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Fig. 55. The aggregate investments to aggregate borrowings ratio in the banking system, % Retail deposits remain the principal resource base for banks. It is the RUB 2,333 bln growth in retail deposits that resulted in a 53% cumulative growth in liabilities of the banking sector in 2010. Two reasons are responsible for a 31% increase in retail deposits. First, reSection 3.

Financial Markets and Financial Institutes maining uncertainty in the economy maintains a high level of supports thrift propensity of individuals, whereas the domestic demand is only beginning to recover. Second, a considerable growth in bank deposits in 2010 is related to the effect of a recession-driven growth in retail deposits. Bank deposits for a period of one year or beyond which were opened in the period of high interest rates, were intensively replenished in 2010. It is the higher interest of depositors in replenishing their recession deposits that resulted in material changes in the fixedterm structure of the deposit portfolio. In fact, replenishment of a deposit opened in the recession period replaced risky investments in the stock market, with growth being expected way ahead of the consumer price index. According to the data published by the Central Bank of Russia, retail deposits opened for a period of more than one year accounted for 65% of the total deposits as of January 1, 2011. Growth rates slowed down drastically in the fixed-term structure of foreign currency deposits, with even a decrease in balances being reported in specific cases. For example, in 2010 the volume of retail deposits for a period of up to 30 days and ruble-denominated call deposits increased by 46%, whereas the foreign exchange part of such deposits increased by only 9% and decreased by 27% in the structure of deposits for a period of 31 days to one year.

In general, a similar situation took place with the bank deposits placed by non-financial organizations, though volumes of such deposits are normally much smaller. According to the official data, corporate deposits in 2010 totaled a mere RUB 569 bln, accounting for 13% of total growth in the total balance on the liabilities side in the banking system. Like retail deposits, corporate deposits for a period of up to 30 days and for a period of more than one year were reported to become most intensive as of 2010 year-end. The former were mostly shortterm deposits of free working capital, the latter mostly resulted from replenishment of longterm deposits by exporters ( the foreign exchange part accounts for more than a half of nominal growth: RUB 259 bln of RUB 490 bln ).

Data Source: National Foreign Exchange Association.

Fig. 56. Dynamics of MosPrime 3M rate in The volume of bank borrowings in the interbank loans market increased by 20% or RUB 637 bln in nominal terms in 2010. The two principal sources of borrowings became ruble-denominated deposits from resident banks, which increased by RUB 388 bln, and foreign exchange borrowings, an equivalent of RUB 152 bln, from non-resident banks.

RUSSIAN ECONOMY IN trends and outlooks Substantial reduction of the regulators money on deposits with commercial banks became one of the main trends describing post-recessional development of the banking system in the Russian Federation. Throughout the entire 2010 the Central Bank of Russia systematically reduced its balances from RUB 1,423 bln as of January 1, 2010 to RUB 326 bln as of January 1, 2011. Meeting the liquidity crisis at all levels of the banking system as well as a considerable decrease in interest rates in the interbank loans market were mostly responsible for decreased activity of the Central Bank of Russia. For example, the MosPrime 3 indicative rate decreased rapidly from 7 to 4% (Fig. 56) in 2010.

3.9.3. Quality of Assets Expecting a potential, serious deterioration in the quality of the credit portfolio of the banking system was one of the key concerns which analysts expressed in 2010. A delayed negative effect of a large-scale deterioration in loan servicing could resulted from a campaign dedicated to restructuring of impaired loans which banks carried out in the H2 2009. In fact, the specifics of the Russian accounting system allowed banks to partially hide impaired assets and thereby hide the real situation with adequacy of provisions, potential growth of interest revenues, etc. Fortunately, no catastrophe took place. Economic recovery in 2010 slowed down drastically the process of creating provisions for losses at banks. In addition, recordbreaking volumes of revenues were obtained through, including, but not limited to, split-up of the provisions across the entire banking system. Growth in overdue accounts in 2010 slowed down substantially in the retail credit portfolio and stopped in the portfolio of loans to nonfinancial institutions. According to the data published by the Central Bank of Russia, overdue accounts in the retail portfolio decreased from 6.8 to 6.9%, and in the corporate credit portfolio dropped from 6.1 to 5.3% as of 2010 year-end (Fig. 57) 8,0% 7,5% 6,8% 7,0% 6,9% 6,5% 6,0% 6,1% 5,5% overdue accounts in corporate 5,0% credit portfolio, % 5,3% overdue accounts in retail credit 4,5% 4,0% Data Source: the Central Bank of Russia.

Fig. 57. Dynamics of overdue accounts Jul-Jan-Jun-Oct-Apr-Feb-Sep-Dec-Dec-Aug-Nov-Mar-May-Section 3.

Financial Markets and Financial Institutes Situation with the quality of loan servicing in the corporate sector was heterogeneous in 2010. A share of overdue accounts under loans to enterprises of the fuel and energy mineral extraction industry in the portfolio remained minimum in the banking system and even decreased from 1.4 to 1.3% in 2010. By the end of 2010, most of the problem borrowers, in terms of overdue accounts, were concentrated in the automobile industry (overdue accounts accounted for 19.2% of the portfolio), woodworking industry (18.8%), air transport sector (12.9%), retail and wholesale trade (9.7%). Manufacture of nonmetallic mineral products (+ 1.6 p.p.) as well as manufacture of machinery and equipment (+ 1.3 p.p.) were among the leaders in growth rates of overdue accounts in 2010.

The structure of the corporate credit portfolio by category of quality in the group of the largest Russian banks can be another factor which supports the assertion of improved quality of the credit portfolio. In 2010 a share of standard loans increased by 3,1 p.p. here. A share of loans of 2nd category of quality substandard loans decreased by almost the same value. In turn, a share of impaired and unrecoverable loans (4th and 5th category of quality) decreased by 2 p.p. as a share of impaired loans increased by 2.1 p.p. Two conclusions can be made based on the afore described dynamics of changes in the structure :

- first, increase in a share of standard loans resulted mostly from new loans to financially reliable borrowers in 2010 ;

- second, decrease in a share of loans of the 4th and 5th category of quality resulted from write-off of bad loans from the banking systems balance sheet due to both improved previously desperate conditions of specific borrowers and sale of impaired assets of special non-bank institutions (Fig. 58).

8,10,1 9,90 Impaired + unrecoverable loans 10,8,6 9,Suspicious loans 35,38,Substandard loans Standard loans 46,42,2009-dec 2010-jun 2010-dec Data Source: the Central Bank of Russia.

Fig. 58. Structure of the credit portfolio at the 30 largest banks, by quality category of loans Reduction in growth rates in provisions for impairment losses on loans had a direct impact on the improvement of the quality of bank assets in 2010. According to the data published by the Central Bank of Russia, on-balance residues of provisions in the banking system increased by only RUB 141,4 bln in nominal terms (+ 6.9%) in 2010, which was far below the growth RUSSIAN ECONOMY IN trends and outlooks in the preceding year. During the recession in 2009 the stock of provisions increased by RUB 1,027 bln or 100% in the same year. Split-up of provisions was one of the factors which had a material impact on generation of a record-breaking profit in the banking system of the Russian Federation in 2010.

3.9.4. Profit and Loss in the Banking System According to the data published by the Central Bank of Russia, pre-tax profit in the banking sector totaled RUB 581 bln in 2010, of which Sberbank of Russia OJSC generated about RUB 225 bln. Contribution of net interest income to the financial performance of the banking system decreased by RUB 31,5 bln against the preceding year. It is the decrease in the net interest income from retail lending that became most responsible for reduction in interest income at banks in 2010. As expected, a substantial growth in bank deposit rates in Q3 and Q4 2009 had a delayed adverse effect on the interest income of banks in 2010. Throughout the entire period in 2010 banks continued to pay recession-driven interest rates to depositors. The situation was aggravated by replenishment of high interest rate deposits which were opened for a period of more than two years. As a result, costs on interest payable on retail deposits increased by 23.5% in 2010 against the previous year, whereas costs on non-financial institutions decreased by 36% in the same year. Analysis of average weighted interest rates on borrowings and investments confirms that banks had an extra interest rate to pay to retail depositors in the H1 2010. For example, interest spread between ruble-denominated loans to individuals and deposits of up one year narrowed from 25.5 to 20.1 p.p. in the period between January and June 2010, and only in June began to show a stable upward trend. Replenishment of long-term bank deposits also slowed down growth in interest margin on retail loans and deposits for a period of more than one year. At the same time, an outstripping decreased in interest rates on ruble-denominated non-financial institutions deposits for a period of more than one year allowed interest margin to be increased by 2.5 p.p. on corporate loans granted for a period of more than one year (Fig. 59).

Net fee and commission income in the banking sector in the Russian Federation increased by RUB 35 bln or 8.5% in 2010, which was directly related with the number of newly granted loans. At the same time, the decision made by a series of large banks to charge no fees during loan administration became one of the key events which governed the dynamics of the fee and commission income in the banking system in 2010.

Banks income from foreign exchange operations was reported to decrease by RUB 113 bln in 2010, which can be explained by a relatively low volatility in the money market. Steady growth in the stock market allowed banks to earn RUB 360 bln from transactions with securities, which in general was comparable with the earnings (369 bln RUB) gained in 2009. By all means, split-up of provisions became one of the key sources of income for banks in 2010. According to the data published by the Central Bank of Russia, in banks reduced costs on creation of provisions down to RUB 233 bln against RUB 1,051 bln in the preceding year (Fig. 60).

Section 3.

Financial Markets and Financial Institutes Fig. 59. Dynamics of interest margin on average weighted lending and borrowing rates, % net interest income 1 051,net fee and commission income 452,net income from transactions with securities 359,net income for foreign exchange transactions 45,other net income -374,costs incurred on provisions -233,operational costs -719,581,2 pre-tax profit Fig. 60. Profit and loss in the banking system in the Russian Federation in 2010, bln RUB RUSSIAN ECONOMY IN trends and outlooks 3.9.5 Analysis of the 500 Largest Russian Banks By banking specialization To be able to gain an insight into the processes which took place in the Russian banking system in 2010, lets analyze the 500 largest Russian banks by specialization in the banking market and by type of ownership banks.

We relied on a given banks credit portfolio structure as of 1 July 2010 as the factor to identify the type of specialization of the bank. We employed the following method of identification of banking specialization: a bank was recognized as a corporate bank if loans to nonfinancial institutions accounted for or more than 80% of the aggregate credit portfolio of the bank; a bank was recognized as a retail bank if retail loans accounted for or more than 80% of the aggregate portfolio of the bank. For the purpose of this survey, the rest of the banks were recognized as full-service commercial banks.

As of January 1, 2011, the assets of the 500 largest banks of the Russian banking system totaled RUB 32,793 bln (accounting for 97% of the total bank assets). It is noteworthy that it was retail banks that increased their assets as of 2010 year-end, with annual asset growth accounting for 21% (Fig. 61). In spite of such a growth, the retail-group banks still had an insignificant effect on cumulative growth in assets in the banking system of the Russian Federation. Full-service commercial banks and corporate banks were found to be the key drivers for asset growth in the Russian banking system in terms of banking specialization.

As of January 1, 2011, corporate banks accounted for 49% of the assets of the 500 largest Russian banks, with a 16% annual growth rates. VTB, Gazprombank, Alfa Bank, Bank of Moscow were the key players in the corporate banking.

Sberbank of Russia OJSC, Rosbank, Uralsib, Raiffeisen Bank were the leaders among fullservice commercial banks. Full-service commercial banks accounted for 46% of the total assets of the 500largest banks as of January 1, 2011. Growth rates in the assets of this group of banks reached 16% in 2010.

16 500 1 20,6% 1 16 000 1 1 16 0691 15 16,1% 15 000 1 15 14 500 1 13 14 000 16,0% 13 500 13 corporate banks 13 000 full-service commercial banks 12 500 retail banks (right-side scale) 12 000 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-Data Source: the Central Bank of Russia, official financial statements published by banks (f-101).

Fig. 61. Assets the 500 largest Russian banks, by banking specialization, bln RUB As of 2010 year-end, the corporate credit portfolio in the group of corporate banks increased by 14% (or RUB 934 bln), whereas the corporate portfolio of full-service commercial Section 3.

Financial Markets and Financial Institutes banks increased by 12% (or 672 bln RUB) in the preceding year. Full-service commercial banks were leading in terms of growth volumes, especially owing to Sberbank (Fig. 62).

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