IMF Says Russian Banks Concealing Bad Debt May Need More Capital

  • Non-performing loans may be higher than reported level of 9.2%
  • Russia spent $16 billion to recapitalize banks amid recession

Russia’s banking industry risks a capital shortfall of as much as 1 percent of gross domestic product after under-reporting bad debt during the economic crisis, according to the International Monetary Fund.

Non-performing loans might be 3.5 percentage points higher than the reported level of 9.2 percent in March, the Washington-based lender said in a report Wednesday. Under stress scenarios that envision low oil prices, the capital shortfall could reach up to 4.5 percent of GDP, according to the IMF.

“The banking system is likely to require additional capital,” it said. “The overall capital adequacy ratio resumed its declining trend on the back of low profitability and anemic credit growth. Credit quality continues to worsen.”

The impairments would present a further drain on banks after the government spent almost 1 trillion rubles ($16 billion) last year to recapitalize the financial industry. Russian lenders may face larger holes in their balance sheets than they have let on even as executives and officials publicly say the worst of the crisis is behind them.

The industry is on its way to recovery and may post a profit of 600 billion to 700 billion rubles this year, Herman Gref, head of the country’s biggest lender Sberbank PJSC, said last month.

Weak, Stable

Calling the banking system “weak but stable,” the IMF said it made its estimates of non-performing credit “after adjusting for the lower quality of restructured loans, misclassifications, and transfer of distressed assets to affiliated off-balance sheet entities.”

Its report was based on two visits to Russia in the first quarter, which included meetings with central bank Governor Elvira Nabiullina, deputy heads of the finance and economy ministries and senior banking executives.

Russia has yet to find a workable formula for cleaning up the financial industry, despite revoking a record number of licenses. Nabiullina has proposed a new fund to handle bailouts of troubled lenders after previous efforts via outside investors proved to be more expensive than planned, with the rescuers sometimes dumping bad assets onto their balance sheets.

“Overdue loans have been rising in various industries, in particular in construction and real estate,” the IMF said. “Other sectors experiencing increased credit risk include mining, trade, and agriculture, which suffered from low domestic demand and a slowdown in government spending.”

Servicing Debt

The IMF said that corporate borrowers’ ability to service debt continues to deteriorate, especially among smaller companies dependent on domestic financing. It also said many restructured loans, which amount to about 30 percent of all large loans, were of “weaker quality.”

Fitch Ratings estimates that as much as 15 percent of restructured loans are potentially problematic, with half that amount at risk of becoming losses, according to analyst Alexander Danilov.

“Russian banks are hoping to grow their way out of the problems that haven’t been adequately covered with reserves,” Danilov said. “If no new problems appear, we estimate most lenders will work through them in three years.”

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