Financial Crisis Alters Russian Banks

Financial Crisis Alters Russian Banks
Oxford Analytica 03.16.10, 6:00 AM ET


The financial crisis brought to an end the rapid expansion of the Russian banking sector. As sources of external finance dried up and trust suffered, state support was necessary to stabilize the system. State banks have been an important mechanism for channeling financial assistance to other institutions and maintaining the flow of lending.
The aftermath of the crisis has created a new environment for banking in Russia, with reduced funding possibilities and diminished growth prospects. There will be no immediate return to the rapid development that characterized the precrisis period, with a doubling of banks' assets (as a share of GDP) in 2000–08. However, the country remains underbanked: Only about one-third of households have a bank account and just 10% of fixed investments are financed by loans.
State banks. The ownership structure of the Russian banking system differs from those in other emerging eastern European markets. It more closely resembles China's: Both markets are characterized by the dominance of state institutions and the relatively small role of foreign banks.
In the precrisis period the authorities sought to improve the system through better regulation--while simultaneously preserving strong state control and not relying on foreign ownership to transform the sector. As in other countries, the crisis prompted the state to take on a greater role in the banking system. State-owned systemic banks, in particular Vneshekonombank (VEB), have been used to carry out anticrisis measures, such as driving growth in lending (however limited) and supporting private institutions.
State-controlled banks' share of total assets rose from about 30% to 45% in the 10 years prior to 2008. As a result of the crisis state banks are now estimated to control 60% of total assets. So far there do not appear to be any plans to roll back the state's increased presence.
Consolidation. Extreme fragmentation is a structural feature of the Russian banking system. Of more than 1,000 banks, only the top 50 are significant. Such a large number of banks makes supervision more difficult. Higher capital requirements entered into force this year, with the minimum set at 90 million rubles (just over $3 million at the current exchange rate); this will double by 2012. Unlike previous initiatives this measure will apply to existing banks, therefore contributing to the consolidation of the sector. However, the extent to which regulatory pressures will reduce fragmentation remains uncertain.
Privatization. Past equity offerings increased private ownership in state-owned Sberbank and Vneshtorgbank (VTB). There are now conflicting views regarding further privatization, though none of the plans under consideration would entail a loss of state control:
--Sberbank Chief Executive Officer German Gref has stated that privatizing his bank--in which the state has a 57.6% stake--would help finance the budget deficit.
--By contrast, Finance Minister Aleksei Kudrin has stressed that the immediate focus should be on improving regulation and reestablishing the flow of lending.

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--In any case VTB--where the state's stake rose to 85.5% during the crisis--is likely to be the first candidate for partial privatization.
Outlook. In the postcrisis context banking strategies will remain focused on financial restructuring, working out problem loans and reassessing funding alternatives:
--Asset quality. Asset quality is one of the main sources of uncertainty; this will require continued attention to loss provisioning.
--Lending. Banks have excess short-term liquidity and have increased capital to absorb losses, but high-quality borrowers remain scarce.
--Financing. Future banking sector growth will have to rely to a larger extent on domestic funding. During the crisis state funds and deposits alleviated banks' lack of access to external capital markets, with an interbank market that remains highly dependent on nonresidents for foreign currency resources. However, higher deposit rates have squeezed banks' margins.