The evolution of the pandemic remains a key factor of uncertainty for the Russian and global economy. At the same time, inflation is on an upward trend in a large number of countries. The main risk is linked to the possibility of persistent elevated inflationary pressure for a longer period. Accelerated rate hikes by major central banks may entail a sharp tightening of global financial conditions.
According to the Bank of Russia estimates, the Russian financial system is sufficiently stable and capable to perform its functions even if the situation deteriorates. The key buffers including substantial amount of international reserves, low public debt, significant capital buffers and high banking sector profit help to withstand potential external and internal shocks.
Meanwhile, the Bank of Russia identifies the following key vulnerabilities of the Russian financial sector in the short- and medium-term.
In H1 2021, the household debt burden at the macro level increased from 9.8% to 10.2% of disposable income. This was primarily caused by faster growth of unsecured consumer lending, which was accompanied by looser lending standards. However, the growth of consumer lending is driven not by the expansion of the banking sector’s client base, but rather by an increase in loan amounts, which creates risks of household excessive debt burden. To contain systemic risks, the Bank of Russia raised macroprudential capital requirements for banks on consumer loans on 1 July and 1 October 2021. Once given a mandate to apply macroprudential limits, the Bank of Russia would mostly use this mechanism to limit risks.
Dynamics of household debt burden, amount of planned loan payments, % of disposable income
Amid introduction of the United States’ restrictions on the purchase of bonds by investors in the primary OFZ market and discussion of potential expansion of the restrictions to the secondary market, as well as risks of an earlier unwinding of monetary stimulus measures by major central banks, the vulnerability associated with the sensitivity of the Russian financial market to the behaviour of foreign investors is still relevant. According to the National Settlement Depositary (NSD) data, by the end of Q3 2021 the volume of non-residents’ investments in OFZs reached an all-time high of 3.3 trillion rubles, with the share of their investments standing at 20.3% as of 18 November 2021. At the same time, in Russia, the public debt-to-GDP ratio is still the lowest among the G20 countries. In the FX swap market, non-residents were increasingly active in carry trade operations, their FX short position reached a record value of 30 billion US dollars in October 2021. Meanwhile non-residents continued to exit the equity market, this trend was accompanied by high demand from Russian private investors and by the growth of stock indices.
Dynamics of the non-residents’ investments into OFZs according to NSD, billions of rubles
The growth of interest rates in the economy has not yet led to a decrease in the net interest income (NII) of the banking sector. In the future, interest rate risk may crystallise due to a faster revaluation of liabilities compared to assets because of a high share of short-term liabilities. However, the negative consequences will be limited given the expansion of banks’ safety margin (an increase in their profit to 1.9 trillion rubles in the first nine months of 2021).
Banking sector income structure, billions of rubles
In 2021, retail investors continued to actively enter the stock market.
The massive households’ investments in securities will increase the dependence of their financial standing on stock market prices fluctuations. The active participation of private investors with identical strategies can theoretically increase market volatility, but so far households’ investments have been characterized by moderate concentration. At the same time, the risks associated with household investments in cryptocurrencies are rising. According to various estimates, Russian investors are among the most active participants in cryptocurrencies market.
The Bank of Russia considers money surrogates to carry significant risks for the well-being of citizens investing in them and for financial stability in general.
Accumulated net inflows of retail investors’ funds by type of instruments, billions of rubles
In 2021, a number of major banks have continued to develop their ecosystems, and the role of BigTechs has increased in the Russian financial market. The uncontrolled development of ecosystems may lead to greater step-in risk of banks developing ecosystems, increasing systemic importance of BigTechs and to the emergence of new channels of contagion in the financial market.
The global transition to a low-carbon economy will affect many sectors of the Russian economy, from electric power to mining. Transition risks will be reflected in a decline in revenues, growing operating expenses and capital expenditures of energy-intensive companies, which will lead to an increase in their debt burden. Risks of companies will inevitably affect the financial sector as well: significant capital investment needs of companies to reduce emissions and the difficulty of obtaining financing from global investors will contribute to an increase in the concentration of Russian banks’ portfolio on the largest “brown” companies. In this regard, banks should take into account transition climate risks in their activities and encourage borrowers to improve their environmental performance.
Corporate lending amid economic recovery and the end of regulatory easing
The economic recovery and the desire of companies to raise financing before interest rate hikes have led to an increase in corporate lending, leasing and factoring operations. The quality of banks’ corporate loan portfolio has improved amid economic recovery. The level of bad debt of leasing companies has increased somewhat due to high concentration of portfolios in the sectors affected by the COVID-19 pandemic (air and railway transportation).
Assessment of the financial sector resilience
In the reporting period, the resilience of banks increased due to the growth of profits as a result of borrowers’ credit quality improvement. Lower provisioning costs were the main driver of profit growth. The improved solvency of borrowers allowed banks to exit the temporary regulatory relaxations that were introduced by the Bank of Russia at the beginning of the pandemic. To support banks in the process of exiting regulatory relaxations, the Bank of Russia released the macroprudential buffer in the amount of 124 billion rubles.
Tightening of the macroprudential policy in relation to consumer and mortgage lending has enabled to increase banks’ macroprudential buffer to 711 billion rubles in comparison to 628 billion rubles at the beginning of the pandemic.
The resilience of non-bank financial institutions remains at an acceptable level. At the same time, amid accelerated growth of assets marginality of their business has slightly decreased. The Bank of Russia is gradually introducing a risk-based approach to the regulation of insurers as well as strengthening the regulation of brokers, given their growing importance for the financial market.