Russia Banking Sector Report - H2, 2013

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Russia Banking Sector Report - H2, 2013

This report provides an overview of Russia’s economic and banking sector through February 2014. The report includes a discussion of the recent political turmoil in Ukraine and its effect on the Russian economy. The report also summarizes the Central Bank’s economic forecasts, monetary policy, and provides an extensive description of banking system developments in 2013 for firms including, among others, Sberbank, VTB Bank, and Gazprombank.

In its latest monetary and credit policy report, the Central Bank of Russia (CBR) revised its GDP growth forecast for 2014 from 2% to 1.5%–1.8%. This estimate also includes a 0.3ppt estimated positive effect from the Sochi 2014 Winter Olympics. The growth forecast for 2015–16 was also cut from 2.5%–3% to 1.7%–2%. The stagnation in the economy continues, but it is expected to be over between Q2 2014 and Q3 2014. EconMin hopes that starting in Q2 the dynamics will turn around in such segments as machinery manufacturing and food processing. GDP growth in Q1 2014 is forecasted at 1%. The CBR has not yet revised its 5% inflation target for 2014.

The crisis in Ukraine has raised the risks to Russia's already weakening economy presented by currency depreciation and capital flight, Fitch Ratings says. The situation is still highly unpredictable, but Russia's sovereign credit profile is robust and events so far do not have implications for the country's 'BBB' rating, Fitch Ratings informed.

The ruble has now fallen around 9% against the dollar this year, partly driven by fears across emerging markets about the impact of US tapering, but also on Russia-specific concerns about low growth and the weakening current account surplus, and in anticipation of further liberalization of the exchange rate regime, Fitch points out.

Russia's already-strong sovereign balance sheet is characterized by low sovereign debt levels and high international reserves (around USD 490bn in late February). Sovereign net foreign assets equivalent to 23% of GDP provide an ample buffer against external shocks, supporting the rating. These are sufficient to cover gross external financing needs more than three times over. The Reserve Fund, the government's main fiscal buffer, contains USD 87bn (4.5% of GDP), giving Russia a cushion against a drop in demand for its sovereign debt.

Key Points:

• In corporate news, Russia’s Sberbank is targeting expanded operations on the Czech market in 2014 as it seeks to grow internationally.

• Russia’s second-largest bank, the state-controlled VTB Bank, could merge its retail arm VTB24 and the Bank of Moscow (BoM).

• Russia’s third-largest bank, the state-controlled Gazprombank, has issued USD 750mn worth of Eurobonds maturing in 2019.

• Actual real sector crediting growth in Russian banking sector has slowed from the 14%–15% seen at the beginning of the year to 12.7% year on year for 2013 overall. This compares to expectations of 15% growth by the Central Bank of Russia (CBR).

• The consolidation of the banking sector will continue in 2014–15, as slowing economic growth limits the scope of organic growth.

Table of Contents

1. Executive Summary

2. Sector overview
2.1 Stakes high in Ukraine as Putin authorises military option
2.2 EconMin: GDP growth estimated at 0.7% y/y in January.
2.3 EconMin: GDP growth not to exceed 2% in 2014.
2.4 Officials speak of stagflation.
2.5 CBR sees positive effect of Sochi Olympics worth 0.3ppt of GDP.
2.6 Fitch affirms Russia at BBB, outlook stable
2.7 Fitch: Crisis to Weigh on Russia Economy
2.8 Moody’s: Russia’s uncertain position on Ukraine is credit-negative.
2.9 Russia’s budget surplus at 9.3% of GDP in January.
2.10 Russia's international reserves down 6% y/y to USD 493bn in February.
2.11 Russia’s external debt up by 15% in 2013 - CBR.
2.12 Russia keeps external borrowing plan at USD 7bn for 2014.
2.13 Russia's real effective RUB rate down by 7% y/y in February.
2.14 CBR eases currency interventions in February
2.15 Inflation in Russia inches up to 6.2% y/y in February.
2.16 Russia’s EconMin: GDP, inflation targets in 2014 could be underperformed.
2.17 Russia’s CBR sticks to 2014 targets.
2.18 Russia’s CBR ups main interest rate to 7% as RUB drops on military involvement in Ukraine.
2.19 Russia’s base sectors, investment, retail trade continue declining in January.
2.20 Russia's Business Confidence Index in February flat for extraction, down for processing.
2.21 Russia’s current account surplus halves to USD 33bn in 2013.
2.23 Russia’s foreign trade surplus down by 7% y/y in 2013.
2.24 Russia’s foreign investment inflow up by 10% y/y in Jan-Sep, outflow up by 34.5% y/y, balance negative.
2.25 Outflow from Russian country funds continues at USD 100mn in week ending February 26.
2.26 Capital outflow from Russia up by 15% to USD 62.7bn in 2013.
2.27Russia’s broad definition monetary base up 6.6% y/y in 2013.

3. Banking:
3.1 Moody’s welcomes Russian banking sector’s consolidation.
3.2 CBR: RUB weakening of 20% would costs top banks USD 6bn.
3.3 Fitch: Russian banks significantly exposed in Ukraine.
3.4 Fitch: Capital buffer proposal could strengthen Russian banks.
3.5 Weaker rouble, markets may pressure Russian bank capital

4. Main Banks:
4.1 Russia's Sberbank places USD 1bn in 10-year subordinated bonds.
4.2 Fitch rates Sberbank’s subordinated Eurobonds at BBB-.
4.3 Sberbank eyes expansion on Czech market in 2014.
4.4 VTB Bank could merge VTB24 and Bank of Moscow.
4.5 Nomos Bank raises USD 600mn in SPO.
4.6 Agricultural Bank could place 10-year Eurobonds.
4.7 S&P affirms Russia’s development bank VEB at BBB, outlook Stable.
4.8 Gazprombank places USD 750mn Eurobonds.
4.9 PromSvyazBank postpones subordinated bonds on bad markets.

Table 1 CBR’s reserves
Table 2 CPI inflation

Figure 1 Real GDP growth
Figure 2 Reserve Fund
Figure 3 Public external debt
Figure 4 CPI inflation dynamics
Figure 5 Output in base sectors
Figure 6 Current account balance
Figure 7 Export & Import growth
Figure 8 Net capital outflow

Number of pages: 28
Release Date: Thu, 20 Mar 2014