By the end of April the acute phase of the crisis induced by the start of the war in Ukraine was clearly coming to an end. The financial system had a shock but the fast action from the CBR and its rapid clampdown on withdrawals plus a flood of liquidity had their desired effects. The population was also clearly encouraged by the rapid recovery in the ruble’s exchange rate after it had crashed to a peak of RUB133, which encouraged them to return cash to bank deposits.
While the indicators show that the recovery process is still ongoing, a lot of progress has already been made. The CBR has managed to cut rates three times in under two months to bring the rate to 11% at the end of May from 20% in early March. That has brought high interest rates down, which will support a growth in credits, and has also brought down the population’s inflation expectations.
Banks were on for a bumper year in terms of profits in 2022, as the chart shows, but those hopes will be dashed now, although the extent of the damage will only become clearer later. The CBR has chosen to withhold some key banking sectors from its regular reporting since February and profits is one of those indicators.
There were no new non-performing loan (NLP) numbers either. While the worst of the crisis has yet to reach street level other than in soaring food prices, analysts expect the level of NPLs to start climbing steadily, mainly thanks to the increase in interest rates. However, as the CBR has managed to cut rates back from the emergency 20% level very fast the damage from the spike in rates is likely to be limited. At the same time, consumers are already paring back on consumer loans and the CBR already acted last year to reduce the amount of borrowing, afraid of a consumer credit bubble forming.
On a more positive note, the influx of ruble household deposits of RUB1.3 trillion back into the banks almost completely offsets the total outflow in February-March, according to CBR’s monthly update. At the same time, the outflow of foreign currency deposits stopped almost completely, and the placement of state funds made it possible to reduce the volume of borrowings from the Bank of Russia to the pre-crisis level, the CBR reports.
However, the high volatile and extreme swings in interest rates have depressed mortgage issuance, which has dropped noticeably. Mortgage lending has become one of the banking sector's most profitable activities and lending has been subsidised by the state, in part to support the real estate sector – one of the economy’s main drivers.
The portfolio of consumer loans also continues to decline, as the crisis has depressed demand in general. The dynamics of the corporate borrowing were also near zero in April, the CBR said.
In general, the amount of information being shared has been greatly decreased. In March, the Russian government allowed companies whose shares are traded on the stock exchange to decide what information to disclose. They have the option of declining to publish any data until the end of this year if there is a threat that it would bring sanctions against the issuer, or any person named in a report. The CBR has also permitted banks to stop reporting under Russian Accounting Standards. And it has allowed all financial institutions (including insurance companies) to conceal data on controlling shareholders and members of management bodies.
In April, the corporate portfolio remained virtually unchanged (down RUB15bn, or -0.03% year on year) after a slight decline in March (-0.3%) and peak growth in February (up RUB1.3 trillion, or 2.03%).
“Banks are cautious in their choice of borrowers, taking into account high interest rates and economic uncertainty. In the future, issuance may increase slightly after the key rate is reduced to 14% and the expansion of state support programmes lending to systemically important companies,” the CBR said in its update.
As the chart shows, bank interest rates spiked to over 20% after the CBR more than doubled interest rates to 20% on March 18, but have decreased steadily since and will continue to fall as the CBR is expected to make more rate cuts in the coming months.
In April, there was a slight decrease in the mortgage portfolio (-0.1%, according to preliminary data) after a significant increase of around 2% in February-March.
Issues fell three-fold to RUB162bn ($2.1bn) from RUB521bn in March, while the market contracted seven-fold, largely due to the cessation of issuance of loans approved at the pre-hike rates, as well as the halt to subsidised mortgages, which halved to RUB113bn in April from RUB210bn a month earlier.
“It is noteworthy that the issuance decreased as for the "preferential" mortgage, for which in early April the rate was increased from 7% to 12%, as well as for the "family" rate, in respect of which the conditions have not changed and the rate for which remains at a comfortable 6%, including due to a decrease in loans to the pre-crisis level after the rush demand between March and April 30,” the CBR said. “The rate under the "preferential" programme was reduced to 9%, and the maximum loan amount increased, which will slightly increase the demand for it.”
Unsecured consumer lending shank for the second month in a row: in April, the reduction was -1.8% and in March -1.9%, according to preliminary data.
With interest rates and exchange rates swinging wildly, both consumers and companies rushed to take cash out of banks and put it somewhere more secure, preferably in other currencies. March was the most turbulent month but in April fears were clearly starting to subside.
“The dynamics of funds of legal entities remains weak for the second month in a row,” the CBR said in its monthly update. “In April there was moderate RUB78bn rubles, or +0.2%, inflow of corporate funds, up from March’s outflow of -0.01%, due to the growth of foreign currency balances. An additional $8.9bn (RUB748bn in ruble terms equivalent) was deposited in banks.”
As the chart shows, at the same time, retail customers also were depositing foreign exchange in banks, probably due to foreign exchange earnings, for which the sale period was extended to 60 working days. Funds in rubles, on the contrary, fell RUB670bn, mainly in the last week of April, which is also related to annual tax payments, the CBR said.
Household deposits increased by RUB1.3 trillion in April, a 3.8% gain, as depositors returned to their deposits previously withdrawn cash, which dominated the outflow in February-March: about RUB1.4 trillion was withdrawn in those months in total.
On balance taking both currencies into account then a total of $0.2bn, or RUB16bn, was withdrawn in the ruble equivalent, after $9.8bn was taken out in March.
The CBR is expecting growth in deposits in May after state child support is paid out worth RUB363bn, and total social payments of RUB505bn are planned for the whole year.
“As the situation stabilises and the key rate decreases, banks begin to revise conditions for deposits. Thus the average maximum rate for the largest banks decreased by the end of April to 13% from 20.5% at the peak, which correlates with the key rate reduction dynamics,” the CBR said.
Following a sharp slowdown in mortgage lending, the growth of household funds in escrow accounts slowed three-fold compared to the previous month, to RUB113bn, or 3.1% against a 9.4% growth in March, due, among other things, to a reduction in mortgage occupancy, which may reflect a likely overall decline in home sales, the CBR said.
State funds increased by RUB823bn, or 10.3%, mainly in the form of deposits of the Federal Treasury. The influx of funding allowed banks to reduce the volume of borrowings from the CBR to the pre-crisis level.
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