Russia’s banking sector put in another strong month in August, reporting profits of RUB353bn ($3.4bn), its best monthly result this year, with a return on equity of approximately 32% on an annual basis, the Central Bank of Russia (CBR) says in its latest sector update. (chart)

“This represents an 8% increase compared to July, which saw a profit of RUB327bn. Since the beginning of the year, the sector has earned RUB2.4 trillion ($40.2bn), matching the result for the entire year in 2021,” the CBR said, as the Russian banking sector continues one of its strongest performing years since sanctions were first imposed in 2014. (chart)

Deputy Governor of the Bank of Russia Olga Polyakova did not rule out that the profit of the Russian banking sector in 2023 could amount to RUB3 trillion ($30.9bn) by the end of this year.

"Given that nearly [RUB] 2.4 trillion have already been earned in eight months, anything is possible," she said.

When asked about next year, she noted: "Time will tell." "Everything will depend on how the macroeconomic situation will develop," Polyakova said.

Income from the revaluation of foreign currency continued to be a significant driver of profit growth, totalling RUB104bn in August compared with RUB90bn in July.

“This growth was fuelled by the weakening of the ruble, which depreciated by 5% in August and 4% in July, along with several banks maintaining long foreign currency positions. However, the core profit in August remained nearly unchanged at RUB225bn, representing a marginal 1% decrease,” the CBR said.

The number of profitable banks remained largely stable compared to July, with 263 banks, accounting for 81% of the total, staying profitable as opposed to 265 banks, or 82%, in July. Over the course of the first eight months of 2023, there were 276 such banks, or 85% of the total, contributing to 99% of the sector's assets.

Despite the sector's profits, the balance capital increased by RUB223bn, reaching RUB13.4 trillion. The main factors contributing to this difference were the negative revaluation of securities assessed at fair value through other comprehensive income (approximately RUB82bn), the revaluation of subordinated loans (a decrease of RUB32bn), and dividend payments (approximately RUB16bn).

Based on preliminary results, the capital adequacy ratio (N1.0) in August 2023 remained largely unchanged at 12.1%, primarily due to the even growth of average regulatory capital and capital (both increased by 2.6%).

The growth in regulatory capital in August was driven by monthly profits. Average regulatory requirements increased mainly due to the expansion of the credit portfolio and the revaluation of its foreign currency component, influenced by the ruble's depreciation by 5% against the US dollar.

The capital buffer remained stable, ending the month at around RUB6.7 trillion.

The growth of corporate lending slowed down in September, Russian Central Bank Governor Elvira Nabiullina told a forum on September 28, adding that the regulator also sees cash returning to banks at more attractive interest rates following two big rate hikes in August and September.

Corporate loans increased by 2.2% in August. Meanwhile, the regulator said that considering rising rates, the growth of lending was expected to be more limited in the remaining months of the year. The Central Bank upgraded its outlook on growth of corporate lending for 2023 to 14-18% and downgraded the outlook on growth rates of persons and legal entities for 2024 to 7-12%.

Consumer lending also continued to expand at a relatively high pace (+2.4% in August compared to +2.0% in July), despite the rise in interest rates following the key rate hike. Banks maintain a high risk appetite. Seasonal factors also contribute to the growth of lending, as August traditionally sees increased spending due to vacations and preparations for the new academic year.

In August, corporate deposits saw a significant increase, climbing by RUB1,772bn, which represents a 3.7% growth. This growth was primarily observed in the oil and gas, metallurgical and financial sectors, which are booming on the back of rising exports.

The growth of household funds slightly decelerated in August compared to July, with a 0.8% increase in August compared to a 1.1% rise in July. This slowdown could be attributed to seasonal increases in spending on vacations, preparations for the new school year, as well as households investing in real estate, the CBR said.

The volume of liquidity in the banking sector experienced a substantial increase of 4.2%, or RUB684bn. This rise is notably attributed to a significant inflow of client funds, including those in escrow and brokerage accounts (refer to sections 7 and 8 for details).

The overall amount of liquid assets now stands at approximately RUB16.9 trillion ($171bn). This is another pool of money the Kremlin can use to cover the projected budget deficit of RUB2.9 trillion in the future by selling Russian Finance Ministry’s OFZ treasury bills. In addition, there is another RUB6.8 trillion in the NWF – more than three times larger than whne this year’s budget deficit hit its full-year target after the first ten days of March expectation.

The banking sector liquidity represents a “sufficient level,” according to the CBR, covering 21% of client funds in total or 47% of individual client funds. Additionally, banks have the potential to obtain another RUB9.5 trillion (equivalent to 12% of client funds) from the Bank of Russia by pledging non-market assets as collateral. Consequently available sources of liquidity account for roughly 33% of client funds in total.

“Furthermore, the reserve of foreign currency liquidity, which amounts to $53bn, remains at a satisfactory level. It covers approximately 55% of client funds and 29% of foreign currency obligations. In July, these figures were at 50% and 27% respectively,” the CBR said.

All-in-all Russia’s banking sector has access to RUB26.4 trillion ($266bn) and another $53bn in dollars cash.

Compared to the huge pool of banking sector liquidity, the banking sector maintains a relatively low exposure to OFZs and has plenty of capacity to buy more. In August, the portfolio of debt securities held by banks experienced a slight decrease of -0.3% or RUB70bn, primarily due to the negative revaluation of bonds amid rising interest rates.

Throughout August, a portion of OFZ was either redeemed (~RUB90bn) or sold in the secondary market (~RUB90bn), mostly with fixed coupon income. This volume was replaced by new issuances of OFZ (~RUB180bn), with approximately 80% having floating coupons.

Overall, the issuance activity by the Russian Ministry of Finance decreased slightly compared to July, with the total placement of OFZ reaching around RUB230bn (compared with RUB340bn in July). During a conference last week, Russian Finance Minister Anton Siluanov said that as oil revenues are recovering in the second half of the year, MinFin had no plans to borrow to cover budget expenditures.

In addition to banks, demand for OFZ was also demonstrated by Non-State Pension Funds (NPFs), which acquired approximately 16% of the total issuance volume for their clients within trust management frameworks.