Problem assets in the Russian economy
On March 8-9 in London, Great Britain, the NPL Europe Spring conference was held, sponsored by Legacy Square Capital. Within the framework of the conference, Managing Partner of Legacy Square Capital Mark Feldman held a presentation on the economic state of Russia, the situation on investments in distressed assets, and presented a new fund - LCS Value Recovery II.
The Russian economy: overview
A large-scale drop of oil prices and a corresponding drop of ruble exchange rate were a shock for the Russian economy. Since then, the situation has stabilized – oil has partially won back the losses, and ruble has become more stable.
The Russian economy enters the recovery period, but GDP growth is still quite moderate, not more than 2.5%. The economy is still lower than the values of 2014.
A rapid drop of oil prices, for more than one third, has brought down export revenues. Non-energy export remained at the same level, due to which export structure has become more balanced – energy commodities now bring a bit more than a half of the total foreign trade revenues.
The situation with regard to capital outflow looks much better than even in 2013, which was quite calm. Average quarterly capital export for the last three years reduced to 9 bln. USD, which is three times less compared to 2013-14.
Partial loss of oil revenues had a negative impact on the Russian budget. The budget has stable deficit three years in a row, nevertheless, it doesn’t exceed a quite moderate level of 5% of GDP. A positive dynamics emerged in 2017, the deficit is gradually reducing.
The role of oil and gas revenues in the Russian Federal Budget is decreasing. The revenues connected with domestic production, such as VAT, excise duties and profit tax, demonstrate stable growth for the last years.
Situation in the banking sector
Severe monetary policy of the CBR has managed to bring the inflation down, below 4%. But the reduction of the key interest rate is significantly lower than decline in inflation. As the result, for the first time in the history, Russia lives with a high real interest rate, above 5%. It complicates refinancing, prolongation and extension of loans.
Loan volume stagnated for the last two years, with no growth even in nominal terms. A minor growth emerged only in the second semester of 2017.
However, even a minor growth in lending at the end of last year is fully levelled out by a larger increase of deposit volume. Since the beginning of 2017, the amount of deposits significantly exceeds the amount of extended loans.
As a result, the banking sector is rapidly increasing its liquidity surplus. Credit organizations are experiencing a steady demand for the placement of funds in the Central Bank.
Loan and deposit volume in the banking sector, except credit organizations
Structural proficit (+) / deficit (-) of liquidity in the banking
As the result of the policy of the CBR with regard to clearance of the banking sector, the number of credit organizations in Russia is progressively decreasing. For the last six years, the number of banks has reduced almost in half.
More and more assets are concentrated in the hands of a small number of banks. As of the end of 2017, almost 56% of assets belonged only to five largest banks. Herewith, the share of medium banks has grown as well. Small banks are forced out of the marked.
The share of state-owned banks reached 69% at the end of last year. This indicator was largely affected by transfer of the largest banks Otkrytie and Promsvyazbank into public ownership. Therefore, there are only two private banks remaining in the top ten largest banks – Alfa Bank and Moscow Credit Bank.
Foreign banks continue leaving the Russian market. As of the end of last year, their assets reduced to 12,3% of the whole banking system of Russia.
The share of banks with a foreign participation in the total banking assets
Problem assets
As of December 1, 2017, according to the CBR, the share of bank assets with no guarantee of repayment was 10% of the total assets of the banking sector – about $100 billion of NPLs (5.6 trillion rubles).
Overdue debt is stabilized at the level a bit above 5% of the total extended loans, having demonstrated a significant growth after the events of 2014.
Despite quite moderate growth rate of troubled assets, their distribution among the banks is becoming worth. As of the end of 2017, 10.7% of Russian banks had overdue debt of 20% to 90% of their deposits.
In spite of quite moderate growth rate of troubled assets, their distribution among the banks is becoming worth. As of the end of 2017, 10.7% of Russian banks had overdue debt of 20% to 90% of their deposits.
The share of banks having overdue debt of 20% to 90% of all their deposits
The financial result of banks and their profitability in comparison with the risk-free rate
