Elvira Nabiullina’s speech at the Association of Russian Banks
Good afternoon, everyone.
I am pleased to welcome you to our regular meeting of Association members. Unfortunately, I missed both of the Association’s regular events last year. I hope there won’t be any more events that force that kind of change in plans.
This year, we have received many questions from you ahead of the meeting, and my remarks will be short so that there will be time for a Q&A session.
In my opening remarks today, I would like to focus on three issues. One is about our assessment of the situation and trends in the banking sector overall. Two is key trends in regulation. And three — a very important and worrying topic — is the bank and customer relationship.
Speaking of last year’s results, the Russian financial system showed a decent performance. In previous years, banks had indeed ramped up their safety margins, which proved sufficient in not only seeing out the unprecedented shock of sanctions, but also in ensuring uninterrupted banking operations and lending while supporting clients by granting payment holidays when they were most badly needed.
In what is seen as a key accomplishment, banks were quick to launch an overhaul of their business models, rather than consume the reserves of previous years, and some have successfully done this and are showing a profit again. This means they are still able to provide the necessary resources for economic development.
It is essential that the banking system is focussed on long-term objectives, which include long-term stability. We are seeing that some banks are trying to make quick money to offset last year’s decline in profits. Such business practices are certain to come under our increased scrutiny. We are certain to clamp down on them to stave off systemic risks and deliver long-term stability for the banking system. Today, I will highlight some areas of concern that we think are areas for improvement in your business processes.
Current developments in lending. Corporate loans were up 14% last year, well above the 12% rise in 2021. However, this growth should be adjusted for the replacement of external borrowing and government support of systemically important businesses. Also, banks are ramping up their housing construction loans.
Allowing for a normalisation in the economic situation and the fully completed substitution of external financing, corporate lending is on course to rise by about 10%. For our part, the regulatory measures we have enacted are intended to expand potential capabilities. However, the key thing is projects to invest in, and the willingness of businesses to invest in future projects. The risk of overextending credit at all costs is nothing but a problem for the future.
Mortgage loans. Mortgages were up 20% last year, which is below the 2021 record, but still immense growth. Some components of this growth are of concern. We report a deterioration in mortgage lending standards. The share of loans with low down payments went up to 53% in the fourth quarter. Furthermore, banks are persistently approving loans with high debt service-to-income (DSTI) ratios. This applies to 44% of such loans being issued to borrowers spending 80% of their income on debt servicing. Meanwhile, increasingly fewer mortgage loans are being repaid early. These are all signs of a deteriorating financial position for borrowers.
We will take action to stop the number of high-risk mortgages from growing.
The immense shock in the economy has affected household incomes. Recovery will take time, but banks are sometimes impatient. We report a rise in such schemes as ‘developer-subsidised mortgages’ and ‘cashback mortgages’. The former suggests an overstated apartment price that hides the price of the mortgage. The borrower would struggle to sell this apartment considering the price difference between the primary and secondary markets. There is essentially no down payment in the latter. Either case is nothing more than a mortgage loan forced on a borrower who would fail to service it.
This attempted cheating on the economy would have serious consequences, with risks to financial and social stability. We are therefore forced to respond by requiring increased reserves on the so-called scheme mortgage loans by developers and higher add-ons on lower down payments. Effective 1 May, macroprudential add-ons on low down payment mortgages will be increased. If this remedy falls through, we will ask the legislators to enact a direct ban on equity financing of housing to leave conventional mechanisms that would be legalised. We need to prevent such schemes multiplying, which is why we have been working to put up appropriate regulatory barriers.
Having said that, mortgage growth is estimated at 15% for the past year. This is also a solid pace, but as I have said, it is all about quality. We will monitor the quality of mortgage loans, since expansion at all costs is unacceptable.
Late in the year, after a strong decline, we saw a recovery in unsecured consumer lending, but its annual growth came in at a mere 3%. This comes as the result of tightened lending requirements of banks and a cautious approach from borrowers, which is normal behaviour in current developments. As the economy stabilises and government-funded social support expands, we expect unsecured consumer lending to grow as much as 10% this year. We will be watching things here to prevent an overheated market, since people tend to become tired of long uncertainty and may well ramp up spending, setting off a turnaround in consumer lending patterns. In order to prevent runaway growth in household lending, the macroprudential limits we have introduced are set to limit high-risk loans. We are now beginning to exercise the powers we have obtained. The share of loans with a DSTI ratio above 80% is now limited to 25%; loans with a maturity of more than five years should not exceed 10%. This has left the add-ons unchanged so far, but we intend to calibrate them as things develop, taking into account the scheduled revision in the method for calculating the effective interest rate.
Now on to liquidity. Banks can boast sufficient resources and liquidity. For all the outflow in the first half of the year and in the autumn, household funds are up almost 7% for the year. Inflows of corporate funds were near-record (21%) on the back of high commodity prices and rising fiscal spending. As the situation stabilises this year, banks’ household funds are expected to grow slightly higher than last year. Growth in corporate funds is on course for a slowdown to more moderate rates of 15% at most.
For all the strong drop in 2022 profits to 200 billion rubles from 2.4 trillion in 2021, it is still a decent and better-than-expected performance. The decline in profits is largely attributable to a fivefold increase in reserves, that is, banks had to increase the costs of reserves five times as much last year on loans and also on assets. Some banks have already in large part earmarked reserves on blocked assets, although we have granted a ten-year extension, so we can see that banks are acting in a responsible manner and are increasingly making reserves for blocked assets. Another 400 billion rubles is a loss due to exchange rate volatility and the inability of the sector to hedge foreign currency risks.
Still, banks showed a decent performance last year. This fairly strong performance is uneven across the sector, with individual banks having sustained serious losses, but not to a degree suggesting the need for a system-wide capital top-up. Last year, the sector added some 180 billion rubles to its capital on the back of individual banks’ replenishments, with several more having announced plans for capital top-ups in this year.
The preliminary (if conservative) forecast for this year’s sector profits is more than a trillion rubles. This is lower than 2021, on the back of the still high cost of reserves, taking into consideration maturing problems and this year’s rollback of relaxations.
The overall banking sector’s performance as well as the broader economy will come under sanctions pressure.
And we will continue to take measures to minimise this impact.
The recent inclusion of new banks on the sanctions lists is no longer perceived as a shock and does not create systemic risks. Compared to the banks that have previously been sanctioned, they are better prepared in terms of divesting assets that can be blocked. They are automatically covered by our support measures to address such situations.
In 2022, we supported credit growth by introducing regulatory relaxations. Thanks to the rollback of macroprudential add-ons on retail and foreign currency corporate loans alone, about one trillion rubles of banks’ capital was released.
In a further effort to boost lending and to make it easier for banks to recognise possible losses, the add-ons were set to zero and banks have five-years to restore such reserves provided that dividend payouts are limited. Let me emphasise, in response to Mr Aksakov, that I am aware of the recent proposals from the Federal Antimonopoly Service that add-ons should be cancelled altogether. We challenge this position. It is capital buffers that help banks in such difficult times. But for the buffers we had accumulated in good years, we would have had a much harder time in this crisis. Undoubtedly, buffer requirements should gradually be restored. Also, we have provided, I have mentioned, a
But we do not think it is enough. The economy badly needs additional resources for restructuring, as well as the funding for structural transformation projects. Mr Aksakov has already mentioned the taxonomy and our cooperation with the Government and the risk-based approach. Banks that will finance such projects enjoy lower risk weights in calculating capital adequacy ratios.
According to our estimates, if the programme is delivered to its full limits, that is, there are such projects, and you finance them, lending capabilities for priority projects add another ten trillion rubles, which is 20% of the corporate loan portfolio. We expect these measures to provide a further incentive for the development of the most important enterprises and industries.
We are preparing to launch this programme. We are making the necessary changes to banking regulation in close contact with the Government and the market. We look to institute the programme in the first half of 2023, most likely in the summer.
The important point here is that the introduction of incentives does not suggest a deterioration in prudential standards. On the contrary, we expect the risk-sensitive incentives being implemented today to help reduce long-term risks for the banking system. What is the rationale for this? This is not the kind of relaxation when we turn a blind eye to risks. Relaxations of this kind are intended to strengthen the economy and reduce long-term risks for bank lending.
A second important point, is that we are indeed making every effort to create conditions for priority financing of essential projects so they are more profitable for banks, but it takes more than a financing facility. We look to banks to take a proactive stance here, looking for such projects and interacting with borrowers, other banks, investors, and government institutions to develop such projects. This is because your competence enables you to develop these projects. We expect you to look for such areas of investment lending yourself, rather than just wait for these projects to fall into your lap. We intend to support this approach in every way.
Undoubtedly, economic growth can be enabled by a deeper involvement of development institutions, which we are discussing with the Government, as well by expanding government guarantees, including unqualified ones. We discussed the matter on multiple occasions on this platform, as well as in the Duma. We are holding discussions with the Government to ensure that lending to essential projects extensively uses the government guarantee tool.
There is another point I would like to highlight. We create conditions to enable expansion of lending capabilities, but these efforts will fail without symmetric solutions to address risk distribution in the banking system. What is this all about? It is about growing concentration of loan portfolios, which is one of the most significant risks, especially for large banks whose sustainability is key to systemic financial stability. In the acute phase of the crisis, we introduced the reduced risk weight of 50% for the concentration ratio as regards companies with more than ten billion rubles of exposure in 2022. However, we consider these relaxations as nothing but temporary, since banking regulation should incentivise diversification of loan portfolios and thereby help reduce risk. This year, we intend to consider an overhaul of concentration ratios to limit these risks. But I would like to ask banks to take a proactive stance. Please think about risk distribution and explore syndication options. Otherwise, the fragile balance may be broken by unforeseen events.
Last year, a lot of effort went into the development of international settlements. To enable expansion here, we have eased constraints related to opening foreign accounts for banks with basic licences. We are exploring the option of removing these constraints altogether, on condition that banks with basic licences establish a total concentration limit for such placements to maintain a balance of opportunities and risks.
Speaking of this, we have established a new department at the Bank of Russia, the International Settlements Department, which will be responsible for correspondent relations between Russian banks and counterparties and the switch to settlements in national currencies. This will be another department to work with you in this area.
As a separate matter, let me turn your attention to small banks. In the context of sanctions, they are becoming increasingly more relevant and are taking up new opportunities.
As I have mentioned, we want the option of opening correspondent accounts with foreign banks to become permanent. We are also working to expand the list of approved securities transactions. We are continuing discussions with the Ministry of Finance about the transition to credit ratings to be used as a key qualifying criterion when banks seek access to government-funded or government-subsidised programmes. We support this approach.
There are longer-term initiatives, too, and we have begun to discuss them. This is the concept of special banking communities, which would enable small regional banks to combine resources in a mutually beneficial way. There are plans to discuss this initiative among others as the agenda for the Association between March and April. Based on discussion results, we will publish a comprehensive consultation paper on the topic in order to collect all the feedback from market players. We view this as a valuable concept to be promoted.
Now, a few words on regulation. When we unveiled the essence of our plans in a report at the end of 2022, we had the time to discuss them with you in detail. However, new proposals come in as life goes on, and we are open to their discussion.
Here comes another topic of concern: capital controls and foreign exchange controls.
Those controls were critical to a rapid stabilisation. In the course of the year, we either eased or revoked many of them. Moving forward, with no turnaround in external conditions in sight, those limitations will hold. Since we are approaching the end of timeframes for restrictions, such as caps on cash withdrawal from bank accounts and cross-border transfers, and on cash withdrawal by non-residents from hostile countries, all those controls will be rolled over.
Now comes the topic I want to go into detail on: the relationship between bank and customer. When I recall our past meetings, I realise that the acute nature of this problem is cyclical. When everything is fine, we can see a rise in all kinds of quite customer-unfriendly practices including misselling or tied selling. We use platforms like this to make clear our antagonism against such practices, while we also tighten conduct supervision. However, in times of crisis, banks help customers and act in a very responsible manner, which I greatly appreciate. Last year was no different.
But it appears that the acute phase of the crisis is behind us, and new unacceptable practices have emerged. I have spoken about mortgage schemes. They are of great concern. Unfortunately, this is not the only concern, and it goes beyond mortgage schemes.
I have to admit some cases are just outrageous. Let me tell you about a few such cases I have been briefed on, so you can see that they cannot be tolerated. A retired woman whose monthly income is 20,000 rubles is sold some unit investment funds. A retired woman in her eighties comes to open an account, but ends up with an endowment life insurance policy with regular contributions of 100,000 rubles over five years. She wants to opt out, but is convinced there is no other way to open a deposit account. Moreover, once she decides to come back to the bank and insist she goes her own way, her appointment is scheduled just after the end of the cooling-off period. All that is on record.
A pensioner signs up to an investment life insurance policy that provides for an insurance premium to be paid in annual equal payments. He comes to make a next instalment under his contract, but is ultimately issued four new identical insurance contracts, which he has absolutely no need for but which he cannot reject. These stories go beyond particular cases since we can see that some banks are expanding such practices.
Another example is advertising loan rates that are only possible if an inconceivable myriad of conditions are met. The Bank of Russia and the Federal Antimonopoly Service have issued a joint letter of recommendation on the problem. We hope that the market community is aware of our position, especially considering we intend to monitor compliance with our recommendations.
In addition to misselling, there is just an outrageous practice of services being registered against the consumer’s will. Here is another story. A customer is offered to take out two insurance policies: one to cover the loan, with a small insurance premium, and another one as a voluntary contract — with a tenfold premium. The customer ticks his acceptance of the type of insurance that covers loan risks. The bank, however, includes both types of insurance, with the loan agreement saying that ‘the borrower instructs the bank to transfer funds to pay for the voluntary insurance service’. The customer signs the agreement with confidence in the bank, without expecting a catch, but ends up paying for both insurance covers, although he chose only one.
Please remember that we now have the authority to suspend sales and enforce buybacks for such products. We have not yet acted on this authority given the challenging situation and, most importantly, the fairly responsible behaviour of banks last year. However, we will not hesitate to do so this year if such practices persist. Unfortunately, such practices have been on the rise.
We hope that banks build a long-term relationship of trust with their clients. This ultimately pays off. Client-focused banks normally shun such practices and therefore enjoy loyal and trusting customers. If regular violations of consumer rights are reported, we will have to tighten regulation.
And here I would like to thank you deputies, and you Mr Aksakov, for supporting all the initiatives in the protection of financial consumer rights. I am well aware that deputies take a keen interest in such initiatives and support them.
The bill we soon expect to be signed into a law provides for the effective interest rate to apply to all borrower payments, including any additional services directly or indirectly related to a loan disbursement. I know that some banks are against this bill, but I hope that we deliver on this initiative as long as it is in the interest of financial customers.
To be fair, I should note that the number of misselling cases and complaints are down in 2022 compared with 2021, which suggests that banks are taking a fairly responsible stance here. However, we have recently seen a certain change in trend and have seen a lot of violations by some banks, including large ones. While we are certainly authorised to take enforcement actions, we would rather keep our baton idle since we hope that bankers act in a responsible manner.
I will conclude with financial technology. There will be a separate presentation on this subject. We have always taken pride on the progress our banking sector made in digital technologies. Given that technology is particularly exposed to sanctions, we are working together with the Government and the market to accelerate import substitution and keep the innovation momentum in the banking business. We at the Bank of Russia will make further efforts to advance all the digital initiatives including the digital ruble which is to become a reality in the near future. The priority here is the same — reducing the costs of financial transactions for consumers and businesses.
In conclusion, let me return to the beginning of my speech, when I said that I would concentrate on the areas of our concern so you pay attention to them, notwithstanding the fairly positive trends in the overall banking sector. Let me stress that we — all of us — have had a tough time. The banking sector has showed solid performance. With that ordeal behind us, we may rest assured that our financial system will be able to provide the economy with the necessary financial resources to support development in a new environment.
Thank you for your efforts. I wish you every success with business development.
We now have several presentations, and then my colleagues and I will be ready for a Q&A.