Private Banks Are Teetering on the Edge of Zero Returns on Assets

In H1 2016, balance profit of the Russian banking sector amounted to Rb 360bn which is seven times as much than a year before (in H1 2015 the banking sector received only Rb 51bn worth of profits) and nearly twice as much than in the entire 2015 when the banking sector’s profits amounted to Rb 192bn.

In H1 2016, the banking sector’s ROA amounted to 0.9% year on year which is equal to the level of 2014 in general. However, at that time till December banking assets’ profitability remained at a higher level of around 1.5% year on year. So, despite considerable growth in the banking sector’s profits their volumes are still rather moderate as compared to pre-crisis levels. In 2011–2012, ROA in the banking sector used to exceed 2% year on year.   

A greater portion of half-year profits was shown in June 2016 – Rb 126bn – that is, more than 1/3 of all the profits for six months. June happened to be the most profitable month for the banking sector in nominal terms. The previous record-high result was in June 2014 when banks earned Rb 114bn. At the same time, even such a record-high volume of monthly profits is not that impressive in terms of ROA. In June, it amounted to the mere 1.9% year on year.

The pattern of the banking profit points to a decrease in the weight of “crisis” components, that is, formation of reserves for possible losses and income received from revaluation of the exchange rate difference. So, in H1 2016 growth in banking reserves for possible bad loans and other assets amounted to Rb 237bn which is even less than in the respective period of 2013 (Rb 260bn), to say nothing of 2014 (Rb 399bn) and 2015 (Rb 571bn). So, reduction of provisions for possible losses, that is, slowdown of the level of risks of banking assets became a major factor behind ROA growth in in the banking sector in 2016.

Simultaneously, banks’ net income from revaluation of account balances in foreign currency decreased. In H1 2016, it happened to be negative (Rb -41bn) while a year before in the same period banks earned Rb 52bn from depreciation of the exchange rate. The above negative net income is related to appreciation of the national currency. In H1 2016, the ruble appreciated against the US dollar and euro by 12% and 10.5%, respectively. A year before, in H1 2015 the RUR\USD exchange rate remained virtually unchanged; ruble’s appreciation against the US dollar and euro amounted to 0.7% and 8.8%, respectively.

As regards banks’ profits from regular banking operations, that is, less growth in reserves for possible losses and net income from revaluation of foreign currency account balances, growth was not that powerful. For six months, banks earned on such operations Rb 638bn which is only 12.6% more than in H1 2015 (Rb 566bn). Within a year, profitability of banking assets as regards that income component did bot virtually change having amounted to 1.6% year on year as compared to 1.5% in H1 2015. For comparison, up to 2014 in H1 banks used to receive profits from regular operations equal to 2.7–2.9% year on year of the volume of average assets. It means that at present profitability of the main banking operations is nearly twice below its normal level typical of the period of sustained development of the banking sector.

It is to be noted that only one large bank – the Sberbank – still accounts for the greater portion of income made by banks. In H1 2016, the Sberbank’s profit amounted to Rb 299bn, that is, over 80% of the entire banking sector’s profit. It means that the Sberbank which accounts for less than 30% of the aggregate assets of the banking sector received five times more profit than all other banks. However, that is already a step on the way to normalization of distribution of incomes in the banking sector as on the basis of the results of 2015 the Sberbank’s profit (Rb 282bn) exceeded the profit of the entire banking sector (Rb 192bn) – other banks aggregately showed a loss.

If one adds to the Sberbank other large banks affiliated with the Government of the RF and the Gazprom, the largest state-owned company (banks of the VTB group (VTB, VTB24 and the Bank of Moscow), the Rosselkhozbank and the Gasprombank), it comes out that large state-owned banks account for nearly the entire profit of the banking sector. Aggregately, the above banks received Rb 356bn out of Rb 360bn worth of profits of the entire banking sector. The above is evidence of the fact that aggregately other private banks are teetering on the edge of zero returns on assets. The private segment of the banking sector remains highly unattractive in investment terms for bank owners.  The above factor is likely to result in further consolidation of positions of state-owned banks on the market of banking services and concentration of assets in the banking sector.

Mikhail Khromov, Director of the Structural Research Center