SURVEY: Banks Gaze Cautiously At Better Times
Interfax | Aug. 23, 2010 | JRL 2010-160-26 - JRL Home
MOSCOW. Aug 23 (Interfax) - The last few months have finally started to convince Russian bankers that there are better times ahead and the worst is behind the sector, but there are still grounds for caution.
Watershed?
Data for the last few months indicates lending is picking up: Russian banks increased their loan book 4% in H1 2010, and 2% in June alone. Corporate lending might have slowed a little in July, but retail lending gained momentum.
The Central Bank reckons the lending growth is a robust tendency, and that banks will bolster their overall lending 10%-15% this year, and bankers are starting to believe this.
"The tendency for the biggest banks to increase their loan books is a natural one in a growing economy and in a period of business consolidation," said Alexei Krokhin, first vice president of TransCreditBank (TCB) (RTS: TCBN).
The biggest lenders have no doubt about the Central Bank's forecasts. Promsvyazbank (RTS: PRSB) and VTB24 (RTS: GUTB) plan to boost loans at least 15% in 2010, and both are on track to do this. "Our optimism is based partly on the fact that we saw household income growth in both nominal and real terms in July," said Georgy Gorshkov, head of retail banking at VTB24.
"In general, lending growth will at least remain stable if it doesn't accelerate sharply in the coming months," UniCredit Bank's chairman, Mikhail Alexeyev, said.
But not everybody is so bullish. "We'd not rush to draw conclusions about a robust tendency for loan portfolios to grow," said Denis Vlasov, marketing and direct sales manager at Home Credit & Finance Bank (RTS: HCFB). Households are interested in loans, but lending activity is still constrained, he said.
TCB's Krokhin said growth was being constrained partly due to the uncertainty in some sectors like automotive, heavy industry and agriculture.
And bank's own policies towards borrowers, which were firmed up during the crisis period, aren't helping, said Igor Bulantsev, chairman of Nordea Bank. "Too many borrowers from the 'more or less' are now in the 'no go' category," he said, adding that demand for loans was still low.
Corporate lending strongest
Most bankers expect the corporate loan portfolio to grow more than retail lending this year because the latter is harder to sustain.
"We're placing our bets more on growth in corporate loans in H2. Although in percentage terms this growth is roughly the same (14%-15% for both corporate and retail loans), growth in corporate loans in absolute terms will be approximately three times greater," said TCB's Krokhin.
Nordea's Bulantsev agreed: corporate lending will grow faster because loans to this segment will be bigger. But there are positive trends in retail lending too, particularly mortgages, which have been growing robustly since the middle of 2009.
"But it won't be easy to ensure marked growth for quality retail loan portfolios - it's the corporates that are likely to generate growth in H2," said B&N Bank's financial director, Alexei Kitayev. B&N Bank expects to achieve more than 10% lending growth in H2 2010, Kitayev said.
A whole range of banks are seeing their retail portfolios continue to contract. "A significant number of Russian banks are still not stepping up retail lending, mainly because of the provisions they have had to put in place," VTB24's Gorshkov said.
"Demand and pent-up liquidity enable banks to lend, but caution prevails when taking on risk," said Dmitry Orlov, vice president of First Republican Bank.
Home Credit's Vlasov said he thought retail lending would take off in the autumn.
Lower rates
The turnaround in the deposits market was one of last year's highlights, but may are now wondering about the wisdom of this.
Attracted by high rates, people started taking money from under their mattresses and depositing it with banks. The Central Bank was skeptical about such an aggressive means of replenishing resources, and warned banks that were enthusiastic about putting their rates up that this was risky. Banks heeded the regulator, but they had already attracted a lot of deposits at high rates and they are now paying for it, because they are forced to lower lending rates in order to compete.
That competition is intense, as banks fight for good borrowers, and lending rates are low as a result, said Vozrozhdenie's (RTS: VZRZ) deputy chair, Lyudmila Goncharova.
Most banks calculate their net interest margins will fall at least 100-150 basis points in 2010. "Of course the margins will fall compared with last year's heights, but it won't stay as low as it was in Q1 2010," said Irina Belkova, deputy investor relations manager at Promsvyazbank.
"Margins are melting everywhere. If you are looking for a high margin you need to be in the high-risk segments. This is not an ideal strategy any longer for most players because they are all fighting for good clients," said Barclays chief Nikolai Tsekhomsky.
"Clients are starting to measure banks by the quality of banking services and not only by their loan rates. On a market where most players have only had loans to offer, we are starting to see competition for the client, and a departure to the service element," Tsekhomsky said.
Rate correction
A key concern for bankers is the possibility that the trend in loan interest rates might change. Fewer and fewer of them doubt that rates have neared the bottom and will soon begin moving up. "The potential for an increase (in loan interest rates) is now higher than a decrease," Sberbank Russia (RTS: SBER) Deputy CEO Andrei Donskikh said.
VTB24 and Vozrozhdenie expect the change to come before the end of the year. "Inflation in the fourth quarter needs to be looked at very carefully," VTB24's Gorshkov said.
Vozrozhdenie's Goncharova believes rates on corporate loans might start rising in the next few months.
Still others believe it is too soon to expect changes. "An overall increase in rates is unlikely because demand for loans from borrowers is still low," Absolut Bank's strategic department chief, Ravil Nigmatov said.
In any case, rates are not expected to rise substantially. "The most likely scenario is for a certain logical correction and for rates to settle at a new, more acceptable level for the economy," UniCredit's Alekseev said.
Write-offs to continue
Bad assets, which were a real headache for Russian banks last year, are still a concern. "Overdue loans won't increase at the pace of 2009. Nonetheless, not all the problem assets have been closed, although it's no longer as acute as it was last year," Goncharova said.
Loan portfolios are now improving, with many loans being moved out of the "problem" category, Bulantsev said. There will still be write-offs, but they won't represent a significant problem for the banking system.
Many bank officials believe up to 10% of the total loan portfolio will have to be written off. "The banking sector will have to write off up to 10% of the overall loan portfolio in 2010. That, in our estimation, is the volume of the toxic assets at banks," VTB24's Gorshkov said.
This will be the year for scrubbing bank portfolios, he said. "I am practically certain that the banks will not carry over a large part of the overdue loans from the crisis into 2011," he added.
But UniCredit's Alexeyev was less sanguine. "The volume of accumulated problems at several lenders is quite large. Indirect confirmation of that is provided by the ratio of reserves to overdue loans at the state banks, which averages about 176%, 14 percentage points higher than the average for the system. It would seem that with the overdue loan rate so low, banks in that category should have nothing to worry about. But they prefer the extra insurance," he said.
The process of writing off bad loans is still far from completion. "It may continue until 2011 or 2012," he said.
Consolidation
The active banking sector consolidation anticipated last year has yet to come about. One of the most significant events in this area was the unification of MDM Bank (RTS: MBWB) and URSA Bank (RTS: URSA), which was accomplished in August of 2009. The announcement about the amalgamation of Societe Generale's Russian banking assets last year was a signal to the sector.
Market players are waiting for these sorts of moves to become more frequent. "At the very least, there is another deal ahead - the purchase by VTB (RTS: VTBR) of TransCreditBank. I won't rule out that some of the smaller players in the top fifty will experience difficulties and one way or another depart the market," Tsekhomsky of Barclays said.
VTB24's Gorshkov said he thinks that five or six of the top thirty banks will have to take urgent stabilization measures. For some of these, he said, mergers and acquisitions will be what saves them. "I think five or six banks in the top thirty have shown that the problems of 2009 are not short-term, but relate to business models," he said.
"Those that show losses overall in 2010 may be rather confident in relating to problem structures," he said.
Easier to breathe
Experts and bankers, despite signs of stabilization at the end of last year, were guarded in their optimism, unable to say when the bad times would be over. The problem of bad assets, reserves, and capital hung over them like the sword of Damocles. Market players now see that the urgency of the moment has passed, and things are clearer and more upbeat. But bankers still remember the unresolved issues.
Nevertheless, a majority of banks will be profit-makers this year, market players are certain. Less provisioning than in 2008 and 2009 will help. "Many banks have been able to critically reassess their spending, including for the extensive development of branch networks in the chase after market share at any price, which will also give them a certain increase in net profits," Krokhin of TCB said.
Absolut Bank's Nigmatov said aggregate pretax profit in the Russian banking system was about 200 billion rubles at the end of May. "It's more likely that in the second half the proportion of write-offs into reserves will be gradually decreasing thanks to an improvement in the real-sector situation and revitalization of some reserves that were created in the crisis period," he said.
Alexeyev from UniCredit Bank said he thinks this year will end with banking-sector net profit roughly doubled from last year. "A majority of banks will show profits, and the circle of loss-making organizations will, in turn, narrow," he said.
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