The Russian Economy and Banking Sector in 2010

Annual report 2010

# The Russian Economy and Banking Sector in 2010

The recovery, which began in the Russian economy in the second half of 2009, gained momentum last year. It was driven by the overall economic recovery worldwide, a revival on foreign markets accompanied by rising energy prices, and stronger domestic demand in Russia.

In 2010, Russia’s GDP rose by 4%, industrial output by 8.2%, and fixed asset investments by 6%. The fastest growing sector was manufacturing, which expanded by 13.4%, while transport and telecommunications grew by 7% and mining by 4.8%. Agriculture showed consistently strong results up to the third quarter of 2010, when growth was undermined by the negative impact of the extremely hot and dry summer.

Economic growth boosted real disposable household income and improved the situation on the labor market, which had an effect on consumer sentiment through the year and helped to deliver better results in the Russian banking system.

Banking sector assets grew by 14.9% in 2010 to RUB33,804.6 billion. The total net income of the sector was RUB573.4 billion, compared with RUB205.1 billion in 2009.

Individual deposits remained the principal source of banking sector funding in 2010, and confidence of personal depositors rose during the year. The share of personal savings held as bank deposits and securities was 7.7% in 2010, compared with 4.5% in 2009. Deposits grew by 31.2% to RUB9,818 billion. Excessive liquidity in the banking system led to a gradual reduction in interest rates on personal deposits in 2010, and rates offered by medium-sized and large privately owned banks almost matched those of state-owned banks.

The inflow of funds to banks from the corporate sector and state organizations also increased during the reporting period. Corporate deposits grew by 16% in 2010 to RUB10,893.6 billion, and the amount of funds attracted by banks from the Finance Ministry and other state bodies grew by 1.7 times to RUB464.3 billion. The increase in deposits enabled banks to fund banking operations themselves, and unsecured loans from the Central Bank to financial institutions had been fully repaid by November 2010.

While the growth of deposits fully resolved the liquidity problems of banks, lending markets continued to stagnate for part of the year. Banks were forced to seek more efficient ways of placing funds as credit risks remained high. The Central Bank encouraged demand for lending through its interest-rate policy and measures to stimulate the lending market: the refinancing rate was reduced several times during the year, having reached 7.75% by the end of 2010.

Last year, banks resumed their lending programs, which had been scaled down or suspended during the crisis. State-owned banks capitalized on the price advantage that they enjoy as a result of cheaper funding, rapidly increasing their presence on lending markets. This led to much tougher competition for quality borrowers and a fall in interest rates on loans. Many banks softened their borrower requirements to boost lending.

The banking sector’s total outstanding loans rose by 12.6% in 2010. Most of the growth was in the retail segment, where loan volumes increased by 14.3% to RUB4,084.8 billion. Mortgage portfolios demonstrated the strongest performance, growing by 2.5 times to RUB370 billion. The Bank’s strive to develop consumer lending and the credit card business in 2010 was contingent to the high returns that these segments offer while matching the maturities of most deposit products.

Outstanding loans to the corporate sector grew by 12.1% in 2010 to RUB14,062.9 billion. Growth of corporate lending in 2010 was driven by the small and medium-sized enterprise (SME) sector. The number of SMEs in Russia increased during 2010 following a decline in 2009, and loans to small business grew proportionately. Improvements in the economy also led to better lending terms for SMEs, including easing of requirements for borrowers and higher-quality service. Average loan amounts increased and interest rates on corporate loans fell from 20.5% to 16.2%.

Improvement of asset quality and reduction in the share of overdue debt (to 5.7% under RAS) were important drivers of the banks’ loan portfolio growth. The share of overdue retail loans was 6.8%, in line with 2009, although the absolute amount of overdue retail debt grew in line with the whole portfolio. The volume of overdue corporate loans remained almost unchanged since 2009, and its share in total corporate loans fell from 6.1% to 5.3%.

Banks maintained their conservative provisioning policy in 2010, despite the improvement in asset quality. The share of loan loss provisions under RAS fell, from 11.3% to 10.5% of total loans issued by the bank system, and the NPL coverage ratio was 186%.

Lower margins from banking operations in 2010 stimulated banks’ activity on the securities market. The sector’s securities portfolio grew by 35.3% to RUB5,829 billion, rising from 14.6% to 17.2% of total assets. Banks paid greater attention to debt instruments in 2010, particularly Central Bank bonds, to maintain an adequate balance between risk and return. The share of bank investments in debt instruments grew by 30.8% during the year and reached 75% of their securities portfolio as of 1 January 2011.

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## Expectations for 2011

Expansion of loan portfolios will remain the key challenge for the banking system in 2011, and portfolio growth rates will equal those in 2010. The loan market will be driven by an increase in consumption and corporate sector activity.

Economic recovery and improving credit quality of borrowers will help to overcome the problem of NPLs and reduce credit risk. Overall conditions in the economy (inflation and the money supply) bode well for an increase in interest rates, though they are more likely to remain at the level seen at the start of the year due to a liquidity surplus. Deposit rates will continue to decline due to lower competition for funds, with a positive effect on the margins of those banks that are most dependent on deposits.

The profit of the banking sector in 2011 is expected to be close to the level seen in 2010, at RUB500 billion.

#### Indicators for the Russian economy, %

#### Bank lending in Russia, RUB billion

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#### Indicators for the Russian banking system, RUB billion

#### Corporate and retail deposits, RUB billion

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© 2011 Bank «Vozrozhdenie»