What awaits Russia’s banking sector?

A business’s success in general doesn’t stop the departure of some players from the market

The news that according to experts’ forecasts about 30 banks will leave the market in Russia by October 2022 spread on the eve of Bank Worker’s Day. The news was received calmly and routinely because everybody got used to the exit of banks the Central Bank has organised in the last year methodically clearing the market of dishonest and weak players. Realnoe Vremya’s columnist Artur Safiulin reflects on why banks are leaving the market and what awaits the banking sector in the near future.

The situation in the sector and reasons for the exit of banks

It might seem the coronavirus pandemic was to severely hurt banks’ incomes, but 2021 has become the most successful year for banks in history. According to the Central Bank’s outlook, this year, the sector’s income will total 2,5 trillion rubles, which is 1,5 times higher than during the best years. The so-called banking health index has reached 91,5%, and it has been the best result in two years. A rise in interest incomes amid rapid loan growth became the main reason for the profitability. But the success of the sector in general doesn’t stop the departure of some players from the market.

Once we had about a thousand banks in the country, now there are hundreds or, more precisely, 339 as of 1 September 2021. In 2020, the Russian banking system reduced by 36 banks, 38 banks in 2019, 77 in 218. If we take the forecast number as 30 in these statistics, everything complies with the average “clean-up.”

The only difference from previous years is that many banks themselves ask to have their licence revoked, not wait for a collapse, big troubles from the Central Bank and its loyal stick in the person of the Deposit Insurance Agency. The regulator would be pleased to have 10-20 banks across the country removing the rest. In fact, this is what is happening. In the last four quarters, 45 banks have left the sector, 32 have had on regulatory grounds, 7 because of voluntary licence surrender, another six have joined other banks.

A lower income due to changes in the loan market is the reason why banks cease operations. Banks with a rating at ruB (Editor’s note: low credit rating with which a bank can repay current debts but the safety margin is limited) are subject to greater risk. A sudden and multiple rise in the Central Bank’s key rate forced banks to raise deposit rates, but in the loan market, banks have to sacrifice their profit to attract borrowers: the market became the borrower’s market a long time ago where demand for loans rules, not supply. This is the colossal difference of the situation from the one 10-15 years ago — the golden era of Russian banking when the profitability of banking activity allowed hundreds of banks to live a good life. Only big players survive now, especially those spoiled by public injections in case of a crisis.

The disproportion between the expenses (deposits) and incomes (lower profit in lending) will inevitably influence the interest income and profit. Due to the grown key rate and the general situation in the public corporate debt market, banks can also face a risk of bond devaluation. Settlement and offers for a myriad of big issues are scheduled in 2022.

Small regional banks that are far from the top 100 Russian banks and don’t belong to financial and industrial groups don’t have large industrial, big clients turned out under special market pressure. This somehow resembles the situation with chain stores in the country where Pyatorochka and Magnit grocery stores reign, while local chains are a thing of the past. Judging by the queues to big bank’s cash machines that are guilty of conducting illegal transactions, it is transactions in favour of online casinos, bookmakers’ offices, siphoning off money abroad via doubtful transactions in foreign economic activity and other violations according to Federal Law No. 115 (this applies especially to not fulfilling their obligation of overseeing clients’ transactions).

Borrowers’ ability to repay loans, new or restructured, taken out in 2020-2021, till the end of the term of agreements remains the biggest business risk for banks. We will likely see growth in default and overdue payments.

A lot of experts feared these events would develop this way this year already, but growing lending has shown that we have a big grey economy nobody sees, and we cannot assess its size. How else we can explain why the population has money to repay such an amount of loans.

Whats next?

With high inflation in the country, the population’s real incomes will be falling, which will bring a decrease in the number of good borrowers. Also, the Central Bank is already taking measures to cool the consumer market down — new regulatory requirements will slow down the pace of lending. The current volatility of financial markets, its influence on currency revaluation and the price of securities will put pressure on banks’ profit.

Due to the smaller profitability of the traditional banking business and grown competition for clients with fintech companies, banks have to look for new income sources. Big banks increase investments in related areas of the finance sector — insurance and leasing businesses. For instance, in the last five years, the share of banking leasing companies in financing of the new leasing car fleet has risen from 39 to 50%. It is no surprise because this area is more diversified and attractive from a perspective of profitability.

To attract a bigger number of clients and raise a business’s profit, banks have to start providing non-banking services — we see banks in commodity marketplaces, construction, services, public catering, transport more often. Now it is necessary to divide marketplaces into financial and consumer.

The Central Bank isn’t really happy to see banks in non-core businesses, this hugely increments risks of traditional business for banks. On the other hand, banks often stay with non-core businesses as a result of regulation of big troubled borrowers’ debt, from shopping centres to golf clubs.

Large public banks’ monopolisation is another problem for the sector. They account for 74% of the assets of the banking sector. Since success in the market is now determined by digitalisation, it is very hard for small banks to compete with tycoons — they lack incomes to finance pricey IT developments. Therefore an interesting idea of the necessity of providing small banks with the state’s support in creating modern digital services and platforms, providing unrestricted access to state services no worse than to large players was voiced. It is a good solution to save at least some competition in the market because the longer the oligopoly of the top 5 banks develops, the faster we will see a hike in bank tariffs, via conspiracy. It is the classic economic theory and practice.

In general large-scale digitalisation of financial services awaits us. A law on small and mid-sized businesses’ access to services of financial platforms (marketplaces) will be adopted soon.

Now they offer products for individuals — deposits, compulsory third-party car insurance, open-end funds, over-the-counter bonds. After the law is adopted, legal entities and sole traders can use the platforms, credit products and much more will appear. It will be riveting to see the development of the banking business in the near future.

Artur Safiulin

The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial board.