LONDON, March 7 (IFR) - Russia’s large banks are relatively well positioned to cope with potential economic sanctions on the country as a result of the crisis in Ukraine, according to analysts.
This week, the country’s banks have been hit hard by a stock market that lost 10% of its value in one day, and a currency whose value against the US dollar has fallen 9% in 2014. The Central Bank of Russia responded by raising its main interest rate from 5.5% to 7% in an attempt stop the currency’s depreciation, but the move could slow growth and raise domestic funding costs.
However, analysts played down the problems, pointing out that the Russian index had already bounced back by about 6% and even the currency was showing some signs of stabilising. They added that Russian banks got most of their funding through domestic corporates and individuals, and were less reliant on the central bank than they had been in the past.
Barclays estimates that Russian banks’ external debt sat at USD215bn at the end of 2013, or 14% of their funding. Many analysts went as far as saying that it was an excellent buying opportunity for Russian financials.
“So far the effects are moderate, as the stock market rebounded somewhat after the initial big drop, while the pressure on the rouble has also abated,” said Alexander Danilov, a Russian banks analyst at Fitch. “There would only be a moderate hit on bank capital ratios, as the sector is not very dollarised or exposed to equity markets. The big banks have sufficient capitalisation to absorb it.”
Russia’s larger banks are fortunate in that they are reasonably well capitalised and have no apparent need to raise capital in the near term. While average Core Tier 1 ratios have fallen in recent years, they are still at a 12% average, according to Fitch.
Even difficulties with Russian banks’ assets in Ukraine might not have a dramatic impact on their overall health, given the relative size of those operations. Sberbank’s subsidiary in Ukraine, for example, has total assets of USD4bn, but this represents only 0.79% of group assets. VTB’s Ukraine subsidiary equals 1.34% of group assets.
However, sanctions could certainly hamper the Russian economy, which has already been in decline. Analysts said the economy grew by a modest 2.5% in 2013, but forecast 2014 growth at zero and in some cases negative. Furthermore, Moody’s said that non-performing loans at Russian banks were around 8.5% of all loans, and with a weaker economy this could easily grow. Compounding this problem is that lending at Russian banks has grown exponentially, whereas household incomes have not kept pace.
It is also the case that sanctions from the US would hurt the banks simply because of the importance of the US in global finance.
“Russia can say all they want about using fewer dollars,” said Marcus Svedberg, chief economist at East Capital. “But at the end of the day, sanctions would hurt the economy and the sector. It could affect the way they trade and syndicate loans, and it could hurt relations with other banking groups. Russian banks can finance themselves and China would be happy to help, so it’s not like the sector would collapse, but it would hit sentiment really hard.”
Reporting by Spencer Anderson; Editing by Matthew Davies