Page 14 - RusRPTSept19

2.5 Time to worry about Russia’s household credit boom?
The recent pace of Russian household lending looks frothy, but the central bank already appears to have taken some of the steam out of the credit boom. Even if household loans start turning sour further down the line, the impact on the banking sector should be manageable.
Having slumped after the ruble crisis, bank lending in Russia has picked up over the last 18 months and is running at a double digit pace. The stock of corporate lending rose by 7% y/y in June, while household credit expanded by 25% y/y in the same month.
When considering the risks posed by household lending, changes in the credit- to-income ratio tend to be the best predictor of future financial stress. On this basis, there are some reasons to be concerned. Outstanding credit to households has risen relative to both income and GDP. On both measures, the credit ratio is now higher than its 2014 peak. (See Chart) However, we think some of the fears that have recently been aired about the credit boom are overdone. For one thing, household debt servicing has improved. The non- performing loan (NPL) ratio of household loans (overdue by 90 days or more) has dropped from a peak of 11% in 2016 to 5% in May.
It seems unlikely that debt servicing will deteriorate in the very near future. Interest rates have fallen (and should continue to do so) and loan maturities are lengthening. These should reduce aggregate debt servicing costs. What’s more, despite the economy’s recent weak patch, the labour market is tight and, as a result, wage growth should strengthen.
Moreover, it looks unlikely that the recent pace of household credit growth will be sustained. The central bank has imposed higher risk weights on some mortgages and some unsecured consumer loans this year. These measures already seem to have resulted in a slowdown in issuance of new loans. (See Chart 2.) As a result, our central view is that this household lending boom is likely to deflate pretty smoothly. This should limit the risks to the banking sector – at the cost of weaker consumer spending.
But even if an increasing number of household loans turns sour, this is unlikely to cause problems at an economy-wide level. If the NPL ratio on household debt were to rise back to its previous peak of 11%, the banking sector’s tier 1 capital ratio would only fall modestly, from 9.5% to 8.4%.
The central bank also has a pretty good record when it comes to helping banks. An emergency package announced in December 2014 staved off a meltdown in the sector. More recently, the central bank rescued three of the country’s largest banks in 2017, without any discernible impact on credit conditions.
The bigger risk to Russia’s banks still lies with corporate loans. Unlike household loans which are almost entirely denominated in local currency, about a third of corporate loans are denominated in foreign currencies (the same as on the eve of the ruble crisis). And loans are concentrated among a relatively small number of large firms. The economy is, of course, much less
14 RUSSIA Country Report September 2019 www.intellinews.com