The outlook for the Russian banking sector 2020 and beyond

By Mikhail Shlemov – VTB Capital’s Chief Banking Analyst

2020 has already thrown a lot at the banking sector both in Russia and globally, whether its tensions in Iran, the outbreak of coronavirus in China or the change in Russian Government, it’s safe to say it’s already been a busy year. Despite these challenges, we still remain optimistic about how the banking sector in Russia will look in 2020. Following 2 years of fiscal consolidation, the combination of easing the Russian central bank’s monetary policy coupled with fiscal stimulus aimed at families with children is set to accelerate Russian economy to 1.6% in 2020 up from 1.3% in 2019.

We expect loan growth to increase to 7.6% from 6.5% in 2019 however the engines of growth are changing from unsecured consumer lending cooling down after timely measures of CBR, to mortgages and corporate loans as CBR gradually eases. While NIMs will remain under pressure for the foreseeable future, the growth we are seeing is becoming more balanced with risk costs continuing to decline closer to those seen in CEE.

The digitalization of banking in Russia together with more cross-sector partnerships forming the building blocks of consumer-centric ecosystems will continue to see significant investment from Russia’s largest banks. Keeping up the pace with CBR’s efforts to level the playing field with a number of Fintech initiatives (Fast Payments System, Biometric Technology and Open API) will require continuous investments into IT, limiting room for further operational leverage.

Russia has almost completed the adoption of Basel 3 regulatory framework from a capital perspective, and the focus is now shifting to transition from a standardized approach in RW density to the Basel 3 compliant IRB methodology for systemic important banks and more widespread use of the national rating agencies for corporate lending, which would help to fund private investment. So far Russian banks are wrong-footed in this regard with RW density of over 95% vs EM EMEA average of 60%.

Thanks to the success of inflation targeting policy with inflation falling to 2.1% as of Jan-20, well below the CBR target of 4%, we expect to see a continuous shift of retail savings from bank deposits and real estate into capital market products. The number of retail investment accounts has doubled in the last year from 2 million to almost 4 million, and we expect this pace of growth to remain similar in 2020. The erosion of the traditional model of a balance sheet heavy business will become evident and we believe 2020 will be the tipping point as we see Russian banks tackle this dilemma. This is both a threat and opportunity for the banks, however we believe in the longer term it will reduce the cyclicality of banking models and improve capital allocation throughout the economy which will in turn help to drive investment.

Summing all of this up, we at VTB Capital feel that after having completed the recovery after the external shocks of falling oil prices and sanctions in 2014, the Russian banking sector is on firm footing to adjust the “modus operandi” to fund investment while keeping attractive high-teens ROEs.