Russia may have to spend more than $40 billion (R455bn) this year to avert a banking crisis, as the growing likelihood of a sharp recession threatens to pile extra costs on a sector suffering from Western sanctions over Ukraine and a plunge in the rouble.
Russian banks are seeing a deterioration in their loan quality, a rise in their risk management costs and increase in their cost of funding, and banking executives and analysts predict things are going to get worse.
This represents a major challenge to President Vladimir Putin, who took power 15 years ago in the ashes of a crisis that wiped out the financial system, and whose popularity partly rests on his reputation for restoring stability.
“We expect a contraction in the number of small, medium and large banks this year,” Mikhail Zadornov, the head of VTB 24, the retail arm of No 2 bank VTB, said last week.
“It will be hard for all banks. The weakest will leave the market,” he said.
Russia’s central bank has already relaxed regulation of banks, and the government has pledged support of more than 1.2 trillion roubles (R216 billion) this year after spending more than 350 billion roubles in 2014. But analysts say this is a fraction of what is needed.
The anti-crisis measures will significantly add to pressures on Russia’s international reserves and the budget, which is already forecast to run a deficit of up to 3 percent of gross domestic product this year, hurt most by a collapse in oil prices.
“To preserve the status quo, banks may need far more capital than 1 trillion roubles,” said Yaroslav Sovgyra, an associate managing director for Moody’s ratings agency in Russia.
“One trillion would boost their capital (adequacy ratio) by about 200 basis points. But on the other hand because of credit losses you’ll see a reduction in capital by roughly 500 basis points.”
A further problem is that the government’s planned capital injection comes with strings attached: Russian banks are being asked to increase lending to core sectors of the economy by around 12 percent. That could further stretch their capital. – Reuters