Page 40 - IFR Opportunities in Russian capital markets

CHAPTER02
ifrintelligence reports/Opportunities in: Russian Capital Markets
Non-performing loans
A much more serious problem than falling capital adequacy is the rapid rise of non-performing loans (NPLs). This problem is made more worrying as, despite the CBR’s closer supervision of the bank sector, the owners of banks are adept at hiding bad debt. While both bankers and the regulator agree that the problem is not yet so bad as to cause real concern, the clear upward trend in the number of NPLs is a genuine worry. A race is on between banks' proclivity to hide their bad debts and the CBR's ability to make banks report the true size of NPLs.
NPLs are probably the biggest risk facing Russia's bank sector today. At current levels, NPLs are not destabilising and would not be, even if the sector received another shock as it did in 2004. But the clock is ticking and the rise of bad debt is potentially destabilising.
Eric Kraus, manager of the Nikitsky Fund, sums up the issue: "There is no way a bank that is seeing credits double every year and is at the same time branching out into new product areas every six months can do proper risk management. But we will only know how bad the problem is when the next bank crisis arrives."
Russians are borrowing from banks for the first time and an increasing number of Russians are getting into trouble. At the same time, in their rush to build up market share there is anecdotal evidence that banks are prepared to bend the rules in order to win new customers: after Raiffeisen International bought top-20 retail bank Impexbank in 2006, Russian daily Kommersant reported the Austrian management had to ditch three out of four consumer loans as they did not meet the bank's risk criteria.
The CBR says that according to officially reported figures 2.63% of all consumer loans were non- performing in the third quarter of 2006 (see Figure 2.6). This is in itself nothing to worry about but all Russia's bankers are watching this trend closely. Industry experts believe the real number is closer to 5–6%, against the typical delinquency rate of 4–5% in the US, according to the American Bankers Association.
Even if the problem is getting worse, the newness of the business means a collapse of the consumer credit business will only do limited damage. Total household credits amounted to 5.6% of GDP in 2005 against an average 16% of GDP in Central Europe, the Balkans and the Baltic states. This implies that non-performing household loans currently amount to between 0.2–0.3% of GDP, which economists say is a manageable level.
"The danger is not in the number, which is low," says Michele Perhirin, CEO of MDM Bank. "It is the trend that is obviously the worry. Also you can be sure that the real numbers of NPL are in reality much higher than this, although no one can say by how much. Russian banks have a habit of moving their NPL off balance sheet."
The extent of the problem will only be made clear if Russia goes through another severe bank crisis. At the moment even a nasty crisis would probably not bring the consumer credit specialists down, as typical annual real interest rates are an extraordinary 50%-plus and in many cases over 100% a year.
"Only when the tide goes out will we actually know who has been swimming naked," says a senior executive at Vneshenconombank.
Figure 2.6: Growth of non-performing consumer loans, July 2004–July 2006 (%)
%
3.0 2.5 2.0 1.5 1.0 0.5
NPL corporate NPL individuals
Source: CBR
1 Jul 2004
1 Jan 2005
1 Jul 2005
1 Jan 2006
1 Jul 2006
33