Philipp Gabunia’s speech at Financial Stability Review Q2–3 press conference

Good afternoon. Today, we are presenting the Financial Stability Review for 2025 Q2–Q3.

As a reminder, in recent years we have identified five key vulnerabilities in the financial sector: credit risk in the corporate sector, households’ debt burden, imbalances in the housing market and project finance risks, structural imbalances in the foreign exchange market, and banks’ interest rate risk. There has been a change since May’s Financial Stability Review in the configuration of these vulnerabilities. Two have recently lost prominence, and we no longer classify them as key vulnerabilities: these are structural imbalances in the foreign exchange market, and banks' interest rate risk.

I will briefly explain this reassessment. The domestic foreign exchange market has largely stabilised, and ruble exchange rate volatility this year is at its lowest since 2022. First, tight monetary policy is working to ensure ruble investments remain attractive. Second, we are seeing the effects of structural factors such as import substitution and the repayment of a considerable part of external debt in previous years.

At the same time, there are new sanctions against Russian oil companies, which may temporarily drive down the revenues of our major exporters. However, we know from experience that it takes several months before sales and settlement channels adjust, after which a recovery typically follows. We do not therefore anticipate problems in the foreign exchange market.

As for banks’ interest rate risk, the sector has shown this is manageable, even in a high-rate environment. In some measure, banks were helped by floating-rate loans, and in part by subsidised lending programmes. The banking sector’s margin now remains stable as rates are declining.

Let us move on to outline the key financial sector vulnerabilities according to this Review, and let me begin with corporate credit risk.

With the Russian economy slowing and interest rates remaining high, this remains our focus. Sanctions, a drop in external demand and lower oil and coal and other commodity prices have combined to drive revenues in export industries down. This has led to rapidly rising costs, as well as shrinking margins. However, higher interest rates pushed corporate costs of debt servicing upwards, resulting in companies building up debt.

While most of them have no difficulty servicing their debt, they now have less potential for further borrowing. Some are struggling where operating profit is less than interest due. However, the share of their debt remains low.

Our baseline scenario suggests a decline in corporate debt as monetary conditions gradually ease next year. Our estimates show that even if major companies post a significant drop in profits, they will be able to maintain stability. We project only a slight increase in the share of companies at risk, indicating that most will retain safety buffers.

Currently, small and micro businesses are facing the greatest pressure, and their bad loans are growing. However, this does not amount to a systemic deterioration. Where necessary, banks are extending repayment periods or rescheduling interest payments.

Consequently, the overall financial position of the corporate sector remains stable. This is evidenced by the slow growth of non-performing loans, at 4% as of 1 October, having increased only marginally since the start of the year.

That said, for the situation to remain stable, companies should avoid ramping up debt. We have observed increased demand for loans in recent months, with particularly strong debt growth among major overleveraged companies. Therefore, we have introduced a twofold increase in the risk weight add-on applied to incremental debt of major overleveraged companies, effective from 1 December. You may recall that it only applies to lump-sum loans to large businesses. This add-on can be further increased if necessary. Banks should not let borrowers ramp up their debt overburden. We will ensure that they maintain loss-absorbing provisions and adequate capital buffers against corporate loans.

Now on to retail lending.

We note a decline in households’ Debt Service-to-Income (DSTI) ratio for bank loans. First, households are taking out fewer loans. Second, incomes have grown at a sustainably high pace. This has triggered a decline in the share of income spent on loan servicing.

At the same time, there is a slight increase in the share of household incomes that goes towards servicing microfinance loans and property payment plans. We can see that microfinance loans are partially substituting bank loans. Moreover, the most rapid growth is seen in loans from microfinance organisations (MFOs) affiliated with banks. We intend to review the way we include MFOs in banking groups for regulatory ratio calculations to ensure banks account for these risks appropriately. In an effort to protect people against over-indebtedness, it is also imperative we implement the MFO reform we have previously discussed. 

Now on to the quality of loan servicing. The share of non-performing unsecured consumer loans has grown since the beginning of this year by almost 4 pp to 13%. This was primarily driven by reduced portfolios. A further contributor is overdue loans originated during the recent lending boom – at a time when banks willingly lent to high-risk borrowers. Nevertheless, the share of non-performing loans is still below its all-time high of almost 17% a decade ago. If we had failed to take action to limit household debt through macroprudential limits in recent years, we would be in a far worse position. Payment delays are most common among highly indebted borrowers.

Current loss provisions would allow banks to cover 120% of outstanding non-performing loans. Furthermore, the sector holds a substantial macroprudential buffer, which could be released if necessary to help banks cover loan losses, as we did back in 2020 and 2022. But at this juncture, such a decision is unnecessary. Quite the opposite, the banks are making solid profits, and a buffer release is not needed.

Now on to the housing market.

The market has been steady, supported by growing mortgage lending. A decline in interest rates has caused market-based mortgage loans in October to grow almost threefold since April. They now account for almost a quarter of all loan disbursements.

Mortgage loan quality has deteriorated slightly: the NPL ratio has risen from 1% at the start of the year to 1.7% as of 1 October. This is largely due to loans for private house construction where houses were not commissioned on time. In this segment, loans overdue by more than 90 days account for 4% of the total mortgage portfolio, five times the ratio for apartment mortgages. But it is now possible to credit funds for private house construction to an escrow account, similar to buying a flat in an apartment building, a long-standing arrangement; for government-subsidised programmes, this is now mandatory. Also, we note late payments on some subsidised and market-based mortgages for flats. Still, the quality of mortgage loans is good overall.

We also need to consider that some homes are bought in instalments. As of 1 October, household debt to developers is ₽1.4 trillion. While the instalment practice is on the decline overall, the share of such sales in many housing projects remains high.

Our estimates suggest that a significant number of buyers using instalment plans look to take out a mortgage to repay the developer. However, far from all succeed in obtaining a mortgage, leading some to terminate shared construction agreements. We are in discussions with the Government about a draft law whereby instalment data would be transmitted to credit history bureaus. This would ensure that banks take into account borrowers’ real debt burden in processing further loan requests.

Let me add a brief comment about the residential property market. Over the first ten months, home sales totalled almost ₽4 trillion, a level comparable to the past two years. Sales in terms of square metres dropped 10% year-on-year, which is unsurprising given the spike in demand ahead of the end of the mass subsidised mortgages. As much as 32% of housing under construction has been sold – this is a reasonable ratio. Admittedly, there is surplus supply in some regions, but demand for housing is set for recovery as market rates drop.

Most construction companies remain profitable. Based on data about major public developers in the first half, their margins remain unchanged. Most are well-positioned to maintain stability, supported by high profits earned in previous years.

In conclusion, let me say that the situation in both the corporate and financial sectors is stable. Since the beginning of the year, banks’ capital adequacy has increased to nearly 13% as of 1 October, and their return on equity is 20.4%. The two indicators are comparable with the previous two years. The gradual reinstitution of add-ons to capital adequacy ratios will bolster stability in the banking sector. Banks will be able to lend to the economy and support borrowers by means of loan restructuring where needed.

We will continue to closely monitor financial stability, to be able to respond to new challenges in a timely manner.