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1 CONSOLIDATION: THE SPEED MATTERS
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2 The trends – consolidation has been approaching Local funds were not enough for supporting economic growth External borrowing was not available to many local banks Expansion in the retail segment required significant investment Mortgages demanded cheap long-term funding Competition with foreign banks increased rapidly
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3 Concentration of assets With the exclusion of several success stories, the Russian TOP50 used to improve their positions slowly but steadily During the same period state-owned banks increased their share from 46.6% to 49.6%
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4 Autumn: painful reaction Confidence crisis in the banking sector in September Bank runs in October Increased losses due to bad public market performance Increasing share of NPLs due to corporate defaults Depreciation of rouble Non-payment crisis in non-financial corporate sector Worsening of labor market conditions
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5 Funds: aggregates dynamics The personal deposit growth rate is declining rapidly. From 1 January 2008 they have increased by only RUR390 bln. Even the acceleration in the growth rate of corporate funds in 2H 2008 is mostly explained by state activity.
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6 Funds: a closer look at corporate sector deposits Decomposition of deposit growth in October: Minfin + RUR217 bln; State-owned entities + RUR4 bln; Private sector – RUR15 bln Since 01.01.2008 private corporate deposits have increased by only RUR524 bln
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7 Banking sector – October’s figures Personal deposits decreased by 5.9% MoM (less than 20% YoY) Corporate funds decreased by approx 1% only, but mostly due to state activity 10-month accumulated profit of the banking sector decreased by 3.3% Corporate NPLs increased by 31% and reached 1.5% of loans issued Personal NPLs increased by 2.1% and reached 3.2% of loans issued Cash funds increased by 31%, which used to happen in December only Correspondent accounts with non-resident banks increased by 41% and approached US$20 bln (RUR532 bln) Asset growth of 3.5% was mostly assured by Minfin and CBR funds placed during the month: banks got RUR1075 (4.3% of assets) from these sources CONDITIONS IN THE BANKING SECTOR ARE BECOMING VERY UNFAVORABLE
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8 LIABILITIES: TOP5 and the others Although even in the TOP5 the total amount of individual deposits decreased by 3% MoM, they managed to achieve asset growth by 4.8% MoM and improve their positions. % October 2008September 2008 Refinance with the CBR 28.945.6 Non-financial sector current accounts 41.436.5 Deposits of legal entities 50.148.0 Personal deposits57.555.7 Total liabilities45.144.5
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9 Loans – deceleration is already here We expect the currently slowly declining growth rate of corporate and personal loans to decrease substantially over coming months; with the lack of local and foreign funds the pace of growth will fall to 20-30% in nominal terms at best
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10 Banking sector is ready The group of 50-100 biggest banks has been improving their positions since 2H 2007 and in the new conditions they are better positioned than the others Assets growth is decelerating as resource base is diminishing Government support is increasing – most of the banks now can’t live without CBR refinancing Non-performing loans are increasing and the situation will be worsening as the number of corporate defaults tends to increase Profits are decreasing and many constant loss-makers may appear among banks THE TOUGHT TIMES ARE HERE ALREADY – AWAITING CONSOLIDATION ALL IS IN THE HANDS OF MONETARY AUTHORITIES THE ONLY QUESTION LEFT: WHAT SPEED WILL BE PROPOSED?
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11 Speed Enforcement: The Bank of Russia now may affect the speed on the consolidation process substantially More than 350 small banks may be eliminated by simply increasing capital requirement to EUR5 mln Tenths of the bigger ones may be forced to merger by tougher refinancing conditions Lack of funding and thus future prospects will leave owners of the most of the others no choice but to sell their business Parachute: Refinance conditions acceptable for TOP100-200 banks, but CBR mostly provides short-term liquidity Licenses are being revoked only from banks with serious breaches Facilitation of mergers in the banking sector through legislation and CBR financing
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12 30-50 WE GET SEVERAL MORE NATIONAL CHAMPIONS BUT LOSE EFFICIENCY AND COMPETION There are 5-10 banks constituting most of the assets in the system The other 20-40 play a supportive role, trying to concentrate in the niches, but being “universal” in their nature Every bank is very important – no bankruptcies to prevent the failure of the system Banks have a lot of “bad” assets on their books The government supports the banking sector constantly through funds placement The sector in not quick to react and the pace of development is slow, although there is no significant decrease in growth rates during the process of consolidation Sector capacity to adapt to the external shocks is low
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13 300-400 300-400 banks may survive The TOP100-200 are mostly universal commercial banks, with TOP30-50 with 50% of all the assets Most of the others are concentrated in the niches – private banking, investment banking (depends on the regulations), different kind of corporate services After a period of adaptation which will be reflected in slow growth rates, high NPLs and big losses the system will begin developing very quickly The speed of adaptation to the external shocks and the efficiency of operation are very high Bankruptcies (especially beyond TOP200) may take place, but do not result in the failure of the system THE TOUGHT TIMES ARE HERE ALREADY – AWAITING CONSOLIDATION
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14 THANK YOU! Most of the estimates are done basing on the TRUST Banking Sector Navigator, which is available at www.trust.ru
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