______2012/SFOM10/007 Session: 2

Russian Banking Sector Developments in 2011 and in January-April 2012

Purpose: Information Submitted by: Russia

10th Senior Finance Officials’ Meeting St. Petersburg, Russia 28-29 June 2012 Russian Banking Sector Developments in 2011 and in January-April 2012

In 2011, the Russian banking sector was characterised by growth of key macroeconomic indicators. Banking sector total assets showed high rates of growth and lending to businesses and households was also on the rise. Interest rates declined, while loans became more affordable. The resource base of credit institutions broadened due to the inflow of customer funds, primarily deposits by legal entities and private individuals, whose total amount with Russian banks increased. Bank profits expanded and the financial situation in the banking sector improved.

In 2011, the annual rate of growth in banking sector assets increased from 14.9% to 23.1%, while the ratio of total banking sector assets to GDP expanded from 75.2% to 76.6%*. As in the previous year, loans prevailed in the structure of banking sector assets.

In April 2012, the annual rate of growth in banking sector assets rose to 23.3% (as of 1 May 2012).

In 2011, the annual rate of growth in loans to non-financial organisations increased from 12.1% to 26.0%* (over 65% of total loans were extended to non-financial organisations for terms longer than one year). In January-February 2012, this indicator dropped to 22.6% (as of 1 March 2012), but rose again in March-April 2012 to 24.2% (as of 1 May 2012).

The annual rate of growth in loans to households rose in 2011 from 14.3% to 35.9%* (over 80% of total loans to households were extended for terms longer than one year) and in January-April 2012, to 42.0% (as of 1 May 2012).

The ratio of loans extended to non-financial organisations and households to GDP increased in 2011 from 40.4% to 42.8%*.

Housing mortgage lending intensified in 2011. Housing prices stabilised and pent-up demand for mortgage loans began to materialise. By 1 January 2012, Russian banks extended 745.97 billon roubles in mortgage loans, an almost twofold increase on the same period of 2010. In 2012, this trend continued: by 1 May, mortgage loans amounted to 274.89 billion roubles, which is significantly higher than the same indicator of the previous year.

At the same time, global financial market instability in 2011 led to a fall in the rates of growth in certain banking sector indicators.

In January through March 2011, the annual rates of growth in the banking sector equity capital were observed to fall from 2.4% to 0.6%. However, by the end of the year this indicator rose to 10.8% and in January-April 2012, to 14.0% (as of 1 May 2012).

The ratio of the banking sector equity capital to GDP in 2011 declined from10.5% to 9.6% *. 1 The rate of growth in household deposits, which as of 1 January 2011 stood at an annualised 31.2%, slowed to 20.9% by the end of the year. In 2011, the value of household deposits grew from 9.82 trillion roubles to 11.87 trillion roubles* (or 28.5% of the banking sector liabilities). The ratio of household deposits to GDP in 2011 remained unchanged and stood at 21.8% as of 1 January 2012.

In January-April 2012, the annual rate of growth in household deposits dropped somewhat to 19.8%, while their total value went up to 12.26 trillion roubles (as of 1 May 2012).

In 2011, the total number of operating credit institutions declined from 1,012 to 978*, of which 918 credit institutions (94% of the total) had a capital of 180 million roubles and more (starting from 1 January 2012, the minimum equity capital for newly-established banks has been raised to 300 million roubles and for existing ones – to 180 million roubles). As of 1 May 2012, the total number of operating credit institutions decreased to 970.

1 * On an annualised basis: January 2011 on January 2012. In 2011, the capital adequacy ratio of credit institutions declined to 14.5% from 18.1% in 2010, but nevertheless remained at a high enough level. As of 1 May 2012, it stood at 14.3%.

In September-October 2011, given the increased financial market volatility the Bank of Russia broadened banks’ opportunities to attract liquidity. Thus, interest rates on certain operations to provide liquidity were cut, adjustment ratios to correct the value of assets used as a security for Bank of Russia loans were raised, and the limit of funds provided at overnight repo auctions was also increased. From 1 November 2011, the Bank of Russia introduced an additional instrument – loans secured by non-marketable assets or guarantees for a term of up to 180 days. Banks’ debt to the Bank of Russia on refinancing operations grew virtually from zero in mid-September 2011 to 1.2 trillion roubles in the last few days of December. In February 2012, given the stable liquidity situation, credit institutions’ demand for Bank of Russia refinancing instruments fell: the value of the said funds dropped by 8.0%.

Nevertheless, the Bank of Russia plans to further develop the refinancing mechanism. It announced the resumption from 2 April 2012 of operations to extend loans secured by assets or guarantees to credit institutions for a term of 181 to 365 days, as well as operations to extend loans secured by gold to credit institutions for a term of 181 to 365 days. On 22 May 2012, the Bank of Russia made a decision to resume exchange repo operations with shares included in the Bank of Russia Lombard List.

In 2011, interest rates virtually returned to their pre-crisis levels (although they grew somewhat at the end of the year). The average weighted rate on rouble loans extended to non-financial organisations for a term of up to one year stood at 9.2% as of 1 January 2012, and 9.6% as of 1 May 2012. In its turn, the average weighted rate on household rouble deposits for a term of up to one year stood at 6.6% as of 1 January 2012, and 6.6% as of 1 May 2012 as well.

* 2 In 2011, the bad loan problem became less acute. From 1 January 2011 to 1 January 2012, the share of overdue loans in total loans and other funds extended to non-financial organisations dropped from 5.3% to 4.6%. However, as of 1 May 2012, it increased slightly to 5.1%. In 2011, the share of overdue loans in total loans extended to private individuals declined from 6.9% to 5.2% and to 5.0% as of 1 May 2012. However, overdue loans and non-performing assets on the whole are still in excess of the respective pre-crisis indicators.

In 2011, profits made by operating credit institutions increased by a factor of 1.5 year on year and stood at 853.8 billion roubles. As of 1 May 2012, it stood at 348.91 billion roubles exceeding the figure registered in the same period of 2011 (as of 1 May 2011, 295.27 billion roubles).

In order to strengthen stability of the banking sector the Bank of Russia attached great importance to the assessment of credit institution risks. The development of risk-based supervision remains a major element of the financial regulation reform in Russia.

June 2012

2 On an annualised basis: January 2011 on January 2012.