Russian Banks Cut Bonds for First Time Since 2008

Retail sales growth accelerated for a fifth month in May
Bank Rossii Chairman Sergey Ignatiev. Photographer:Dmitry Beliakov/Bloomberg News.

Russian banks, the largest owners of domestic corporate bonds, are reducing holdings for the first time since 2008 to finance increased lending.

Banks, which hold about 40 percent of domestic company debt, trimmed government and corporate securities by 1.4 percent to 5.1 trillion rubles ($167 billion), a change from the past 19 months when investments more than doubled, according to the most recent data published by the central bank for May. MDM Bank, Russia’s second-largest private lender, cut bonds to 7 percent of total lending, Chief Financial Officer Vadim Sorokin said.

While lending in the second quarter rose at the fastest pace since 2008 as the economy rebounded from the biggest slump since the collapse of the Soviet Union, Bank Rossii Chairman Sergey Ignatiev said banks still preferred to “purchase securities and build up liquidity.” Now, bond yields may climb as loans increase an estimated 13 percent this year, said Clemens Grafe, chief economist at UBS AG in Moscow.

“As demand for loans revives, some resources will be redistributed away from high-yielding liquid instruments and into loans to the corporate sector -- small and medium businesses and also retail consumers,” said Alexandra Volchenko, head of risk management and finance at OAO Promzvyazbank in Moscow.

Russia’s third-largest private lender reduced securities holdings by 1.7 percent in June to help boost loans by at least 15 percent this year, Volchenko said in an e-mail response to questions. MDM, which completed a merger with Novosibirsk-based Ursa Bank last August, trimmed securities to 7 percent of its loan portfolio as lending expanded, Sorokin said.

‘Better Off’

The Finance Ministry expects the credit expansion to continue through the end of this year, Deputy Finance Minister Alexei Savatyugin said in an interview in Moscow yesterday. Banks are “better off” today than a year ago, he said.

Lending growth helped cut the annual cost for companies to borrow in rubles by 240 basis points, or 2.4 percentage points, between January and May to an average 11.4 percent, the lowest level since July 2008, according to the central bank.

The decline compared with the 70 basis-point drop in yields to 7.02 percent on Russia’s sovereign OFZ bonds due December 2014 for the same period. The yield on 2012 ruble bonds of Moscow-based OAO Gazprom declined 140 basis points to 6.9 percent between January and May, data compiled by Bloomberg show.

Russian banks are charging 2.74 percent to lend to each other overnight, a decrease of 321 basis points from Jan. 25. The so-called MosPrime rate peaked at 25.17 percent in January 2009 as lenders sought rubles after global credit markets seized up.

‘Less Risky’

Buying securities during the credit crisis “was a less risky strategy because demand for loans was low and securities with fixed yields carried a lot less risk than loans,” Rustam Botashev, the deputy head of research at UniCredit SpA in Moscow, said in an interview.

“Bank lending will expand this year, albeit at a weak pace,” Botashev said. “Banks’ holdings of securities will decline as a share of total lending.”

Bank Rossii cut interest rates 14 times between April 2009 and May this year to spur lending and help the economic recovery. The central bank is likely to keep rates unchanged in coming months, the regulator said in a June 30 statement. The government predicts the economy will grow 4 percent this year as oil, the country’s biggest export earner, rallies from a record decline in the second half of 2008.

‘Quality Borrowers’

Retail sales growth accelerated for a fifth month in May to an annual 5.1 percent while real wages rose 7 percent and disposable incomes climbed 2.8 percent. Investment in production capacity increased 5.5 percent for a third monthly gain, according to data compiled by the Federal Service of State Statistics in Moscow and Bloomberg.

The second quarter saw a “clear trend” toward reviving demand from “quality borrowers,” said Andrey Shalimov, the head of treasury at Moscow-based lender Bank Vozrozhdenie. “The most recent decrease in the refinancing rate and the central bank’s statement that further decreases are unlikely spurred many borrowers to seek new bank financing. Lower rates have made credit more accessible for a broader range of borrowers.”

The yield on Russia’s dollar bonds due in 2020 and sold in April fell for a fourth day, dropping by 2 basis points to 5.212 percent. The cost of protecting Russian debt against non-payment for five years with credit-default swaps declined 11 basis points to 169 on July 13, the lowest since May 18. The contracts, which investors use to hedge against losses on debt or speculate on creditworthiness, pay the buyer face value if a borrower reneges on its obligations.

Russia Vs Turkey

Credit-default swaps on Russian debt, rated Baa1 by Moody’s Investors Service, cost the same as contracts for Turkey, which is rated four levels lower at Ba2. That difference has narrowed since April 20, when Turkey’s CDS were 40 basis points higher.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries today fell 2 basis points to 243, according to JPMorgan Chase & Co.’s EMBI+ indexes. The spread compares with 172 for debt of similarly rated Mexican debt and 218 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The yield difference on Russian bonds is 60 basis points below the average for emerging markets, according to JPMorgan indexes.

Banks held 1.2 trillion rubles in corporate debt at the end of April and a further 594.8 billion rubles of bonds issued by non-residents, according to the most recent central bank data. The total amount of outstanding corporate debt is about 2.6 trillion rubles, according to UralSib Financial Corp. in Moscow.

‘Peculiar Market’

Yields on corporate bonds may climb as banks free up funds for lending, said Grafe at UBS, which forecasts a 13 percent jump in overall lending this year.

“The question is who’s ultimately going to be the owner of ruble securities,” said Grafe. “The outlook for that market is not such that I would really want to hold ruble securities. It’s a very peculiar market because the only buyer of corporate ruble bonds is essentially Russian banks.”

VTB Group, Russia’s second biggest bank, will “maintain a relatively stable securities portfolio,” Chief Financial Officer Herbert Moos said in an e-mail response to questions.

ZAO Raiffeisenbank, the Russian unit of Raiffeisen International Bank Holding AG, said demand is still rising for corporate bonds even after the bank reduced holdings of securities to 15.2 percent of total lending at the end of May.

Increased Demand

“We see increased demand for loans,” Chief Executive Officer Pavel Gurin said in an e-mail. “We still see a large demand for corporate bonds both from corporates to place and banks to purchase.”

OAO Sberbank increased the share of government debt in its securities portfolio by 8 percent since the start of the year to 78 percent of the total, channeling 578 billion rubles into state bonds, the country’s biggest lender said today in a statement as it reported earnings for June. Its total holdings of securities gained 70 percent in the first six months to 1.7 trillion rubles.

Revenue from trading in securities, which more than doubled in the first half compared to the same period last year, helped Sberbank post an 11-fold surge in net income to 60.7 billion rubles, according to the statement.

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