Russia’s Alfa-Bank can maintain strong growth in retail lending despite new curbs on the segment, according to chief executive Vladimir Verkhoshinskiy.
In response to rising concerns about over-indebtedness among retail borrowers, the Central Bank of Russia (CBR) in October implemented a raft of new regulation designed to slow the pace of retail lending growth.
Russian banks are now obliged to calculate debt service to income (DSTI) ratios for retail borrowers. Loans to consumers with high DSTI levels incur substantially higher risk-weightings. The CBR has also raised risk weights for mortgages with loan-to-value ratios above 80%.
This follows measures in April that sharply increased risk weightings for unsecured consumer loans with an effective interest rate of more than 10%. Central bankers expect the two rounds of regulation to slow retail lending growth to 10% in 2020 from close to 20% during the past two years.
One of the leading drivers of growth in the segment has been Alfa-Bank. Russia’s largest privately owned lender grew its retail portfolio by 60% last year.
Verkhoshinskiy insists that this outperformance has been achieved without compromising standards.
“Our retail growth has come from a low starting point, improved cross-selling and from attracting new customers,” he says.
Alfa-Bank’s client base has grown by close to 25% a year for the past two years on the back of a big marketing push and an overhaul of the bank’s digital offering.
Verkhoshinskiy also rejects suggestions that Alfa-Bank has contributed to overburdening retail customers with debt. While admitting that over-indebtedness is an issue in Russia, he notes that the pace of growth has slowed.
“The regulation in this area is already pretty strict and customers are getting better educated,” he says. “Compared with 10 years ago, retail loans today are much lower-risk and lower-rate. Moreover, most of the recent growth has been driven by mortgages rather than unsecured lending.”
A concerted effort by Russia’s larger banks to persuade retail borrowers to consolidate and refinance expensive consumer loans with cheaper debt has also helped, he adds.
“The cost of a personal instalment loan used to be 20% to 25%,” he says. “Now it’s 13% and declining. That has reduced the overall burden of the market significantly.”
It will affect everyone, including us – but smaller and less technologically advanced players will suffer more- Vladimir Verkhoshinskiy
Nevertheless, policymakers and analysts continue to raise concerns about retail borrowing in Russia. Media reports – and anecdotal evidence – suggest that some consumers continue to take loans from multiple providers and are trapped in a cycle of constant refinancing.
Verkhoshinskiy acknowledges that “a big portion of our population does live like this” – but says banks can mitigate the associated risks.
“It’s pretty easy to calculate,” he says. “We have access to excellent data from many external sources, including credit bureaus, government services and telecoms operators.
“It does affect the approval rate, though. In the good times, it used to be 40% to 50%. For most banks, it’s now 30% to 40%.”
He adds that further reductions are likely following the latest round of regulation.
“It will affect everyone, including us – but smaller and less technologically advanced players will suffer more,” he says.
Nevertheless, he is confident that Alfa-Bank can maintain its recent track record of above-market lending growth. The bank’s overall loan portfolio is forecast to expand by 25% to 30% overall next year, with the majority of growth coming from the retail and SME segments.
A large part of the former is due to come from mortgages, an area in which Alfa-Bank has traditionally been underrepresented. When Verkhoshinskiy joined the bank from VTB in August 2018, its mortgage portfolio stood at $300 million, or around 6% of overall retail lending.
“We had tried to launch mortgages in the past, but couldn’t make it work,” he says. “It’s a very operationally heavy, thin margin business. If you don’t do it efficiently enough, the margin disappears.
“That’s where technology comes in. It totally changes the business case for mortgages.”
Earlier this year, Alfa-Bank launched a new integrated digital platform for housing loans that offers one-day mortgage processing, as well as ancillary services including real-estate searches, surveys and insurance.
The response to the initiative has been positive. Alfa-Bank’s mortgage book has already expanded to $1.3 billion, or 14% of total outstanding retail lending, with nearly $150 million of loans issued in September alone. The bank is now number four in Russia in terms of new mortgage lending volume.
Verkhoshinskiy admits that competition in the segment will likely increase as unsecured consumer lending loses its lustre and interest rates continue to fall. On October 25, the CBR cut its key rate for the fourth time this year, to 6.5%.
“Margins are already squeezed,” he says. “For mortgages, the average is just 1% – or 1.5% for those who can do digital processes.”
He argues, however, that this will be countered by increasing concentration in the Russian banking sector.
“At the moment, around a quarter of banking assets are smaller banks – the bottom 400,” he says. “Over the next few years, a significant part of this business will migrate to top players.
“It’s already happening. Customers are migrating from smaller banks to bigger ones, and also from old-fashioned banks to those that are digitally – and more important ‘phygitally’ – advanced. Retail banking in particular will come down to a fight between the top five to 10 players.”