Background
The review describes the risks to the global economy that may spillover to Russia, covers the main vulnerabilities of the Russian non-financial and financial sectors as well as presents their overall resilience assessment.
Currently, the main global risk is associated with higher-for-longer inflation and interest rates in the US, which may exacerbate credit risks and entail capital flow volatility. For Russia, the significance of this channel of influence has declined amid sanctions and foreign exchange measures enacted in response. It might pose a threat should the problems spread across global commodity markets or financial stability risks arise for Russia’s key trading partners.
Despite the intensification of sanctions’ pressure, the Russian corporate sector in general shows improvements in profitability and debt burden rates owing to the recovery of sales.
In general, the vulnerability landscape in the financial sector has remained unchanged. For the first time, the risk of credit concentration is singled out as a vulnerability, since against the backdrop of active repayment of foreign debt by the largest Russian companies the amount of their financing by Russian banks has notably increased. In its turn, the vulnerability associated with individuals’ investment in foreign instruments is not highlighted among the main ones as it has already materialised due to US sanctions against PJSC SPB Exchange and decreased in relevance as Russians place most of their savings in ruble-denominated deposits and Russian securities.
The new restrictive measures adopted in Q4 2023 and Q1 2024 are targeting not only Russian companies but also businesses from friendly countries. This results in an increasing complexity of logistics and cross-border payments, negatively affecting the dynamics of exports and imports.
Despite geopolitical risks, in 2023, financial performance of most companies from key sectors of the Russian economy has improved or remained at the preceding year’s level. Only some large borrowers experienced an increase in their debt burden. In general, the corporate sector’s sensitivity to the Bank of Russia’s hawkish monetary policy has declined. The overwhelming majority of borrowers have sufficient operating income to pay interest expense on their loans.
Vulnerabilities of the Russian financial sector
A sustained current account surplus of the balance of payment and persistent tight monetary policy have contributed to the stabilisation of the ruble exchange rate. The trend towards deterioration of correspondent relationships with non-resident banks in “toxic” currencies has continued. Meanwhile, the expansion of the network of correspondent relationships in “non-toxic currencies” has slowed down amid the threat of secondary sanctions by unfriendly countries.
The reduction in Russian banks’ balances on correspondent accounts with foreign banks was accompanied by a surge in corporate lending in the Chinese yuan (CNY, yuan) and periodic aggravation of the situation with CNY liquidity. As a result, on certain days (in the end and in the beginning of a month) FX swaps market has seen episodes of CNY liquidity shortage. The Bank of Russia has decided to increase the maximum daily amount of overnight swap from CNY 10 billion to CNY 20 billion during the days of the peak demand for yuan. Although the CNY has become the main foreign currency in Russia, the yuan FX swap market has a local scope. Due to foreign exchange restrictions in China and risks of secondary sanctions, Chinese banks cannot perform the functions of yuan liquidity providers. The main source of funding for Russian banks’ CNY-denominated assets are domestic savings of Russian companies and households.
Despite the Bank of Russia’s tight monetary and macroprudential policies, the growth rate of unsecured consumer lending has remained high (17% YoY as of 1 April 2024). In Q1 2024, the expansion of the unsecured consumer loan portfolio was driven by the credit card segment on which macroprudential limits (MPLs) have a lagged effect.
The implementation of MPLs has mitigated risks of households’ over-indebtedness: in Q1 2024, the share of newly issued loans to individuals with debt service-to-income ratio (DSTI) exceeding 50% dropped to 34% in Q1 2024 compared to 63% in Q4 2022. However, after the key rate hike and temporary lifting of restrictions on the effective interest rate (EIR) of consumer loans, banks have ramped up lending to borrowers with a high risk-profile embedding additional costs in the loan interest rate. Early indicators point to the deterioration in the quality of loan servicing on cash loans issued after Q3 2023 at high interest rates.
Share of loans to borrowers with DSTI ratio of 50-80% and over 80% in the total volume of issued unsecured consumer loans, %
In the car loan segment a significant expansion of the loan portfolio (53% YoY as of 1 April 2024) was accompanied by an increase in borrowers’ debt burden: in Q1 2024, the share of loans with DSTI exceeding 50% climbed to 61% compared to 45% in Q4 2022.
In order to enhance banks’ resilience amid deteriorating quality of newly issued loans, the macroprudential add-ons for consumer loans and car loans have been raised starting from 1 July 2024.
The rapid expansion of mortgage lending in 2023 has also been driven by over-indebted borrowers. In Q4 2023, the share of mortgage loans issued to borrowers with high debt burden (DSTI above 80%) increased to 45% of newly issued loans (+15 pp in two years). The Bank of Russia has tightened macroprudential requirements for mortgages three times, since 1 March 2024 they are at a ‘prohibitive level’ for borrowers with DSTI exceeding 80%. As a result of the measures taken, in Q1 2024, the share of mortgage loans with DSTI above 80% declined to 34% of newly issued loans: in the segment of housing under construction — to 27% (-15 pp QoQ), in the segment of finished homes — to 39% (-9 pp QoQ).
Breakdown of mortgage loans by DSTI, %
Lower demand for loans at market rates and tighter conditions of subsidised mortgage lending programmes have resulted in the reduction in newly issued mortgage loans, with about 70% of issuances attributed to government subsidised programmes in Q1 2024.
The gap between prices for newly constructed and secondary market housing has remained significant. This is confirmed by both Rosstat and Domclick data. In Q1 2024, the price gap between the primary and secondary housing markets amounted to 55% according to Rosstat (44% in Q4 2023) and 45% according to Domclick (43% in Q4 2023).
Price gap in the housing market, %
The termination of the large-scale subsidised mortgage lending programme from 1 July 2024 and the modification of the terms of other subsidised programmes might cause a temporary reduction in the demand for housing. According to the Bank of Russia’s estimates, this will not have a significant negative effect on developers (most housing construction projects are sufficiently resilient) but will make subsidised programmes more targeted, narrow the price gap between the primary and secondary markets and bolster housing affordability for citizens.
Despite the tightening of the Bank of Russia’s monetary policy, the quality of corporate loan portfolio, including floating-rate loans, stays at an acceptable level. Non-performing corporate loans accounted for just 4% as of 1 April 2024, and there was no significant rise in loan restructurings associated with a decline in borrowers’ creditworthiness.
At the same time, since the beginning of 2022, the concentration risk in corporate lending has increased significantly. The corporate sector’s substitution of external debt, as well as the increased need in working capital and investment projects financing, boosted credit growth. As a result, the amount of debt of the five largest companies reached 56% of the banking sector’s capital. The Bank of Russia plans to enhance the approaches to limiting the concentration of credit risks as part of banking regulation. Furthermore, creditors are advised to develop syndicated lending to finance major projects.
Debt of largest companies to banking sector’s capital ratio, %
Although money market rates had been notably rising since July 2023, the materialisation of interest rate risks have not had a significant effect on the banking sector’s sustainability yet. The interest rate risk of the bond portfolio (a reduction in bond prices amid growing interest rates) is limited because of a high proportion of variable coupon bonds and bonds held to maturity. As a result, the negative revaluation of the bond portfolio in October 2023—March 2024 equalled less than 1% of the banking sector’s capital. Banks’ net interest margin edged down in Q1 2024 from 4.8% to 4.5%.
Contrastingly, since the beginning of 2024, yields on
Assessment of the financial sector’s resilience
Banking sector’s capital adequacy remains stable (growth from 12% to 12.1%) despite increased profits, as banks actively expand lending. Furthermore, owing to the macroprudential add-ons in consumer and mortgage lending, banks’ accumulated capital buffer reached RUB 725 billion as of 1 April 2024. Returns on assets edged down from 2.6% to 2.1% by 1 April 2024, but the decline was mainly attributed to the negative foreign currency revaluation in Q4 2023 amid the strengthening of the ruble. The ratio of the ‘economic’ open currency position to capital remained moderate at about 4%, which is the evidence of banks’ resilience to foreign exchange risk.
In 2023 insurers and non-governmental pension funds (NPFs) demonstrated significant business and net profit growth rates, maintaining the high quality of assets. Materialisation of a number of major insured events and higher interest rates in Q4 2023 had moderate negative impact on insurers’ performance. Returns on pension savings and pension reserves slightly declined in H2 2023, but exceeded the inflation rate. Leasing market is expanding at an accelerated pace, but leasing companies are facing a decrease in capital adequacy ratios. Credit risks of the leasing portfolio, which is historically concentrated on the industries affected by sanctions, remain elevated: the lessors’ balances demonstrated an increase in assets for sale under the cancelled contracts (2.9 times increase to 11% of their equity).