In recent weeks, all five traded Russian banks have reported their 3Q11 IFRS results. For most of them the picture was negative: margins held up QoQ but only at the cost of accepting higher risk. In this note we present key takeaways from the reporting season.
Securities and FX losses were among the key concerns. The banks on average lost close to 3% of their equity to securities losses in 3Q11, taking below-the-bottom-line revaluations into account. This underscores our opinion that banks’ exposure to market risk can be very costly (see RUSSIAN BANKS: The Lemons Problem released 9 Nov).
Core revenues at first glance: growth recorded; margins stable. While net profit was damaged by trading losses, core profitability among the traded banks remained at 1H11 levels: only Bank St Petersburg saw a marginal decline in NIS and NIM, while the other four banks saw their margins slightly improve.
But at what cost? A closer look at the generally positive margin dynamics reveals that the banks used an increasing amount of short-term funding to finance longer-term lending, leading to a worsening of maturity ALMs.
Robust loan book growth not necessarily a good thing. The latest Central Bank survey on banking sector trends revealed a further softening of lending conditions in 3Q11. This was driven almost solely by competition between banks as credit demand increased at a much slower rate than expected. The primary result was a relaxation of non-pricing terms (larger loan size, longer maturity, more relaxed collateral policy, etc.). In addition, all five traded banks increased their exposure to real estate-related sectors and the concentration of their largest borrowers in loan books also rose. These factors point to the potentially lower quality of new loans, suggesting that rapid loan book growth was not necessarily a good thing. An exception is Sberbank, which continued to buck the negative trend.
Banks relying more on short-term funding. With the exception of Sberbank, in 3Q11 traded banks significantly increased their reliance on either interbank funding or customers’ current accounts. This supports margins (short-term funding is cheaper) but exposes banks to elevated mismatch risks and dramatically increases their reliance on sector regulators in case of an emergency.
Bottom line: risks are rising, albeit slowly, and VTB and NOMOS look most exposed. In our view, the 3Q11 results of the traded banks reflect the general trends of the Russian banking sector. This could further undermine investor perceptions of the sector, which does not bode well for banking stocks, even the best of them. Rising risks are most evident in the cases of VTB and NOMOS, in our view. For NOMOS, 58% of newly issued loans were effectively funded by interbank and corporate current accounts, on our estimates, while VTB is becoming increasingly addicted to state funding, having absorbed more than RUB750bn of liquidity from the regulators in recent months, according to our estimates based on the RAS financials from VTB Group.
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