Standard & Poor's assessment of Russia's bank system

Updated September 10, 2008

   Recently, Standard & Poor’s published the report, where the rating agency assessed Russia’s bank system saying that "it became more stable, however, we should make a range of stipulations to state this fact". Though, despite its "youth", the Russian bank sector has experienced already three crises, in 1995, 1998 and 2004, and the agency warns that it is too early to speak about the significant changes within the sector. However, this statement doesn’t impede the Russian banks to solve successfully the problems, caused by the world liquidity crisis, due to the support of Russia’s government and the stockholders.

   Within less than 20 years of the existence of Russia’s bank industry, it faced several crises and periods of destabilization, as the analysts of S&P remind. Thus, they mark also that the tendency to the growing lending rating average of the Russian banks from CCC to B+, though this index remains one of the world’s lowest, indicates the recovery of Russia’s bank system.

   Though it has experienced several crises, Russia’s bank system "is still subjected to the risk of the liquidity reduction under the influence of panic moods and the danger of mass withdrawals of the customers’ deposits, like in summer, 2004", the analysts of S&P mark. In their opinion, "the major part of the growing Russian banks’ business is funded by the external borrowings that have the high risk of refunding, liquidity and the currency risk in the bank system".

   In Standard & Poor’s consider that the liquidity slumps, though recoverable, will continue, and the cooldown in the relations with the West, as well as the continuing world loan crisis, will contribute to this. "However, Russia’s banks are dealing successfully with their problems, caused by the world liquidity crisis, due to the changes in the development strategies, creation of the internal liquidity reserves, and the government and stockholders’ support as well", as the agency marks.

   The director of the Department of the Scientific Research, the Moscow University of Industry and Finance Sergey Moiseev marks that the fifth part of the Russian banks’ liabilities is formed using the foreign facilities, thus, this is mainly the money of the foreign banks’ subsidiaries. "If the growth of these banks is suspended because of the unstable foreign receipts, the growth of the overall market will be suspended as well", as Mr. Moiseev considers.

   "The capital outflow in the bank area resulted in the liquidity deficiency that, in its turn, resulted in the growth of the funding cost. One and a half months ago, there was the liquidity surplus in the industry that prevented the growth of expenses for the funding", as the analyst of Deutsche Bank Bob Comers marks. "The situation would hardly improve as compared to the present one. Nevertheless, Deutsche Bank’s key scenario predicts that the tension in the political sector keeps at least by the end of this year. The revival of the capital inflow is unlikely in the nearest future within the framework of this scenario". "The level of the external borrowings is high, but not huge", as the analyst of Troika Dialog IC Olga Veselova considers. "If the borrowings are suspended, it will result in the growth deceleration of the bank sector and in the more expensive money. This will affect negatively Russia’s bank system, but will not be disastrous".

   "The measures to support the liquidity can be assessed as positive. If earlier the banks were taking loans reluctantly at the auctions of the Ministry of Finance, so, when the banks were provided with the new ways of borrowings, for instance, the facilities placement of the fund for housing and utilities development, they became interested in this kind of money attraction", as Olga Veselova considers.

   "High economy rates predetermine favorable terms for the development of Russia’s national bank sector", as the analysts conclude. "The rise of Russia’s credit worthiness minimizes the recurrence of the disastrous scenario". S&P’s analysts mark that the country risks are still high, since the weakness of the legal and supervisory systems, low transparency of the banks and companies’ incorporated structures, as well as the high-level concentration of the bank loan portfolios and the sources of funding and income influence on them.

   "I think that it goes about the provision of the activity norms and the shortage of laws, for instance, about the bank mortgage, securitization, and syndicated lending", as Sergey Moiseev marks. "Russia’ banks, on the contrary, pay much attention to their extra reporting". In the opinion of the president of the Association of Regional Banks of Russia Anatoly Aksakov, everything is relative. "I don’t think that the supervision is low, rather ineffective. The banks’ load is too heavy, and its efficiency is low". "Our supervision is effective because we don’t have banks that went bankrupt due to the losses", as Sergey Moiseev considers. In Anatoly Aksakov’s opinion, the supervisory bodies "should raise the responsibility of owners and the banks’ top-management, including criminal one, and on the other hand, provide them with the independence". As for the transparency of the lending organizations, "it is the false information, at least, concerning those banks that are listed in the Agency for Deposit Insurance, and in the Central Bank are aware of all actual owners", as Anatoly Aksakov states.

   Among the mentioned risks of Russia’s bank market, S&P emphasizes the Bank of Russia’s activity that "has tackled effectively the problems of liquidity caused by the world loan crisis in summer, 2007"; as well as the activities of Russia’s government on the support of private banks that "reflects the aims of Russia’ political authorities and regulatory bodies to provide the bank sector with stability". "When the crises started, the Central Bank acted as an experienced and professional organization, therefore, Russia’s bank system is stable. Russia’s government, in its turn, was placing temporary available facilities on deposits", as Anatoly Aksakov marks. However, the Russian bank sector has been requiring a major reform for a long time that would urge the development of banks and would accelerate the increase of their ratings. However, the reform is progressing slowly, and it is explained by "the opposition of the vested interests, whose interests it affects", as S&P summarizes.

   "We don’t require such reform as the deep revision of relations between regulation, supervision and money policy", as the president of the Russian Banks’ Association Garegin Tosunyan considers. "This is not the reform for the bank system, it is the revision of the system to manage it. The bank system requires some development". "Despite the aggravation of the situation in the bank industry in the nearest prospect, we are still assessing the investment attraction of Russia’s banks as high in the mid-term prospect", as Bob Comers adds.