London: Moody’s Investors Service is maintaining its negative outlook for the Russian banking system over the next 12-18 months, according to its latest outlook, published today, with unfavourable economic trends continuing to weigh on the banking system.
Moody’s report, entitled “Banking System Outlook: Russia”, is available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
“The negative outlook reflects our view that trends in the Russian economy, and consequently, the operating environment for Russian banks will remain challenging over the next 12-18 months, with detrimental consequences for asset quality and profitability,” says Irakli Pipia, a Moody’s Vice President.
“Oil price and exchange rate volatility hamper the ability of corporates and banks to plan ahead and invest in long-term growth strategies, while geopolitical tensions and sanctions severely curtail international appetite for Russian assets.”
Moreover, the rating agency expects asset quality to deteriorate further, forecasting problem loans of rated banks to rise to an average of 14% of their total loans over the next 12-18 months from 9.5% at end-2014.
Moody’s does not expect conditions for loan growth to become favourable over the outlook horizon, forecasting it to remain on average at the level of inflation.
Moody’s also forecasts continued pressure on Russian bank profitability over the outlook horizon, mainly due to increased provisioning needs. “If coverage of nonperforming loans with provisions were maintained at historical levels, the banking system as a whole would be loss-making for full year 2015,” says Mr. Pipia.
In addition, although Russian banks will be able to manage repayment of their external wholesale funding, the system relies on the Central Bank of Russia (CBR) to mitigate refinancing risk. “While external funding opportunities remain virtually frozen at present, we expect the Russian banking system to scale down lending and focus on deposit funding and other domestic funding sources over the outlook period,” according to Mr. Pipia.
Finally, Moody’s expects systemic support to remain stable over the outlook period for the largest banks that are government-controlled (directly or indirectly). This view is supported by a number of policy initiatives and announcements made by the CBR and the Russian government pledging their assistance to systamically important Russian banks.