Wednesday, April 15, 2009

The Worries Facing Russia's Banks

The Worries Facing Russias Banks

Is the financial crisis in Russia coming to an end? Or is it just beginning? That seems to depend on who you listen to.

In recent weeks, senior government ministers and officials have been striking an increasingly optimistic note amid signs the economic situation in Russia has stabilized. Russia's Prime Minister Vladimir Putin has been especially keen to emphasize the government's achievements in the banking sector. "Thanks to the actions of the authorities, the imminent threat of a banking sector collapse has been averted," he boasted to Russia's Parliament on Apr. 6.

Indeed, it's no small achievement that, despite the financial turmoil of recent months, no major Russian bank has gone bust, and there have been minimal signs of depositor panic. But in recent weeks, a chorus of doomsayers has been warning the stability won't last. A "second wave" of the crisis is about to hit Russia, they argue—and the epicenter of this coming shock wave will be the Russian banking sector.

The government now appears to be taking the threat seriously. It can hardly ignore the likes of German Gref, the chairman of Russia's largest bank, state savings bank Sberbank (SBER.RTS). In a conference presentation on Apr. 8, Gref pulled no punches when he warned of the scale of Russia's banking woes. "The banking crisis in Russia is in its very beginning," he said, accusing the government of "slow decision-making" in tackling the problem.

Gref's comments echo similar remarks by Petr Aven, president of Alfa Bank, Russia's largest commercial bank, who has also caused a stir by warning that hundreds of Russian banks could face bankruptcy this year.

More Bad Loans

At the root of these worries is mounting evidence that, as the recession bites, Russian borrowers are struggling to repay bank loans. As a result, the share of nonperforming loans appears to be mushrooming. "A month ago, 15% seemed like a negative figure. Now people are talking about [the share reaching] 20% to 30%," says Natalia Orlova, banking analyst at Alfa Bank. She estimates that around 10% of loans are already bad, but expects the figure to reach at least 15% to 20% by the third quarter.

The precise figure makes a huge difference, with the cost of recapitalizing the banks rising exponentially as the share of bad debts grows. According to estimates by Sberbank, if 10% of loans go bad, the government will need to inject some $6 billion to recapitalize the sector. But that figure skyrockets to $35 billion if the share of bad loans doubles to 20%—and no less than $80 billion if the share reaches 30%.

True, it's still far from clear whether the bad loan problem is actually as bad as the pessimists fear. Elena Romanova, banking analyst at Standard & Poor's (MHP) in Moscow, says that in general banks now regard around a third of loans as potentially "problematic." But it still remains to be seen how many of those loans will actually go bad and how many will be restructured. "The risk is serious," she says. "But it's difficult to say how the situation will develop in Russia, because we've never been through such a calamity before."

It doesn't help that Russia's system of accounting differs in important respects from Western standards, recording unpaid loans (including loans on which the interest is unpaid), rather than estimating which loans are fundamentally unsalvageable.

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