The Banking Sector Is Teetering on the Verge of Unprofitability

In early 2015, the volume of the corporate loan market contracted markedly. For January-May 2015, banks provided to legal entities new loans in the volume of Rb 11.9 trillion down 17.5% against January-May 2014 (Rb 14.4 trillion).

Out of this volume, loans in rubles amounted to Rb 10.6 trillion down 16.9% against the same index 2014 (Rb 12.7 trillion) and provision of loans in hard currency fell by more than half (fr om US$49 bn for the first five months of 2014 to US$24 bn for the same period of 2015).

The volume of extended loans against turnover of organizations in 2013-2014 averaged for January-May 28.5%. This is a little less than over a year on the whole due to seasonal adjustment of loan activity during the first months of the year. In January-May 2014, the volume of new loans constituted 30% of turnover volume and in 2015, this index fell to 22.0%. Lower credit activity was registered only in 2010 when the volume of new loans over January-May came to 19.4% of turnover.

Contraction of the volume of new loans resulted in the reduction of the volume of legal entities' bank debts. Over five months their volume went down by 3.5% (or by 2.1% with correction to hard currency credits valuation adjustment) including the volume of ruble credit debt down 2.1% and foreign currency in dollar terms credits down 3.0%.

Portfolio credit quality is down: the volume of loan arrears went up by 30% from 1 January to 1 June 2015. The share of loan arrears in the overall volume of corporate clients' debt up from 4.6% in January 2015 to 6.2% in 1 June 2015. At the same time, the credit quality in the national currency remains worse than in the foreign one: the share of loan arrears in rubles grew from 5.5% to 7.2% and the share of loan arrears in foreign currency went up from 2.1% to 2.9%. As a result, the share of loan arrears nearly reached 2009-2010 maximum (6.4% across all loans including 7.2% on loans in rubles as of 1 June 2010) and on ruble loans, the peak level of the last crisis has already been reached.

In the months ahead, the credit market will go on stagnating and portfolio credit quality will continue going down. The banking sector is teetering on the edge of unprofitability. That is why they have no reserves to reduce loan interest rates. For the borrowers these rates are still very high: key interest rate of the Bank of Russia has so far not returned to autumn 2014 level from its extreme growth in December last year. When there is no easy access to refinancing old loans, enterprises will tend to increase loan arrears which in its turn will increase banks' assessment of loan risks and additionally will lim it both reduction of loan interest rates and loans growth.

Mikhail Khromov – Director, Center for Structural Research