National countercyclical capital buffer and risk ratio buffers for credit institutions’ computation of capital adequacy ratios

The Bank of Russia Board of Directors has decided that add-ons to risk weights for consumer loans extended from 1 April 2019 of which the effective interest rate (EIR) is 10-30% be increased by 30 percentage points. The decision to increase risk ratio buffers for consumer loans stems from the need to avert excessive growth in household debt burden and boost banks’ resilience to potential systemic risks in the unsecured consumer lending market.

Concurrently, the decision has been made to keep the countercyclical capital buffer (CCB) for Russian credit institutions unchanged at zero per cent of risk-weighted assets. In the context of unevenly growing credit activity and considering that increased risk ratios are applied in several lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.

In making its decision on risk-ratio buffers and the national countercyclical capital buffer, the Bank of Russia recognised the following factors.

Unsecured consumer lending market

Accelerated growth of lending activity in unsecured consumer lending is continued. Outstanding loans increased 21.5% over the past 12 months as of 1 November 2018¹. Meanwhile, annualised growth paces of outstanding loans² for the August to October 2018 period were 24.4%.

The acceleration in retail lending is further attested by data as of 1 December 2018. In November, household outstanding loans in rubles gained 2.3%, or 2.0%³ on a seasonally adjusted basis, which exceeds this October’s readings (1.8%, seasonally unadjusted / adjusted). Preliminary data also suggest this acceleration owes its origin to the advances in unsecured lending, in the first place.

The quality of newly issued loans remains acceptable. The proportion in consumer lending portfolios of loans that are over 90 days overdue is shrinking (by 3.5 pp in 12 months to 10.2% as of 1 November 2018). Of loans extended between 2017 and early 2018, the share of such loans is equal or under 2-2.5% as of the 12th months of the loan issuance date⁴. Having said that, current growth rates of outstanding loans, exceeding nominal household income growth rates, result in higher debt burden of households as the current EIR on consumer loans declines slower. The ratio of regular household loan repayments to⁵ monetary income of households rose in annual terms in the past 12 months by 0.8 pp to 8.4% as of 1 October 2018. Should current growth rates hold firm, household debt next year is set to beat its all-time high of 9.0% seen in 2014. Growing household debts make banks’ credit portfolios more exposed to macroeconomic shocks, spelling the need for banks to build up appropriate capital buffers. Effective from 1 September, new risk ratio buffers apply to unsecured consumer loans. At the same time, with due regard to the above developments suggesting rising systemic risks in unsecured consumer lending, the Bank of Russia has decided that risk ratio buffers will be subsequently increased according to the following scale:

Credit activity. Credit activity expansion is mixed across its segments. Based on data on loan portfolios of the banking sector, credit activity is overall below its long-term trend.

Lending to non-financial institutions

The portfolio of loans to non-financial institutions, the largest by outstanding loans, is expanding consistent with overall economic performance. Total outstanding loans of corporations for the 12 months grew 5.9%⁶ as of 1 December 2018. The period’s total outstanding loans in rubles increased 11.5%, while those in foreign currency dropped 6.0%, highlighting continued shrinkage in the share of foreign currency in credit portfolios. Companies’ external debt, as well as their liabilities under debt securities and national banks’ loans, was overall unchanged over the past 12 months. This debt added 0.5% (as of 1 October 2018)⁷, sending the non-financial institutions’ debt to GDP ratio down in the period under study by 6 pp to 61%.

Mortgage lending

In the ruble-denominated housing mortgage lending segment, annual growth in outstanding loans totalled 26.0% as of 1 November 2018⁸. On an annual basis, the period saw growth in outstanding loans in the August to October 2018 period decline to 21.9% p.a., in a sign of cooling credit activity.

For all the currently high growth paces of mortgage lending, its growth comes so far without substantial financial stability risks. Aiming to ensure sustainable development of mortgage lending, the Bank of Russia has taken a number of measures since 1 January 2018; they did not however lead to reduction in the share of loans with down payments ranging from 10% to 20%, which in 2018 Q3 was 43.4%⁹ (41.4% in 2018 Q2 and 41.2% in 2018 Q1). In light of this, the Bank of Russia decided on 1 October 2018 to increase capital requirements for banks issuing such loans from 1 January 2019 (for more details see Financial Stability Review).

Credit-to GDP gaps (according to the Basel Committee on Banking Supervision)

Estimated credit-to-GDP gaps (defined as the difference between the credit-to GDP ratio and its long-run trend) remain in negative territory as the recovery in credit activity across the corporate and retail segments has been mixed. As banks are currently ramping up credit activity in retail lending results, the negative credit gap in relation to households’ debt is declining. Should current retail lending expansion rates prove sustainable, they can push the credit gap into positive territory in the course of next year.

Capital adequacy ratios. Credit institutions continue to report capital adequacy. On the background of growing credit activity, credit institutions’ capital is seeing growth. Over the last 12 months, credit institutions’¹⁰ capital adequacy ratio¹⁰ N1.0 held firm (14.5% as of 1 November 2018¹¹).

Considering that corporate lending is growing at moderate rates and risk ratio buffers are applicable in certain household lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero. Therefore, the Bank of Russia Board of Directors’ 1 October 2018 decision remains in force.

The Bank of Russia Board of Directors will hold its next CCB rate / risk ratio buffer review meeting in March 2019.

¹ Credit institutions’ financial statements as per Form 0409115 (Section 3, Credit Exposure: Other Consumer Loans, Grouped into a Homogeneous Loan Portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring.

² Seasonally adjusted.

³ Calculated using Credit Institution Reporting Form 0409101. For credit institutions operating as of the last reporting date including banks that underwent restructuring.

⁴ According to National Bureau of Credit Histories data.

⁵ Calculated based on the methodology available on the Bank of Russia website.

⁶ For credit institutions active as of the latest reporting date including banks that underwent restructuring and excluding banks under resolution. Adjusted for FX revaluation.

⁷ Adjusted for FX revaluation.

⁸ Calculated using Credit Institution Reporting Form 0409316. For credit institutions operating as of the last reporting date including banks that underwent restructuring.

⁹ Based on a quarterly survey of banks accounting for over 70% of households’ outstanding loans.

¹⁰ Stripping out banks under resolution including with the involvement of the Banking Sector Consolidation Fund.

¹¹ As of 1 November 2018, the banking sector’s overall capital adequacy ratio was 12.4%.

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