Page 39 - IFR Opportunities in Russian capital markets

CHAPTER02
ifrintelligence reports/Opportunities in: Russian Capital Markets
Sector challenges
Falling capital adequacy
The CBR says that Russian banks are working at an optimum level at the moment as their risk adjusted capital adequacy – the ratio of their capital against the amount they have lent – is about 10%, which is considered to be an ideal: banks have lent as much as is safe, but have sufficient cash in reserve to be able to deal with surprises, such as the 2004 mini-crisis.
However, capital adequacy has been falling by about 1% a year since 2003 and clearly this ideal will not last very long; this year some banks will be forced to stop lending so fast, limited by the amount of capital they must keep in reserve. Under CBR prudential rules banks must keep at least 10% of their capital in reserve. So far, no Russian bank has been forced to stop lending, or reduce the rate of growth of its lending (although this has already happened to one major bank in Ukraine), but this is not far off. Capital adequacy (unadjusted for risk) reached 14.8% in October 2006, down from a peak of 20.3% as of 1 January 2003, and shown in Figure 2.4.
At the same time, banks' liquidity is falling – a combination of CBR policy and the hard lending action of recent years. (See Figure 2.5, and Chapter 3.)
The answer is for owners to inject more equity into their banks and as banking is a sector with such obvious potential, owners’ attitudes have changed drastically in the last three years so that the oligarchs have begun investing in banks, but this trend has been limited to the top two tiers which make up the leading 50 or so banks.
Figure 2.4: Indicators of banking sector capital adequacy (H1 standard) 1999-2006
% 25
20 15 10
5 0
Source: Vnesheconbank
1 Jan 99
1 Jan 00
1 Jan 02
1 Jan 03
1 Jan 04
1 Jan 05
1 Jan 06
1 Oct 06
Figure 2.5: Banking liquidity indicators, Jan 2002–July 2006 (%)
Ratio of highly-liquid assets to cumulative assets
Ratio of liquid assets to cumulative assets
Ratio of liquid assets to
demand liabilities (H2 standards)
Ratio of client funds to cumulative loans
Source: VEB
1 Jan 2002
25.3%
40.8%
70.6%
120.7%
1 Jul 2006
14.7%
26.8%
52.2%
103.1%
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