Azernews.Az

By Bloomberg

For all the buzz about how Russia’s financial crisis is easing, banks keep lining up at the central bank for much-needed cash.

Lenders including OAO Sberbank and VTB Group depended on financing from the Bank of Russia for 10.1 percent, on average, of total liabilities and equity in February. While that’s down from 12 percent in December, it represents a surprising increase from 9.6 percent in January. What’s more, the figure -- which is almost three times the level for Turkey and the European Union - - is up from 6.7 percent a year earlier.

Those figures show that while Russian stock, bond and currency markets may be rebounding, the turnaround in the economy will likely prove much more gradual because credit in the financial system remains limited and expensive.

PAO Rosbank and BCS Financial Group say banks’ losses will deepen as the central bank projects that bad debt will soar by $15 billion this year. One-week funds cost an annualized 14 percent, double what banks paid before President Vladimir Putin’s annexation of Crimea triggered the yearlong crisis that unleashed penalties blocking Russia’s access to global debt markets.

“In the last couple of years banks have become pretty much addicted to the central bank’s funding,” Yulia Safarbakova, a senior analyst at BCS, said by phone from on Moscow on Thursday. “With sanctions and closed capital markets, the ratio of central-bank funding may continue to rise, and we might see a situation where it is sitting on a pile of risky collateral.”

Touting Recovery

There are multiple signs of stress in the banking industry. Lenders posted cumulative losses of 23.5 billion rubles ($396 million) in January versus profits a year earlier, while loan growth is languishing at about four-year lows. Bank of Russia Deputy Governor Mikhail Sukhov said on Friday lenders were facing two years of hardship with non-performing loans poised to increase by 900 billion rubles in 2015.

Government officials are singing a different tune after the ruble outperformed all peers in emerging markets in the past two months with a 10 percent appreciation against the dollar, while government bonds handed investors the second-biggest returns among developing countries.

Finance Minister Anton Siluanov declared March 19 that the worst was over for the financial markets, which are “showing momentum toward growth.”

The situation for banks has begun to improve.

Money-market rates soared as high as 29.93 percent in December as the central bank hoisted benchmark borrowing costs by 650 basis points to an 11-year high of 17 percent to stem the ruble’s worst slump since 1998. The MosPrime three-month rate was 15.8 percent at the end of last week.

Reducing Risks

As prices for oil, the country’s biggest export, started to stabilize following last year’s plunge, central bank Governor Elvira Nabiullina trimmed back almost half of those increases. The level of funding provided by the monetary authority “isn’t a cause for considerable alarm,” it said in an e-mailed response to questions on March 20.

Borrowing costs are “completely correlated” to the benchmark rate and it makes little difference where funding comes from, VTB’s press service said the same day.

The central bank introduced a $50 billion limit on foreign- exchange refinancing last year to help meet banks’ demand for dollars and euros as sanctions over Ukraine prevented borrowers from refinancing abroad. The country’s foreign-debt burden shrank by almost a fifth in 2014 to $599.5 billion, according to central bank estimates in January.

By giving lenders a way to retire maturing external debt, policy makers are “actually reducing the financial risks in the system,” Dmitry Poliakov, an analyst at Sberbank CIB. said by e-mail.

Interest Margins

The higher cost of funds is driving down net interest margins, a measure of profitability. VTB’s margin fell 60 basis points in the fourth quarter to 3.5 percent after interest expenses jumped 20 percent, Bloomberg Intelligence analysts Tomasz Noetzel and Jonathan Tyce wrote March 13.

This, in turn, is leaving lenders to pass on the extra cost to consumers, whose spending power is being pummeled as the economy heads for its first recession since 2009. Real wages fell 9.9 percent in February compared with a year earlier, the fourth month of declines.

“The central bank positions itself as a source of comparatively expensive and short-term funding,” Yury Tulinov the head of research at OAO Rosbank, Societe Generale SA’s Russian unit, said by e-mail. “As a result, banks will offer the man on the street shorter money at a higher price.”