The New Mechanism of Financial Rehabilitation of Banks Has Made the Banking Sector’s Financial Result Worse

Growth rates of bank assets have lagged behind the country’s rates of economic development for two years running. In 2017, the nominal volume of assets increased less than GDP in nominal terms. The positive thing is that assets started to grow anyway, while last year they used to shrink. Also, some segments saw a revival of lending. Growth in consumer lending and mortgage lending intensified.

As regards corporate lending, the aggregate growth rates at year-end were rather low, in the range of 3%, while lending in roubles demonstrated double digit growth rates. Simultaneously, the foreign-currency debt decreased considerably. As a result, due to mixed trends on these two market segments the overall lending portfolio did not virtually grow.

Reduction of the foreign currency debt can be explained by repayment of foreign currency loans received by large corporations two-three years ago for refinancing the foreign debt. From the beginning of 2015, when foreign markets shut down for Russian businesses, a large number of corporate borrowers had to take foreign currency loans from Russian banks to repay their foreign debts. This process was so active that the Central Bank of Russia had to step up foreign currency lending to Russian banks to underpin refinancing of large corporate borrowers. By now, banks’ foreign currency debt to the Central Bank of Russia has been almost repaid in full; accordingly, banks’ foreign currency lending to corporate borrowers decreased, too.

It is noteworthy that fewer licenses were withdrawn from credit institutions and that is a positive factor. If in 2015–2016 over 90 licenses used to be withdrawn per year, in 2017 that number decreased by almost a half. It is undoubtedly a positive factor because in most cases of banking license withdrawal bank customers get nervous and this creates volatility.

It is to be noted that in most cases licenses were withdrawn from small banks. If licenses were withdrawn from large banks, too many customers would have been affected and that could destabilize the banking sector as whole. To support problem large banks, the regulator utilized financial rehabilitation procedures. In 2017, a new mechanism of financial restructuring with participation of the Fund for the Banking Sector Consolidation under the jurisdiction of the Central Bank of Russia was developed. As opposed to the former mechanism with engagement of the Deposit Insurance Agency (DIA), the chain of intermediaries was shortened – the DIA and special administrator –banks were excluded from it – to promote the efficiency of rehabilitation procedures. In H2 2017, financial rehabilitation procedures were started in respect of large banks, such as: FK Otkrytie, the BinBank and the Promsvyazbank.

The dramatic worsening of the financial results of these banks during the financial rehabilitation has revealed a striking extent of problems with banks that used to meet all the formal requirements of the regulator.

As a result of restructuring of large banks, the banking sector’s financial result got worse dramatically. If before autumn 2017 the banking sector’s aggregate profits surpassed largely the trajectory of the previous year –as early as August the profits were higher than in 2016 – the identification of substandard assets with large banks lead to the need of creating large volumes of additional reserves, so the banking sector’s profit plummeted: at the year-end of 2017 it was much lower than in 2016.

Mikhail Khromov, Head of the Financial Studies Department, Gaidar Institute