MIG Forex Research

Once again it is sounding like a broken record or the game ‘I can name that tune in ONE note’ as Russian banks are committing to funding costs so high they risk becoming unsustainable, a trend that constitutes a greater threat to the country’s financial industry than stalled credit flows, the central bank warned on Monday
Banks are offering returns higher than 15% to attract funding both in the form of wholesale financing and deposits as they try to offset inflation of 10.7% in September, albeit it was the lowest level in 2 years, and offer a premium above the central bank’s key refinancing rate of 9.5%, Bank Rossii First Deputy Chairman Gennady Melikyan said at a conference in Moscow today. “It would be very difficult to get the same returns after you raised money at rates of 18 to 20%,” Melikyan said. “This will be a problem for banks.”
As the market has witnessed for the past 6 months, lenders are struggling to remain profitable as they reduce loans to corporations and households on growing, and justifiable, concerns they will be unable to service their debt, cutting banks’ main income source to cover interest costs. The central bank has lowered its key rates eight times since April as policy makers try to avert an entrenched financial crisis that threatens to undermine the world’s biggest energy exporter’s fledgling recovery. Banks seeking to attract funding at these high rates are “potentially bankrupt,” Melikyan said. Some of the country’s top 30 banks offer returns ‘in excess’ of 17%, he added. Excluding short-term deposits, the average rate on deposits was 12.6% in September, central bank data show.
The central bank last week said it is reducing interest rates in part to stem RUB gains and prevent the accumulation of risk on the stock and currency markets as investor appetite for high yields starts to return. The RUB remains very attractive as a carry trade, but earning enough to cover the high financing costs is proving difficult for the banks, as the country’s biggest lenders post losses, or big declines in earnings. State-controlled OAO Sberbank’s 9-month net income plunged 91% from a year earlier to RUB 9.1 billion, the bank said on October 22nd. VTB Bank, also majority-owned by the government, posted a net loss of RUB 12.4 billion in Q2, compared with a profit a year earlier, the bank said on October 21st.
Lenders’ corporate loan books fell 0.7% from August after staying unchanged the previous month, the central bank said in a report on its Web site today. Consumer lending dropped 1.1% for an eighth consecutive monthly decline, and the financial industry’s total assets fell 0.5%, while total equity capital rose 6.5%. Last week Bank Rossii once again lowered its key interest rates to record lows, reducing the refinancing rate 50 bps to 9.5%, and said the move was aimed at “additionally stimulating lending activity of the banking sector.”
The ratio of non-performing consumer loans climbed to 6.4% from 6.2%, according to data posted on the central bank’s Web site. Household and business delinquent lending as a share of the total was unchanged in the month at 5.8%. Banks set aside RUB 1.82 trillion to cover overdue debt, an increase of 3.2%, compared with a month earlier. Overdue corporate loans fell to 5.6% of total lending in September from 5.7% a month earlier. The central bank estimates that bank provisions exceed bad debt by 70%, according to Melikyan. Provisions aren’t big enough to cover total bad debt, he added. Russian banks only book missed payments as non-performing loans, compared with international accounting standards, where the total loan is written off once debtors fail to make payments after 90 days.