of the managers and owners.”
The governor cites efforts to work with law-enforcement agencies to root out money-laundering and the introduction of a criminal code for false financial reporting. She says the CBR is continuing to stress test lenders to assess the quality of their asset base and provisioning, given expectations of an uptick in NPLs. The governor says a reduction in the number of lenders in the country is not an ex-ante objective of the CBR – it’s for the market to decide.
Aside from calling for an increase in their capital base of state lenders to meet Basel III standards, Nabiullina displays little appetite for championing a shakeout of the banking system to challenge its extreme concentration, with the large government-controlled banks holding the majority of assets, which lowers competition and squeezes private-sector players on deposits and loan pricing.
In any case, privatization is a remote prospect, and the management-quality of, and competition between, state lenders, in recent years, has jumped. This agnostic stance is, therefore, smart politics. The more pressing issue, analysts say, is whether the CBR has the political capital to oversee the collapse of a large unsecured credit lender to diminish moral hazard in the banking system. That remains a big unknown.