October 6, 2017 / 9:47 AM / 9 months ago

Fitch: Russian Banking Sector Is Being Reshaped by Clean-up

(The following statement was released by the rating agency) MOSCOW/LONDON, October 06 (Fitch) The number of banks in Russia could halve in four years as the sector clean-up and increased competition drive consolidation and lead to a flight to quality favouring strong or state-owned banks, Fitch Ratings says. Potential bail-outs of larger banks could reduce risks for senior creditors in some cases, but greater dominance by state-owned lenders could increase the sector's reliance on the government, given most state banks' regular need for support. From the start of the clean-up in 2013 to 1 September this year, 346 bank licences have been revoked and 35 banks rescued. We expect more problem banks to be identified, prompting uncertainty about whether liquidation or some form of bail-in will apply, and continued flight to quality by depositors, forcing more banks to close or be acquired. The average shortfall in the largest failed banks is 6-7x Tier 1 capital, which suggests longstanding problems not resolved by earlier Central Bank of Russia (CBR) sector reviews. Such problems are typically the result of aggressive growth through mergers (including bank rescues under the old bail-out mechanism) or related-party lending. The recent failures of Otkritie and B&N are not indicative of a systemic crisis as their combined market share was only 5% and contagion has been limited. The clean-up focuses on weaker privately owned banks that account for about a quarter of sector assets. Financially strong and state-supported banks representing about 75% of sector assets are not directly affected. Russia's new bail-out mechanism, introduced this year, appears more effective than the previous system. Under the new regime, the CBR consolidation fund acquires and recapitalises failed banks so that they immediately meet all regulatory requirements. This should deter weaker buyers and attract stronger ones, in contrast to the old regime, where rescued banks did not have to comply with regulatory ratios while they rebuilt capital from income supported by cheap CBR funding. This created an incentive for weak buyers to acquire rescued banks and transfer toxic assets into them, which often led to additional rescue costs. While we expect the number of banks could fall to 300 from nearly 600, we believe about 50 banks would be enough to service the Russian economy. However, the CBR does not want too many small banks to be forced out of business and is introducing a basic licence with lighter regulatory requirements for banks with less than RUB1 billion of capital. We expect nearly half of Russia's banks to switch to the basic licence. The systemic risks stemming from lighter regulations are limited as these banks represent less than 2% of sector assets. The basic licence also restricts international operations, which will help prevent capital flight out of the country. State-owned banks represent an increasing proportion of Russia's banking sector, which could lead to greater risk for the sector unless their supervision and risk management are strengthened. Most state banks, with the notable exception of Sberbank, have relied on regular government support. Since the 2008 crisis, the authorities have committed capital support of RUB2 trillion to these institutions, on top of the RUB2.7 trillion cost of rescuing or compensating depositors of failed privately owned lenders. Fitch held its Annual Conference on Russia on 26 September, including three presentations on the Russian banking sector, which are available at www.fitchratings.com or by clicking the Related Research links. Contact: Alexander Danilov Senior Director, Financial Institutions - Banks +7 495 956 2408 Fitch Ratings CIS Limited Valovaya Street, 26 Moscow 115054 James Watson Managing Director, Financial Institutions - Banks +7 495 956 6657 David Prowse Senior Analyst, Fitch Wire +44 20 3530 1250 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Fitch Ratings Annual Conference on Russia 2017: Outlook for Macroeconomic and Banking Sector here Fitch Ratings Annual Conference on Russia 2017: Outlook for Macroeconomic and Banking Sector here Regulation as Key Driver of Russian Banking System Transformatihere ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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