The Russian central bank’s rate drop last week will not be enough to prevent the country’s banking system from posting heavy losses this year, which could run to as much as 1 trillion rubles ($US14.5 billion; £9.6 billion).
Research from the ratings agency Moody’s indicates that Russian banks are struggling to contain cost increases following the surprise 650 basis point interest rate hike by the central bank last month, to 17%. Although the Bank of Russia reduced rates to 15% last week in an effort to ease pressure on the banking system, these measures are unlikely to be enough to reverse the trend.
“We estimate that the sector’s aggregate net loss will be around RUB1 trillion in 2015, compared with net profits of RUB600 billion in 2014 and net profits of RUB1 trillion in 2013.”
Pushing interest rates up to 17% was designed to halt the collapsing value of the ruble, but in increasing the cost of borrowing money and servicing debt it also posed a risk to domestic spending. Though it was of limited success in achieving the former (as the crude oil price continued its slide pulling the ruble with it), the negative consequences were borne by Russia’s banking system. The government was forced to inject $US2.4 billion into various financial institutions, including state-owned lenders VTB and Gazprombank.
Interfax is now reporting that the ongoing troubles of the banks could well be behind the CBR’s reported decision to lower rates. The Russian news service quoted a letter from Anatoly Aksakov, the president of the Association of Regional Banks of Russia, to Russian central bank governor Elvira Nabiullina. It said:
The situation in the Russian banking market is a serious concern. Despite some stabilisation in the foreign exchange market and the expected inflow of tax and budgetary resources, banks are experiencing acute shortage of liquidity. According to bankers, skyrocketing interest rates caused an increase in the key rate, already launched the process of losing the solvency of companies. Bankers believe that the preservation of the current situation will cause a wave of bankruptcies not only credit institutions but also a number of enterprises and companies.
Unfortunately, it looks like it comes too late to prevent the higher rates from taking their toll. Higher rates have squeezed bank profit margins as the cost of funding has increased faster than the rate of interest institutions have been able to charge on outstanding loans. If rates remain around current levels, Moody’s estimates that Russian banks could struggle to cover their costs.
The ratings agency writes (emphasis added):
With the CBR key rate at 15%, we estimate that Russian banks’ net aggregate interest income from operations with customers will fall by one third in 2015 to nearly RUB1.5 trillion. Total recurring income (including net interest income and fees and commissions) will barely reach RUB2.3 trillion in 2015, insufficient to cover banks’ administrative expenses and the likely level of credit costs owing
to rising problem loans.
This chimes with analyst expectations that the bank bailout bill is likely to cost the government a further $US40 billion this year. As part of the government’s “anti-crisis plan” brought in last week the government has put aside 1.55 billion rubles to support banks, but that figure is likely to prove only a small percentage of what will be required to keep the banking system afloat.