Russia's banking system is being tested for durability

newsletter 06/07/2016

Today, the Russia's banking system experiences all the difficulties, which are facing the Russian economy: the decline in GDP and industrial production, devaluation of ruble, restrictions of capital on the Western market within the sanctions entered, a high level of the key rate of the Central Bank of the RF (10,5% from 14.06.2016), the decrease in real incomes of the population - all this has led not only to the slowdown of crediting, but also to an increase in overdue payments on loans.

The total amount of overdue loan debt of all legal entities and individual entrepreneurs to banks reached 1,8 trillion RUB as of May 1, 2016, that is 8,4% of the total debt on granted loans (21,4 trillion RUB) - it is close to the maximum value of 8,5%, which was fixed by the CB of the RF quite recently, in March 2016.

The overdue loan debt of individuals as of May 1, 2016 exceeded 1,1 trillion RUB or 10,8% of the total volume of paid funds (10,2 trillion RUB). The historical record of 10,9% on this indicator was also in March 2016.

Because of the situation created with past-due debt, the banks face a significant drop in the main result of activity - net profit indicator and increase of losses.

Thus, on January 1, 2016 the total net profit of all credit institutions in Russia decreased by 117 billion RUB or by 13,7% in relation to January 1, 2015, and the indicator of losses for the same period increased by 280 billion RUB or 106,1% - more than twice.

As seen from the graph in the Picture 1, until quite recently the banks bore symbolic losses by the overwhelming presence of net profit: on the basis of the pre-crisis 2013 the total net profit was fixed in the volume of 1,012 billion RUB, and the loss - of «only» 19 billion RUB.

By May 1, 2016 the cumulative loss of banks has eased, to 174 billion RUB, by the simultaneous fall of total profit to 341 billion RUB. Banks are on the trajectory of the zero financial result (equity of total losses and profit).

Dynamics of the total net profit and loss of all credit institutions, in bln RUBPicture 1. Dynamics of the total net profit and loss of all credit institutions, in bln RUB

The Bank of Russia continues to carry out an active policy of withdrawal of licenses, guided by the following grounds: anti-money laundering is carried out, fight against illegal operations, doubtful statements; banks with «holes» in the capital are closed, which were caused by loan issue to structures affiliated with the management; also the banks are closed, being in poor financial standing (s. Picture 2).

101 credit organizations ceased their operations (due to the withdrawal and revocation of license) in 2015, and from January 1, 2016 up to June 22, 2016 the same fate was shared by another 51 banks.

Totally as of June 22, 2016 682 credit organizations are operating in Russia, that is almost two times less, than, for example, as of January 1, 2005 (1 299 banks).

Dynamics of the number of active credit institutions and credit institutions with revoked and withdrawn licensePicture 2. Dynamics of the number of active credit institutions and credit institutions with revoked and withdrawn license

The main reasons, why the Bank of Russia has recourse to extreme measures of influence - revocation of the license – are, primarily, a money-laundering and an illegal withdrawal of funds abroad; loss of own capital; and various types of fraud among the management of credit institutions.

MONEY LAUNDERING LOSS OF CAPITAL FRAUD AMONG MANAGEMENT
The growth in the number of credit institutions, on which the decisions are made to revoke the license for banking operations, is mainly due to their active involvement in money-laundering and illegal withdrawal of funds abroad, that required the use of tough response actions on the part of the supervisory authority. The growth in the number of credit institutions, on which the decisions are made to revoke the license for banking operations, is mainly due to their active involvement in money-laundering and illegal withdrawal of funds abroad, that required the use of tough response actions on the part of the supervisory authority. The CB of the RF reveals violations in actions of the management of credit institutions on such articles of the Criminal Code of the RF as:
159 «Fraud»;
159.5 «Fraud in the sphere of insurance»;
160 «Misappropriation or Embezzlement»;
172.1 «Falsification of financial statements of account and accountability of financial institution»;
195 «Illegal actions in bankruptcy»;
196 «Deliberate bankruptcy»;
201 «Misuse of authority».
LICENCE REVOCATION!

The rapid decline in the number of active credit institutions, as well as negative factors mentioned above, do not prohibit the growth of total banking assets, mainly due to credit institutions included in the top-10. This fact points to the concentration of the banking system, the predominance of large banks in it, as opposed to medium and small.

On January 1, 2016 the total assets of banks were at the level of 83,000 billion RUB or 102,7% to Russia's GDP for 2015 (80,804 billion RUB). The increase in assets of all credit institutions in relation to January 1, 2015 made 6,9%.

There is a customary view that the higher the bank's assets are, the more stable is the economy as a whole. In Russia, by all negative processes, for the first time it is observed the excess of assets over the size of the country's GDP. Banks, with an increase in assets, become more reliable source of liquidity for industry and public, stimulating the economic growth.

Dynamics of total banking assets and their share to the GDP of the country, annual valuesPicture 3. Dynamics of total banking assets and their share to the GDP of the country, annual values

If we return to the issue of concentration of the banking system around the largest credit institutions, then the data in Table 1 show that the top ten banks in aggregate accumulate 65% of total assets as of January 1, 2016 this value reached 53 985 billion RUB; the increase is by 6,3% per annum. Almost one-third (28,4%) of country's banking assets accounts for the Sberbank.

Table 1. The largest Russian banks on total assets

 Name of the credit institutionAssets as of 1.01.2016, in bln RUBIncrease (decrease) of assets by 1.01.2015, %Share in total assets as of 1.01.2016, %
1 Sberbank 23 546 5,4 28,4
2 VTB 9 414 12,6 11,3
3 Gazprombank 5 178 9,6 6,2
4 FC Otkritie 3 029 10,7 3,6
5 VTB 24 3 001 4,2 3,6
6 Russian Agricultural Bank 2 652 22,5 3,2
7 Alfa-bank 2 286 -1,2 2,8
8 BM-Bank (former - Bank of Moscow) 1 842 -23,9 2,2
9 National Clearing Centre 1 609 8,0 1,9
10 UniCredit Bank 1 428 3,2 1,7
  Amount of assets on the top-10 53 985 6,3 65,0
  Amount of assets of all banks 83 000 6,9 100

As of January 1, 2016, Sberbank is the largest bank also on the indicator of the net profit of 236 billion RUB, however the final financial results of the leading credit organization on Russia fell by 22,7% by January 1, 2015, when the net profit made 306 billion RUB.

Taken as a whole Sberbank generates 32,1% of the net profit of all banks (with the exception of unprofitable banks), that confirms once again the idea of continuing monopolization of the banking services market.

Table 2. The most profitable banks of Russia

 Name of the credit institutionNet profit as of 1.01.2016, in bln RUBIncrease (decrease) of net profit by 1.01.2015, %Share in total profit as of 1.01.2016, %
1 Sberbank 236 -22,7 32,1
2 Alfa-bank 50 1,6 6,7
3 VTB 49 142,8 6,6
4 National Clearing Centre 23 101,3 3,1
5 Raiffeisenbank 20 -18,8 2,7
6 Russian Standard 17 1 053,4 2,2
7 Citibank 15 97,4 2,0
8 Moscow Regional Bank 11 there was loss 1,5
9 Sovcombank 11 63,8 1,5
10 Promsvyazbank 11 6 583,0 1,5
  Amount of net profit on the top-10 442 - 60,1
  Profit of all banks 736 -13,7 100,0

Thus, in spite of the down trend on past-due accounts (decrease in the share of overdue debts in total arrears to banks), risks of the stability of the whole banking system remain. If the country will face a new wave of negative external and internal factors, such as the resumption of decline on commodity markets, escalation in Ukraine, tightening of sanctions, disrupting inflation, key rate increase etc., then a visible positive vector may change.