Russia Risks Prolonged Slump as Asset Quality Worsens

By Alex Nicholson and Paul Abelsky

Sept. 24 (Bloomberg) -- Russian government and central bank assurances that the nation’s financial industry is on the brink of recovery may be premature as asset quality continues to deteriorate, industry executives said.

“There are few quality borrowers, and banks may cease lending to most companies until market conditions improve,” Andrei Sharonov, managing director of Moscow- based Troika Dialog, Russia’s oldest investment bank, said in an interview in the Black Sea coast city of Sochi. “Companies are losing cash flow and becoming unable to service debt.”

Lenders are amassing bad debts at a pace of $2 billion a month, according to Sharonov. Russia’s faltering banking sector threatens to prolong a decline in the world’s biggest energy exporter after oil, gas and metals prices slumped, sending gross domestic product plunging a record 10.9 percent last quarter. The government’s “anti-crisis” program earmarked 495 billion rubles ($16.5 billion) to shore up the financial industry.

The support measures didn’t prevent overdue bank loans from rising to 5.5 percent of total lending in July, compared with 5 percent a month earlier. Bank interest rates on corporate loans rose last month for the first time this year, rising to 15.1 percent on average in August, even after the central bank cut rates, Bank Rossii data show.

Delinquency

The pace of increases in delinquent loans will accelerate until the middle of next year, according to Mikhail Zadornov, a former Finance Minister and chairman of VTB-24, the retail unit of VTB Group, Interfax reported yesterday. Overdue loans at the country’s 30 biggest banks jumped 8.5 percent in August, the news wire cited Zadornov as saying.

Bank St. Petersburg, the biggest private lender in northwestern Russia and one of the country’s two traded private banks, said today that the share of delinquent loans jumped to 7.5 percent of total lending as of July 1, compared with 0.7 percent at the end of last year.

“Given that Bank Saint Petersburg’s loan portfolio has a 30-percent exposure to the high-risk construction and real estate sectors, the rapid increase in non-performing loans is one of the main concerns,” said Yulia Rusanova, a banking analyst at Deutsche Bank AG in Moscow.

Putin Calls

Prime Minister Vladimir Putin has repeatedly called on the recipients of state bailout funds to boost lending and cut interest rates. Russia’s three biggest banks, which are majority-owned by the government, have dragged their feet on increasing lending in an effort to protect their asset quality.

The central bank, which has lowered the key refinancing rate six times since April to 10.5 percent, has sought to assure markets that Russia’s banks are over the worst.

Growth in non-performing loans “slowed quite considerably” last month, bank Chairman Sergey Ignatievsaid on Sept. 9. Overdue corporate debt rose 5 percent in August from July, the smallest monthly rise this year, he said.

Banks’ average capital adequacy ratio is now at about 19 percent, compared with the required 10 percent, the central bank said on Sept. 9. Loan books expanded 0.8 percent last month after state-run OAO Sberbank, the country’s largest bank, boosted its portfolio by 1.9 percent, according to Ignatiev.

“I can speak about the gradual breaking of the vicious circle,” Ignatiev said.

Out of Step

The picture painted by policy makers is also out of step with what rating companies say.

Russian banks may face a surge in “troubled assets” that could total $213 billion, Standard & Poor’s said in June. As much as 38 percent of all assets held by banks at the end of last year may become “problematic” by the end of 2011, S&P said.

Stubborn bad debt may derail the central bank’s bid to unlock credit markets, said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG.

“The central bank will start to consider if cutting rates at a high speed is really a useful means for providing the economy with more credit volumes in the situation where the banking sector has its problems with non-performing loans,” Leuchtmann said in a phone interview from Frankfurt. “Therefore, even despite the fact that the central bank is cutting rates, lenders might not be as willing to increase credit volume to the economy.”

‘Year of Losses’

Russian banks face a “year of losses” in 2009 before they can start to generate profits next year, Andrei Kostin, chief executive officer of VTB Group, Russia’s second biggest lender, said in an interview with Bloomberg Television on Sept. 16. The number of lenders that posted losses through July 2009 rose to 180 from 119 a month earlier, according to Bank Rossii.

“The fall of economic growth affected the Russian banking sector very much, so we still feel the consequences of this,” Kostin said.

Since the failure of Lehman Brothers Holdings Inc. in September, Russia has made available 4 trillion rubles of central bank funding, including uncollateralized loans. So far, the industry has been spared a run on lenders like the one it suffered after the government’s 1998 default on $40 billion of debt that forced a ruble devaluation.

Problems

“Last year we had problems,” First Deputy Prime Minister Igor Shuvalov said in an interview with Bloomberg Television in Washington on Sept. 21. “Russian citizens were queuing in the banks in order to take out their money, liquidity was very short and interbank loans were cut immediately,” he said. Quick steps by the Finance Ministry and the central bank meant “very quickly, the situation changed,” he said.

Since then, the government has also provided 410 billion rubles in subordinated loans, and plans to offer 300 billion rubles in loan guarantees by the end of 2009. The government has also earmarked 150 billion rubles in this year’s budget to swap government bonds for bank shares.

“In spring, when the decline curve was very deep, we thought that the portfolio of bad debts will be enormous,” Shuvalov said. “Possibly we will face another phase of banking crisis.”

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.