The capital adequacy ratio has departed from the last year’s critical level

Main current banking sector risks are attributed to the deterioration of banks’ asset quality and the deficit of attracted means leading to considerable debt of banks before the regulator.

Combination of these two factors resulted in the fall of banks’ profits and fixing of losses: for 3 months December 2014 through February 2015 the banking sector losses amounted to Rb 229 bn on the whole.

Reduction of profit created a direct threat to the banking sector stability because, other thing equal, this could lead to a significant fall of the capital adequacy ratio which, enough as it is, was at the minimum historical levels by the end 2014. As of 1 December 2014, the capital adequacy ratio across the banking sector as a whole constituted solely 11.9%. At the same time, the largest banks’ capital adequacy ratio was still lower: Sberbank – 11.3%, VTB – 10.24% and Gazprombank – 10.65%.

However, on the whole the banking sector has managed avoiding the shortage of regulatory capital even in the wake of absence of considerable replenishment of core capital. Capital adequacy ratio across banking sector on the whole went up by 1 p.p. by 1 April 2015 against the minimum, reaching 12.9%, corresponding to spring last year. This being said, from 1 December 2014 the amount of core and additional capital of the banks went up only by Rb 84 bn (2.6%), of which for Q1 2015 – by Rb 11 bn (0.3%). In the meantime, the size of the regulatory ratio of core capital of the banking sector increased by Rb 208 bn (2.6%) during 4 months. As a result, capital adequacy ratio has departed from the critical indices registered in the end last year.

In the wake of significant losses registered by the banks during that period, attraction of subordinated credits became the main source of replenishment of core capital. The size of subordinated credits registered in the regulatory capital went up from 1 December 2014 through 1 April 2015 by Rb 531 bn (30.0%) of which by Rb 281 bn - in Q1 2015.

Main beneficiaries of subordinated credits were Sberbank (growth of subordinated credits registered in the capital by Rb 211 bn during 4 months) and VTB (growth by Rb 131 bn during 4 months).  This being said, Sberbank received additional tranche from the Bank of Russia in the amount of Rb 200 bn even in June 2014. However, due to normative constraints imposed by the Russian standards of accounting and reporting on the capital, it was registered solely in Q1 2015. The VTB received subordinated credit from the funds of the National Welfare Fund in the amount of RB 100 bn in December 2014 and another one in the amount of Rb 26 bn in March 2015. Gazprombank also received a credit from the National Welfare Fund in the amount of Rb 38 bn in April 2015. For the reviewing period, the amount of subordinated credits registered in the capital of Gazprombank slightly reduced.

Additional incentive to the increase in capital adequacy ratio was a reduction of banks’ investment in risk assets, first of all, expensive credits to physical persons. Average weighted portfolio cost of consumer credits in the banking sector went down from 19.3% annual in 2014 to 18.4% annual in Q1 2015. It is natural to suppose that in the wake of reduction of real income of the population and worsening financial possibilities of debtors on servicing bank loans, most expensive credits will be primarily cut which is reflected in the reporting structure regarding adequacy capital ratio.

Overall, for the period under review risk weighted assets went down by Rb 3.3 trillion assuming that overall volume of bank’s assets for the same period went up by Rb 3.3 trillion (4.6%).

Mikhail Khromov – Director of the Center for Structural Research