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The two factors permitted to prevent the collapse of the banking sector: the governments financial aid and growth in households savings. From the beginning of 2009, within the frameworks of anti-crisis measures the government allocated the largest resources to the banking sector. Households became a prominent participant (though an involuntary one) in rehabilitation of the banking system: during the crisis prevalence of the cautious behavior prompted people to save more money, rather than take loans from banks. In the 2009period, the growth in households bank deposits amounted to Rb 4 trillion which figure exceeded the volume of all the consumer loans as of the end of 2009.

Early in 2011, all the factors pointed to the fact that the banking sector overcame the crisis, and it seemed the upward development began. The banking sector had at its disposal huge available resources for expansion of lending to the non-financial sector. The bank savings of the non-financial sector exceeded the volume of loans to industries and households by Rb 1.trillion, while the excessive banking liquidity amounted (according to our evaluations) to at least Rb 1 trillion. Thus, there were all the reasons to believe that in 2011 the Russian banking system would keep developing in a balanced way and overcome the structural problems which dated back to the pre-crisis period.

In reality, the situation was different: the balanced development failed, while rather intense growth took place in individual segments of the banking sphere and it was accompanied by dramatic structural imbalances. Lending to the non-banking sector of the economy increased considerably with fairly moderate growth in the depositary base. As a result, in the second half of 2011 the banking sector faced the liquidity crisis. More importantly, recovery of the acceptable level of liquidity will inevitably be accompanied by a decrease in the bank lending to the non-financial sector with the bad debt problem being, probably, aggravated. In reality, to achieve the mid-term curve of sustained development the complete restructuring of the banking sector may be required.

3.9.2. The Structure of Institutional Financial Flows in The structure of institutional financial flows which are redistributed by the banking sector provides the important information for evaluation of trends both in the financial and real sectors of the national economy. In 2011, the structure of flows actively shifted from the stable condition to the crisis one. If at the beginning of the last year the high level of excessive liquidity and lower growth rates of lending were typical of the banking sector by the end of the year the situation changed the other way round.

On the basis of the results of 2010, growth in loans to industries amounted to 9.8%, while that to households, to 14.4%. In 2011, more than twofold increase in the growth rates of lending took place (24.2% and 36.1%, respectively). A similar speed-up took place in a situation of sustained growth in the depositary base both in 2010 and 2011; the aggregate volume of funds of industries and households in accounts with banks rose by 23% (Fig. 48). That gap Section Financial Markets and Financial Institutions naturally swallowed the excessive savings which were accumulated in the 20082010 crisis period.

8 6 4 2 -2 -4 -6 -8 Industries Households Source: The Central Bank of the Russian Federation and the IEPs Structural Research Center calculations.

Fig. 48. The net credit of households and industries to the banking system of the Russian Federation, billion Rb.

An important trend in 2011 was the outflow of capital from the banking sector: if in the net capital inflow was registered in the amount of $ 15.9bn in 2011 the net capital outflow amounted to $ 26.2bn. The growing gap between foreign assets and lending to the nonfinancial sector, on the one hand, and the disposable resource base, on the other hand, was financed at the expense of a decrease in the bank liquidity and attraction of government funds.

During the year, the level of liquidity fell by over Rb 600bn (from 8.7% to 5.6% of assets).

On the contrary, the deposits of the Ministry of Finance and the loans of the Bank of Russia increased by Rb 1.3 trillion (from 1.4% to 4.3% of the liabilities) (Fig. 49). It is to be noted that the balance value of the own funds of the banking sector increased within a year by the mere 13.7%, while the capital adequacy norm decreased from 18.1% to 14.7% in 2011.

Generally, in 2011 the following principal changes took place in the structure of institutional financial flows in Russia. To start with, the role of households as a net creditor of the banking system decreased: on the basis of the results of the year the amount of deposits placed by households with banks was only Rb 390bn more then the amount of loans which households received, while in the past two years the net credit to banks from households amounted to Rb 2.1 trillion and Rb 1.9 trillion, respectively. As regards the corporate sector, the situation is quite the opposite: the volume of the extended loans exceeded by over Rb 900bn the volume of the attracted funds and deposits. Finally, a net loan of Rb 740bn was granted to the outside world. As a result, in 2011 the net loan to the non-financial sector and the outside world increased by Rb 1.3 trillion. The sources of such a substantial loan were the reduced bank liquidity and government resources.

Jul-Jul-Jul-Jul-Jan-Jan-Jan-Jan-Jan-Oct-Oct-Oct-Oct-Apr-Apr-Apr-Apr-RUSSIAN ECONOMY IN trends and outlooks 2 2 1 1 --1 -1 -2 -2 -3 The government The outside world Note. Government loans loans of the Ministry of Finance of the Russian Federation, including debt on federal bonds, and the Central Bank of the Russian Federation.

Source: the Central Bank of the Russian Federation and the IEPs Structural Research Center calculations.

Fig. 49. The net credit of the government and the outside world, billion Rb.

3.9.3. The Main Trends in the Banking Sector Growth in Bank Assets In 2011, the dynamics of bank assets somewhat accelerated as compared to 2010 (with adjustment to the revaluation of assets in foreign currency the growth amounted to 21.4% against 14.8% in 2010). Such growth rates are quite moderate as they exceed the GDP deflator and the domestic market deflator1 by the mere 6% and 11%, respectively. It is to be noted that in 2011 the growth rates of the bank assets exceeded by the mere 3.4% the growth in the nominal GDP in 2011, and, accordingly, the ratio of the value of bank assets to the GDP increased insignificantly within a year from 74.8% to 76.5%. As it is shown below, even such growth rates of the banks asset operations were difficult to achieve. The main sources of the banking sectors funds --account balances and customers deposits failed to ensure growth rates which were equal to the nominal growth in the economy in general without further participation of government authorities.

In 2011, in the group of the largest banks, the highest growth rates of assets were observed with state banks2 (without the Sberbank 34%). Undoubtedly, a considerable contribution to the assets growth of the above group was made by the states participation in the rescue of the Bank of Moscow. In September, the Deposit Insurance Agency (DIA) placed with the Bank Such a volume of goods and services consumed on the domestic market as is determined as the GDP, less the net export.

For the purpose of the structural analysis of the banking sector, the following groups of banks were used:

Sberbank, large state banks and banks of state companies (VTB, VTB24, GPB (Gasprombank), RSKhB (Russian Agricultural Bank), The Bank of Moscow and Transkredit), large foreign banks, large private Russian banks which are in the top 30 list and other (mid-sized and small banks).

Jul-Jul-Jul-Jul-Jan-Jan-Jan-Jan-Jan-Oct-Oct-Oct-Oct-Apr-Apr-Apr-Apr-Section Financial Markets and Financial Institutions of Moscow a long-term deposit in the amount of Rb 295bn which figure was equal at that time to about 35% of that banks assets.

The lowest rates were registered with the group of large private banks (14%). It is to be noted that such results conform to the outputs of the polls of Russias largest banks: 72% of the polled banks believe that in competition on the market of banking services the state bankshave the best advantages.

Own Funds A factor behind the insufficiently dynamic development of the banking sector in 2011 was slow-down of growth in the banks own funds. In 2011, the regulatory capital of the banking sector (calculated in accordance with the methods of the Bank of Russia) rose by 10.7%, which figure is twice as little as the growth rates of assets. As a result, capital adequacy fell from 18.1% as of January 1, 2011 to 14.7% as of January 1, 2012. That level is still far from the minimum admissible benchmark of 10%. However, it is important to take into account the following two factors. Firstly, even with such a seemingly significant average level of capital adequacy its index with individual banks, including large ones may be close to a critical value. For instance, the capital adequacy of the VTB bank the second largest bank as regards the value of the assets as of January 1, 2012 amounted to the mere 11.2%. Secondly, capital adequacy of the banking sector fell below 15% only twice before and each time capitalization of the banking sector was supported one way or another by participation of the state. It took place for the first time late in 2006 when capital adequacy of the banking sector fell to the minimum level of 14.4%. Later, bank capitalization grew considerably as a result of placement of equities of Sberbank and VTB. A similar decrease took place for the second time in autumn 2008 (a drop to the level of 14.5%) when the financial crisis was in full swing;

after that banks received government support in the form of subordinated loans for which purpose resources of the National Welfare Fund were used.

In 2011, the main factor behind slowdown of growth in own funds was the fact that the banking sector became less attractive to investors and, as a consequence, no new contributions to banks authorized capital were actually made. In 2011, the amount of the authorized capital and additional capital increased by the mere 4.6%, that is, the minimum rate in the past few years.

Raising of requirements to banks minimum amount of own funds does not change the situation for the better, either. From January 1, 2012, banks need the capital of at least Rb 180m. Consolidation of small banks could become a factor behind growth in the own funds of the banking sector. However, the dynamics of the value of the authorized capital does not point to the fact that bank owners are seeking to secure their banks against a possible withdrawal of the license. As of January 1, 2012, the own funds of over 100 credit institutions were less than Rb 180m.

Profit and the Rate of Return Profitability of the banking sector remains low. The maximum level of profitability after the crisis was achieved in summer 2011 and then the rate of return started to go down. As regards ROA, the first half of 2011 corresponds to the year 2003 (2.6% on a year on year basis), A. Vedev, S. Grigoryan. Development of the Russian Banking System in the Current Decade. The Outputs of Polls of Large Russian Banks (http://www.vedi.ru/bank_sys/bank5411_banks%20poll.pdf).

RUSSIAN ECONOMY IN trends and outlooks while as regards ROE (21.0%), to the year 2004. In the pre-crisis period of the credit boom (20052006) the profitability of the banking sector was much higher (ROA 3%3.5%, and ROE 25%30%). In the second half of 2011, the efficiency of the banking sector as regards the return on assets and return on equity went down further and, as a result, the annual figures turned out to be even lower: ROA 2.3% and ROE 19.6%.

3.9.4. Raised Funds (Resources for the Banking Activities) Households Funds In 2011, in the deposit market the major event was the slow-down of the savings activity of households. In the past year, the volume of funds in deposits grew1 by Rb 1.9 trillion which figure is nearly 20% lower than in 2010 (Rb 2.4 trillion). The growth rates of households deposits in the banking system decreased by over 33.4%: 19.5% against 31.2%.

In 2011, the process of dedollarization of households accounts and deposits slowed down (virtually stopped) (Fig. 50). If in 2010 the share of deposits in foreign currency in the total volume of households deposits fell by 7% from 25.7% as of January 1, 2010 to 18.7% as of January 1, 2011 in 2011 it decreased by the mere 1.1 % (to 17.6%). It is to be noted that in the second half of the year the share of accounts in foreign currency increased (from 16.9% as of August 1).

Source: The Central Bank of the Russian Federation and the IEP calculations Fig. 50. The RUR/USD exchange rate and the share of households deposits in foreign currency with banks Slow-down of growth in bank deposits should not be regarded as evidence of a loss of households confidence in banks. It rather shows that the norm of households savings has generally decreased. An alternative instrument of savings can be cash national currency, but in 2011 the demand in cash funds slowed down as well. 0 monetary aggregate (that is, the cash funds outside the banking system) grew within a year by Rb 876bn which figure is 15% lower than a year before (Rb 1,025bn). It is to be noted that the ratio of nominal growth in With adjustment to the USD revaluation of deposits in foreign currency.

Section Financial Markets and Financial Institutions cash funds in 2011 and 2010 is comparable to a similar bank deposits indicator. It is to be noted that in respect of sales turnover the volume of cash funds remains to be excessive. The value of cash funds is sufficient enough for a three-month consumption of goods and services.

The main factor behind slow-down of households savings activities was stagnation of households real disposable income. In 2011, households real disposable income was only 0.8% higher than in 2010. Simultaneously, ultimate consumption of goods and services in real terms increased by 5.8% (IEP evaluation as regards the aggregate volume of retail trade, public catering and paid services). Stable growth in consumption was supported by simultaneous reduction in the norm of savings and growth in demand in consumer lending (see below).

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