Russian lenders’ profitability will decline amid slower economic growth and rising bad debt, according to Moody’s Investors Service, which kept its negative outlook on the country’s banking system for a second year.
Banks will face “challenging” conditions through 2014, with problem loans set to surpass 10 percent of total lending in the next 12 to 18 months, from about eight percent at the end of 2012, Moscow-based analysts Eugene Tarzimanov and Yaroslav Sovgyra said in an e-mailed report today. Capital buffers are likely to remain “relatively low” with Tier One capital ratios of 10 to 11 percent, the analysts said.
Russia is struggling with the slowest economic growth since a 2009 recession as a weakening global recovery saps demand for its commodity products. The World Bank cut its forecast for expansion in 2013 to 1.8 percent last month from 2.3 percent previously. Net capital outflow reached an estimated $12.9 billion in the third quarter, compared with $7.9 billion in the same period a year earlier, according to the central bank.
“Contraction within the economy’s core sectors, such as manufacturing and construction, poses asset-quality risks because these sectors drive a large part of banks’ loan quality,” Tarzimanov and Sovgyra said. “Rising new loan-loss provisions caused by deteriorating asset quality and declining net interest margins will lead to lower profitability.”
Lending growth will slow to as little as 10 percent this year and next, from 20 percent in 2012, with the corporate market “particularly sluggish,” the analysts said. “The banks’ stable funding and liquidity positions only partly offset the negative drivers.”
The pressure on the ruble has “intensified” this year, “further suppressing growth prospects” for banks, according to Moody’s. A weaker ruble is “negative” for the performance of foreign-currency loans, which account for 17 percent of gross loans this year, most of which are unhedged, Moody’s said.
The ruble has retreated 6.1 percent versus the dollar this year, trading at 32.2815 by 4 p.m. in Moscow.
While Moody’s has maintained its negative outlook on the Russian banking system since October 2011, outlooks were stable on 87 out of 110 rated Russian companies as of last month, according to the report. Most of the “generally low” bank ratings “already incorporate prevailing risks,” the analysts said.
Financial shares declined 0.3 percent on average on the benchmark Micex index. VTB Group, Russia’s second-largest lender, fell 1.2 percent in Moscow, heading for the lowest close since September 2009. The bank slid 1.5 percent to $2.596 in London trading.
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