Russia’s economy expanded by 1.6% year on year in the first quarter of 2013, easing from a 2.1% year on year growth in Q4/12 and 4.8% year on year in Q1/12. This year’s first-quarter GDP growth was the weakest since 2009. In full-2012 the economy grew by 3.4% year on year and the GDP in current prices amounted to RUB 62.599tn (USD 2tn).

The European Bank for Reconstruction and Development (EBRD) has recently slashed its forecast Russia’s 2013 economic growth to 1.8% from previously expected 3.5%. The International Monetary Fund (IMF) and the World Bank have maintained their outlook on Russia’s growth this year at above 3% (3.4% and 3.3%, respectively). But the EBRD’s outlook might be the beginning of another downward revision cycle, especially in the light of first-quarter GDP data.

Ratings agency Standard & Poor’s believes that the slowdown in Russian economic growth to a forecast 3% in 2013 will have a negative influence on the banking sector, most immediate through the growth of bad loans that are seen to increase in 2013 to 7.2% from 6.9% in 2012. However, the share of bad loans is not going to exceed the post-crisis level of 2009-2010.

Retail loans are growing three times faster than crediting of the real sector, the agency notes. Increased reserves and tougher capital requirements with the introduction of Basel-III will result in profitability margin declining from 16.5% in 2012 to 16% in 2013. Loan growth this year is expected to decline to 15%-18%.
S&P notes that one of the main negative factors in the Russian banking system, along with the vulnerability to oil prices and high concentration on stand-alone clients, is the strengthening dominance of state controlled banks. Some 56% of the banking assets are held by four main state-controlled banking groups, with profits in the sector also unequally distributed towards state banks. The situation is expected to be maintained due to limited access to foreign funding: state banks account for 75% of the external funding (20% of the total banking sector resource base as of end of 2012).

In these conditions private banks are being pushed over to riskier segments, such as unsecured retail loans that posted an aggressive growth to 64% of all consumption credits. The growth of unsecured loans is expected to slow in 2013, but to still remain high at 30% (38% in 2012). This segment also has the highest risk of overheating, although the debt burden of Russian households is projected to remain relatively low at 15% of GDP in 2014 (12% currently).

The agency welcomed the central bank’s gradually increasing the requirements to capital sufficiency, coupled with its readiness to provide the banking system with liquidity. At the same time quality of regulation and supervision in Russia remain weak, with some banks able to manipulate vague regulations.