A Drop in Their Credit Quality will be Ruinous for a Number of Banks

In September, the Bank of Russia completed a stress test of Russian banks based on their reports for the first half-year of 2012.


The test revealed that one-third of the Russian banking system will be faced with capital deficit if the price of oil plummets below $ 60 per barrel, and GDP shrinks. Problems may arise for 199 banks whose capital sufficiency index will drop below 10%. Total deficit will amount to Rb 455bn.

The Central Bank’s decision to get concerned with the excessively rapid growth of retail crediting is good news. The rate of credit portfolio’s growth being stable ahead of the rate of growth of the deposit base results in declining liquidity in the banking sector and rising demand of banks for the refinancing instruments offered by the Bank of Russia and the RF Ministry of Finance.

As for more precise estimations of the potential number of ‘problem’ banks, these must be treated with caution. It should be reminded that the ‘deficit of trust’ during the banking crisis in the summer of 2004 had been provoked by the declarations of some officials that there existed a ‘blacklist’ of banks. That is why we praise the Central Bank’s decision not to disclose the detailed results of its stress tests, or name any banks.

True, capital sufficiency in the banking sector has now declined to its historic low. During the credit boom period in 2006–2008, N1 (the normative of sufficiency of bank’s own capital) never dropped below 14%, while as of 1 September 2012 it amounted to 13.3% (the floor being 10%). At the same time, approximately 40% of the aggregate bank assets belongs to banks whose capital sufficiency levels are below 12%, and nearly 80% – to banks with capital sufficiency less than 13%. The worsening quality of credits issued to the population may be felt very painfully by some banks. Thus, an increase in the reserves against potential losses on individual credits from the current level of 6.4% to 10.9% (the record high observed during the crisis) will be equivalent to a decline of N1 Н1 by 0.7–0.8 pp.

M. Yu. Khromov – researcher, Structural Research Center