A sharp rise in retail lending in Russia over the last 18 months has raised fears that the sector could be heading for a second crisis in less than a decade.
Growth in the segment came to a standstill in 2014, as falling oil prices exacerbated the effects of the bursting of a post-financial crisis consumer finance bubble.
Over the last three years, however, lower interest rates and returning consumer confidence have fuelled a revival in demand, while widespread corporate deleveraging has prompted the country’s banks to look for new growth opportunities.
Russia’s retail loan stock increased by close to 20% last year. At the same time, real household incomes – which have stagnated in Russia since 2016 – slipped into negative territory.
Alexander Danilov, a bank analyst at Fitch Ratings in Moscow, says this is a dangerous combination.
“Economic growth is limited and incomes are not rising, which means existing borrowers are becoming more leveraged,” he says. “If this trend continues, we could have overheating in the medium term, which could result in another spike in credit losses, especially on unsecured consumer finance loans.”
He adds that lenders have failed to learn lessons from the bursting of Russia’s previous consumer finance bubble in 2013/14.
“After that crisis, they reduced loan issuance, reduced acceptance rates and improved underwriting,” he says. “Banks have very short memories, however, and now we’re back to fast growth and relaxed underwriting standards.”
The rapid increase in uncollateralized lending has also rung alarm bells at the Central Bank of Russia (CBR). Bank officials note that unsecured retail loans amount to 7.3% of GDP in Russia, higher than in developed markets such as Italy, France and Australia.
The bank’s governor, Elvira Nabiullina, has repeatedly highlighted the risk of overheating in the consumer segment, most recently at the end of January.
The CBR has taken steps to address the issue. From April, risk weights for unsecured consumer loans with an effective interest rate of more than 10% will rise sharply.
A second measure, due to be implemented in October, will tackle over-indebtedness among Russian consumers by linking risk weights for retail loans to borrowers’ debt service-to-income ratio.
Danilov is unconvinced, however, that these regulations will have the desired effect.
“They will only apply to new loans, so it will take two or three years for the impact to be felt by the banks – and in the meantime they will be bolstered by the profits on their existing loan books,” he says.
He also notes that banks may be able to mitigate the effects of the new regulations by booking higher-rate retail loans on the balance sheets of affiliated microfinance companies.
Another issue the CBR has so far failed to address is the increasing duration of unsecured consumer loans.
“Several years ago, banks started offering big-ticket loans of up to five years, which we considered to be risky,” says Danilov. “Now five years is the norm, seven is acceptable and some are going even longer than that.”
Credit Bank of Moscow, one of Russia’s largest privately owned lenders, was advertising unsecured consumer loans of up to Rb3 million ($455,800) with a 15-year maturity “for any purpose” in mid February.
Natalia Berezina, a senior equity analyst at Uralsib Bank, agrees that increasing tenors could be a concern, given the lack of long-term funding in Russia.
“The main funding source for banks here is still deposits,” she says. “Even with bond-market funding, the duration is rarely longer than two to three years, so this could lead to asset-liability mismatches.”
Concerns have also been raised about reports that unsecured consumer loans are being used as deposits for mortgages, undercutting CBR attempts to curb over-borrowing in the segment by raising risk weights for mortgages with loan-to-value ratios above 80%.
For Ivan Kachkovski, a bank analyst at Renaissance Capital, this is where the central bank should be focusing its efforts.
“Increasing risk weights across the board won’t necessarily have the desired effect,” he says. “Regulators should be looking more selectively at high-risk areas of retail lending rather than trying to regulate the whole segment.”
At the same time, he argues that concerns about a consumer finance bubble are overdone.
“There may be the first signs that we could have an overheated environment in a couple of years but that’s not what we’re seeing at the moment,” he says. “The sector is much more tightly regulated now than it was before the 2013/14 crisis, consumer credit specialists are behaving much more rationally, and the competition quality is much better.”
He notes that the main drivers of the recent growth in retail lending have been Russia’s big universal banks – Sberbank, VTB and Alfa Bank – along with consumer finance market leader Tinkoff, rather than smaller specialized lenders such as Orient Express, Home Credit and OTP.
“The big players are all fairly prudent,” he adds.
Berezina expects this trend to continue over the coming year. She notes that, while overall retail lending in Russia is tipped to rise by 10% to 15% in 2019, Sberbank and VTB – which between them account for more than half of the retail banking market – are targeting growth of around 18% and 20% respectively.
“That would imply that growth in the rest of the sector could be fairly slow,” she says.
She also downplays the risk of a consumer-lending bubble, arguing that the decline in disposable incomes, slowing GDP growth – the Russian economy is expected to expand by just 1% this year – and rising interest rates will put a natural dampener on the market.“Combined with the central bank measures, this should be sufficient to curb retail lending growth and avoid any further problems in the segment,” she says. “And hopefully the last crisis taught Russian banks a few lessons.”