LONDON, Jan 30 (IFR) - Russian banks are rushing to the rescue of large domestic companies by extending loans in order to save them from the prospect of default on US$100bn of foreign debt due this year. Most corporates are currently locked out of international capital markets due to sanctions and the growing economic crisis.
The move comes after the Kremlin and the Central Bank of Russia pumped trillions of roubles of capital and liquidity into the country’s banks to enable them to fill a funding hole left by sanctions.
But the rescue is coming at a cost to the wider economy. Russian banks, already in crisis mode because of deposit outflows and rising bad loans, are reluctant to grow their balance sheets - so are cutting lending to smaller clients in order to fund large corporates.
“We are stepping in to help some high quality Russian corporates to refinance their foreign credit lines coming due this year, but on the whole we won’t be increasing our balance sheet,” said Herbert Moos, deputy president and chairman at VTB, Russia’s second-biggest bank. “Loans to retail and SMEs will likely see negative growth.”
US and European sanctions in place since last year have banned a handful of Russian companies from Western capital markets. But even non-sanctioned companies are choked off from international markets, with investors unwilling to buy into new deals at rates acceptable to companies because of economic and political uncertainties surrounding the country.
It has been 12 weeks since the last public Russian Eurobond or sizeable syndicated loan. Bankers who have led dozens of deals in recent years say the closure is painful for a sector that has amassed US$700bn of foreign liabilities.
“The sanctions are only for a small list of entities, so only a fraction of potential issuers are directly shut out of market,” said Bob Foresman, head of Russia at Barclays. “But the large amount of uncertainty - both economic and political - means that effectively everyone is shut out of capital markets right now.”
Domestic banks are largely happy to play corporate lender of last resort. Having previously lost out to foreign investment banks offering loans to Russian companies at low rates, they see the drought of foreign funds as an opportunity to win big, important clients.
“Russian banks will have to step in to help finance these large corporates, but we welcome the opportunity because these loans are to high quality borrowers,” said Moos. “From a risk management and capital point of view, these deals make a lot of sense.”
BALANCING ACT But banks such as VTB, Sberbank and Gazprombank face a delicate balancing act as they extend credit to large corporates. The recent economic slowdown has hit banks hard - the CBR estimates up to 5.5% of loans will be in some state of default by the end of the year, while banks also face writedowns linked to a plunge in the rouble.
Those headwinds will eat into equity at a time when their ability to replenish capital buffers is severely restricted. The Kremlin has injected Rbs1trn (US$14.5bn) into the banking system in recent weeks, but that is likely to prove too little - Sberbank CEO German Gref has warned banks need to make Rbs3trn of provisions this year alone.
On the funding side, the CBR has been extremely accommodative too, extending Rbs7.4trn of loans to the country’s banks. The central bank now funds 10.4% of the entire banking system, helping replace an exodus of deposits in recent months.
But that funding comes at a high price - 15% a year since the CBR cut rates on Friday. When the central bank hiked rates to 17% from 8% previously in December to stop a precipitous drop in the rouble, funding costs rose by an amount equivalent to half the sector’s annual profits, according to Barclays.
“The domestic banking system is under massive stress,” said the head of Russia at one US bank. “The economy is shrinking, the currency is suffering, companies are suffering, the cost of funding is rising - every single bank is facing issues, and is focused internally on getting through this crisis.”
According to the deputy chairman of one mid-sized Russian lender, the funding situation will push banks to cut their balance sheets in order to minimise the amount they need to borrow - even while they extend loans to big corporates.
“Balance sheets will need to be cut as banks adapt to the new funding environment,” he said. “But the economic conditions mean that companies and households are cutting back, so demand for financing is likely to be reduced anyway.” CRUNCH TIME? Some are concerned that the measures taken so far may be insufficient to prevent a credit crunch, and that the banking system may be unable to fully replace the capital markets that remain closed - something that could result in defaults.
“The domestic banking system just isn’t capable of extending enough credit to the entire corporate sector,” said the US banker. “They will likely focus their resources on the top tier of clients, enabling them to refinance their debts - but at a much higher rate. That will still leave some corporates unable to obtain refinancing.”
One hope is that international lenders may soon step back in and lend to non-sanctioned Russian companies.
“International banks are still selectively extending balance sheets to quality clients,” said the banker at the mid-sized Russian lender. “At the same time, we are seeing banks - especially from Asia - come in opportunistically to lend to clients they haven’t had access to until now. That will support liquidity.” (Reporting by Gareth Gore; Editing by Matthew Davies)