Market overview

Macroeconomic situation

The Russian economy was affected by a number of negative trends in 2014. At the beginning of the year, the RUB exchange rate, similarly to the exchange rate of many other currencies, fell slightly due to the end of the FRS quantitative easing programme in the United States. The annexation of Crimea to Russia in March was accompanied by an increased capital outflow, so that only significant intervention allowed the Bank of Russia to bring the situation in the currency market under control. Since March, EU members, the USA, Canada, Japan and some other countries have gradually introduced a broad set of sanctions against individuals and organisations being to their best knowledge liable for the events in Crimea and Eastern Ukraine. In August 2014, the Russian Government imposed retaliatory sanctions by banning the import of agricultural products, raw materials and food from the USA, European Union, Canada, Australia and Norway.

In the second half of the year, oil prices, which had been standing at a record high level for more than three years, began to decline. The price of Urals crude oil decreased by 5.2% in September, and then the decline accelerated: the price dropped 9.3% in October and November and reached 16.8% in December. The reason for the decline in prices was a combination of several factors:

  • increased oil production from unconventional sources – primarily due to the rapid growth of shale oil production in the USA
  • slowdown in demand, primarily due to the decrease in the growth rate of Chinese economy
  • anticipation of oil supplies from Iraq, Iran and Libya to the world market
  • the refusal of OPEC countries to follow their common practice of reducing production in case of excess supply

The decline in oil prices coupled with an increased outflow of capital caused by the sanctions put growing pressure on the foreign exchange market. In November, the USD FX rate was RUB 45-47 per Dollar, and in early December it exceeded RUB 50 per USD, then even exceeded RUB 60 in the middle of December. Emergency measures taken by the Bank of Russia led to the correction of the FX rate, however, it is not possible to say that foreign exchange risks were totally neutralised. In particular, inflation expectations increased sharply, with year-end inflation exceeding 11%.

These events had a negative impact on the economy. Under the conditions of a protracted recession of the Russian economy, it would be difficult for companies with a substantial amount of borrowings to generate the necessary income to pay off both the external and domestic debts, which might result in a higher probability of default of Russian companies. In case of further development of negative trends, we can expect continued growth in consumer prices, a decline of real incomes and the ability of the population to service the credit debts. In addition, the growth of banks’ deposit base will slow down, as households will have to spend savings to satisfy current consumption needs. All this will negatively affect the business of retail banks. At the same time, the entry of the Russian economy into recession will be followed by further deterioration of the corporate loan portfolio quality.

Regulation

In order to control the inflation and support the national currency, the Bank of Russia increased the key rates by several steps from 5.5% at the beginning of the year to 17% in December, 2014. In the autumn of 2014, the Bank of Russia and the Ministry of Finance announced additional measures to support the Ruble. The Bank of Russia began to conduct “currency swap” operations selling Dollars for Rubles and 7- and 28-day REPO auctions for foreign currency; the Ministry of Finance announced its intention to conduct FX deposit auctions. The Government also requested the leading exporters to sell a part of FX revenues.

The sharp weakening of the national currency and the volatility of the securities market had a negative impact on the performance standards required of banks – many market players’ capital adequacy ratios and credit concentrations deteriorated due to the high share of FX instruments. The negative revaluation of securities portfolios worsened financial results, which, in turn, created a threat for capital adequacy ratios. The forecasts for depriving Russia of its investment ratings (S&P agency downgraded the Russian Federation’s rating to “junk” in January 2015 as well as Moody's Investors Service in February 2015), if implemented, could have a negative impact on the maintenance by banks of mandatory standards, and increase the weight for the risk assessment of bonds of quasi-sovereign level Russian issuers.

The Bank of Russia introduced a number of measures that neutralised these negative impacts at the end of December 2014, and contributed to compliance by banks to the regulator’s requirements. To calculate the statutory ratios, the Bank of Russia allowed using the FX rate as of the end of Q3 2014, to ignore the negative revaluation of securities, and to transfer securities from trading portfolio to other categories as well as to use credit ratings assigned in 2014.

Vozrozhdenie Bank’s position on the market

Thanks to the bank’s conservative risk management policy, the impact of negative factors on the bank was limited. According to Expert RA agency, Vozrozhdenie Bank ranks 36th in Russia in terms of assets, and is in 3rd place in the key banking activity of credit financing for small and medium-sized businesses. Furthermore, the bank is in 25th place in terms of corporate credit financing, which is significantly higher than the bank’s formal net assets position. Vozrozhdenie Bank ranks 37th in terms of assets in the Interfax-100 ranking.

The bank’s position in the retail segment also significantly exceeds its net assets rank: the bank ranks 21st in the Expert RA ranking based on the amount of deposits. Vozrozhdenie Bank is 13th in the number of active bank cards, and 19th in the number of ATMs. The brand perception of the bank by a general audience also confirms the bank’s places in the economic rankings. According to the results of a research study conducted by Brand Finance together with BrandLab and Banki.ru, Vozrozhdenie Bank’s brand was listed as one of the most valuable banking brands in Russia, ranked 18th.

VOZROZHDENIE BANK’S POSITION ON THE RUSSIAN MARKET (ACCORDING TO EXPERT RA RANKING)

Index ranking Bank position
Assets 36
Loans to small and medium businesses 3
Retail deposit 21
Mortgage loans 14
Corporate loans 25
Active bank cards 13
Branches / ATMs 39 / 19



Banking market trends

According to the baseline forecast of Expert RA, banking sector assets will add only 8% in 2015, and the loan portfolio will increase by 7%. The growth will be almost entirely provided by financing large business, while the other segments of the credit market are expected to decline. Combined with the growth of the funding costs and deteriorating quality of the portfolio, this will result in losses of banks of RUB 400 billion. Development of the banking sector in 2015 will be substantially determined by the oil price behaviour. The Expert RA basic scenario assumes an annual average oil price of USD 50 per barrel, while a negative scenario calls for USD 35, and a positive scenario is for USD 65 per barrel.

A decrease in interest margin and worsening quality of loan portfolios are the key risks for the banking sector in 2015.However, the loan portfolios of SMEs and individuals raise the least concern. On the one hand, due to the high turnover, the reduction of SME and retail lending would lead to an increase of the overdue debt share in banks' portfolios. On the other hand, since banks started "tightening measures" in these segments at the beginning of the last year, we could expect stabilisation of overdue debt in absolute terms in the first half of 2015.

Key lending segments of the bank, except for loans to large businesses, can expect a reduction. Lending to large business would grow by 16%: support for the segment could be funded by the largest banks as part of the planned recapitalisation through Federal loan bonds. The SME loan portfolio will decrease by 8%, and unsecured loans to individuals will decrease by 7%. Mortgage loans will decrease by 70%, while the mortgage portfolio (loan balance) will be flat (+ 32% in 2014).

According to Expert RA estimates, construction, rental and trading companies, which have a large share of imported goods in their revenue structure (in particular, car dealers, electronics sellers and air carriers) are in the special risk zone. The Agency expects a noticeable deterioration in the quality of the loan service by this type of borrowers already in Q1 2015.

The sharp decrease of interest margin and growth of provisions for non-performing loans would lead to losses in the banking sector as of 2015 year end in the amount of RUB 400 billion.Under the base scenario, the loss (before taxes) in 2015 will be approximately RUB 400 billion, against profit of 589 billion in 2014. Under a negative scenario, the total loss will reach RUB 1.2 trillion. The interest rate risk observed in Q1 2015 will make a number of banks, including large ones, face a considerable decrease in their net interest margin, and the number of money-losing banks could exceed 250 (174 banks as of April 1, 2014).

Fulfillment of the basic and negative scenarios could lead to a significant increase in the market share of banks with state equity participation. In particular, according to forecasts, up to 90% of all mortgage loans in 2015 will be given by Sberbank and VTB. The share of banks with state participation will increase significantly in the large business lending market as well, mainly due to the programme of recapitalisation through Federal loan bonds. However, the activity of banks with state participation will continue to decrease in the small and medium-sized business lending market due to the closure of the so-called "credit factories", owing to which banks with state participation demonstrated high growth rates in 2011-2012. As a result, in 2015 the Agency expects growth of the market share of large private banks and small regional banks.

Analysts of Expert RA agency expect an increase of the share of large private banks as well as of smaller regional banks in 2015 on the market for lending to small- and medium-sized businesses.

BANKS’ AGGREGATE ASSETS IN 2015 WILL GROW BY 8% VERSUS 35% in 2014
RUB trillion, percent

Source: RAEX forecast, Bank of Russia

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