Background
The review describes global risks, examines the key vulnerabilities of Russia’s non-financial and financial sectors and provides an integral assessment of their resilience.
Russian non-financial companies and financial sector are still subject to the risk of sanctions. The main transmission channel of global risks to Russia is associated with a possible decline in export commodities’ prices (primarily oil) in case of further deterioration of the global economy.
The configuration of vulnerabilities in the Russian financial sector has remained largely unchanged. However, some vulnerabilities have already materialised to a large extent – in particular, the risks associated with the foreign exchange market after the USA enacted sanctions against the Moscow Exchange Group in June and a number of credit institutions in November this year. In the context of high interest rates, the banks’ resilience to interest rate risk is being tested, although in the absence of the necessary measures to reduce inflation, financial stability risks in general would have been much greater. Despite a significant amount of negative revaluation on bonds, banks and non-credit financial institutions have managed to maintain their profits at high levels. However, against the background of high interest rates, banks may face the transformation of borrower’s interest rate risk into banks’ credit risk.
The credit quality of corporate borrowers as of 1 October remained sound, with a certain growth in the number of companies with debt servicing problems among micro and small enterprises. Leasing companies also experienced a certain growth in assets received under the cancelled contracts, which may indicate deterioration of financial standing of some lessees. Nevertheless, corporate lending continues to grow rapidly, which is accompanied by a growing concentration of banks’ capital on the largest companies. To limit these risks, the Bank of Russia will further implement regulatory measures to limit concentration and will tighten regulation on loans to large companies accumulating a high debt burden.
The tightening of the monetary policy and macroprudential measures in unsecured consumer and mortgage lending caused significant cooling in these segments in Q3 2024. Meanwhile, the lending standards enhanced with the share of borrowers with debt service-to-income (DSTI) ratio exceeding 50% gradually declining to balanced values. The accumulated macroprudential capital buffer to cover potential risks in retail lending has already reached RUB 1.1 trillion.
Imbalances in the housing market (in particular, the gap between primary and secondary housing prices) are still in place. Amid the mortgage lending transition to a balanced growth, the shrinking demand for housing heightens project finance risks, yet the financial standing of developers remains stable.
Combined, the countercyclical monetary and macroprudential policy measures pursued by the Bank of Russia will help prevent the risks of growing overheating in the economy and maintain macroeconomic stability and the financial system’s resilience.
The West continues to impose sanctions against the Russian corporate sector and companies from third countries. The restrictions are aimed at constraining Russia’s technological advancement in the energy, financial and other sectors and strengthening the control over compliance with the sanctions.
As of the end of H1 2024, the largest public companies maintain a moderate level of debt burden – the aggregate net debt/EBITDA ratio remained unchanged equalling 1.7. Based on the results of 2024, Russian companies’ financial standing is negatively affected by growing production costs due to rising labour costs, higher tariffs of infrastructure companies and logistics costs, as well as the external restrictions. Growing debt service costs are another reason for a reduction in profits, yet this factor is critical only for highly leveraged companies. Most businesses remain financially stable and are still capable of servicing their debt liabilities. If not for tighter monetary policy that has limited the acceleration of inflation and growth in input costs, the pressure on companies’ financial standing would have been much stronger.
Vulnerabilities of the Russian financial sector
Infrastructure constraints resulted from the inclusion of the Moscow Exchange Group in the US sanction list led to the transformation of the FX market and increased payment processing time on foreign trade transactions.
Liquidity flows from the stock to over-the-counter market resulted in temporary expansion of the exchange rates spreads between Chinese yuan and US dollar in the Russian and international market. However, as the market adjusted to the new configuration, the spread returned to normal values (not exceeding 0.5%). New restrictions on Russian banks imposed in November required adjustments to the servicing of foreign trade flows (including exporters) and resulted in certain volatility in the FX market. In this regard, the Bank of Russia has decided that, until the end of this year, it will not buy foreign currency to mirror regular fiscal rule-based operations conducted by the Ministry of Finance of the Russian Federation. Meanwhile, the Bank of Russia will continue operations to sell foreign currency. As previous sanction episodes have shown, restrictions pose infrastructural challenges for foreign economic activity, but the exchange rate dynamics is defined by fundamental factors in the medium and long term.
Certain FX swap market participants temporarily suspended yuan offerings after the sanctions against Moscow Exchange were imposed, however demand for the currency remained. Under such circumstances, the Bank of Russia increased the limit of provided foreign currency liquidity and then gradually increased the rate of the yuan component of the FX swap to the level of the key rate. FX swaps of the Bank of Russia cannot be a tool for funding of foreign currency assets, therefore in the face of sanctions banks should continue to reduce the proportion of foreign currency on their balances and adjust the open currency position with market instruments. In November market rates the on the yuan swaps returned to the pre-sanction level.
Dynamics of the USD/CNY* cross exchange rate in the Russian market and USD/CNH rate in the international market and their spread, yuan
Implied interest rate* in yuan on CNY/RUB FX swaps (%) and the volume of FX swap transactions with the Bank of Russia, billion yuan
Source: Bank of Russia calculations.
As the Bank of Russia tightened monetary and macroprudential policies, unsecured consumer credit growth slowed down (+0.7% MoM in September compared to +1.3% MoM in August), mainly due to a decrease in the volume of issued cash loans.
The implementation of the macroprudential limits has mitigated risks of households’ over-indebtedness: the share of newly issued unsecured loans to borrowers whose DSTI exceeded 50% contracted from 57% in Q3 2023 to 28% in Q3 2024. Meanwhile, the number of borrowers increased due to individuals who had not previously had a credit history but were ready to raise loans at high interest rates. It led to the deterioration in the quality of loan servicing on cash loans. The share of cash loans issued in H1 2024 that became
Credit quality of issued cash loans
Moreover, there was a considerable increase in car loans and general consumer loans secured by vehicle. These loans were often issued to borrowers with already high DSTI ratio: car loans and general consumer loans secured by vehicle issued in Q2 2024 to borrowers with DSTI exceeding 50% accounted for 60% and 80%, respectively.
In order to maintain banks’ resilience amid deteriorating quality of newly issued loans, the Bank of Russia raised the risk-weight add-ons for consumer loans twice and introduced new add-ons for car loans and general consumer loans secured by vehicle.
In Q3 2024, mortgage lending growth shifted to a balanced rate of 1% per month. The Bank of Russia’s decision to increase macroprudential add-ons and tighter conditions of subsidised mortgage lending government programmes helped considerably enhance the mortgage lending standards: the share of mortgages in the new and existing housing segments issued to borrowers with DSTI exceeding 80% contracted from 46% in Q3 2023 to 6% in Q3 2024 and from 47% to 13%, respectively. New housing mortgages with a down payment of less than 20% issued over Q3 2024 accounted for as little as 2% of the total disbursements. However, there was an increase in the default rates within the first year on book in mortgage loans issued in H2 2023 – early 2024 to the level of
Nevertheless, imbalances in the residential real estate market remain. The gap between primary and secondary housing prices remained large, equaling 49% in Q2 2024 and 54% in Q3 2024, according to Domclick, and 55% and 57%, respectively, according to Rosstat.
Gap between nominal housing prices (%)
In addition, in Q3 2024 banks and developers again started to promote joint programmes (schemes with low interest payments during the first years, tranche mortgage schemes, and instalment schemes from developers) that might lead to overpricing in the housing market. To limit these practices the Standard for Protecting the Rights and Legitimate Interests of Mortgage Borrowers was adopted, it will take effect on 1 January 2025.
In recent years developers accumulated sufficient safety cushions and are expected to remain resilient in
The Bank of Russia closely monitors the dynamics of the quality of loan portfolios. The quality of the corporate loan portfolio is generally high: the share of loans overdue for more than 90 days does not exceed 4%. Beginning from July 2024, there is a growing number of companies experiencing debt servicing problems in the segment of loans to micro and small enterprises that are most sensitive to rising interest rates. Nevertheless, the proportion of these borrowers’ loans in the corporate loan portfolio is minor (0.6% of loans to legal entities). From 1 September 2024, changes in interest rates on loans to microenterprises are limited by law (a floating interest rate may be raised by no more than 4 pp).
In Q2-Q3 2024, despite higher interest rates, companies’ demand for loans remained strong. Since the beginning of the year, the amount of loans increased by 14.5%, with a 6.4% increase in Q3 2024 alone. Lending growth was largely driven by large companies implementing major investment projects.
The expansion of corporate lending is accompanied by growing concentration of the loan portfolio in a number of large banks. Since the beginning of 2022, the ratio between the outstanding debt of largest Russian companies and the capital of the banking sector increased by 22 pp to 68% as of 1 October 2024. The Bank of Russia plans to curb concentration risks of banks’ loan exposures by enhancing requirements for concentration limits. It is also essential to maintain large borrowers’ credit risks at an acceptable level. Therefore, the Bank of Russia plans amendments to the macroprudential regulation to be able to establish, if needed, macroprudential add-ons for banks’ claims on highly leveraged largest companies.
Ratio of the six largest companies' overall debt to the banking sector's capital (%)
Sources: Reporting Forms 0409135, 0409303, 0409711, 0409501, 0409603, 0409118, NCC data, C-bonds.
Banks face the materialisation of interest rate risks as interest rates continue to rise in the economy, however, their losses are at a moderate level. In Q2-Q3 2024, the negative revaluation of ruble bond portfolio of the banking sector increased by RUB 519 billion (29% of banks’ profit). Despite its growth, the negative revaluation does not pose risks to financial stability amounting to only 2.9% of the banking sector’s capital. Meanwhile, the unrecognised negative revaluation of the portfolio expanded by RUB 277 billion during the same period (0.17 pp of the sector’s N1.0).
The banking sector remains sufficiently resilient to the interest rate risk of the banking book. All banks’ net interest margin (NIM) remains high equalling 4.4% thanks to a significant share of floating-rate assets and low-interest current account in banks’ liabilities. However, the situation is uneven across the sector, with around 17% of banks (42% of the sector’s assets) having the NIM below the average level. Rising interest rates also increase pressure of funding costs on banks’ NIM. To decrease their vulnerability to interest rate volatility, banks should limit the maturity mismatch between their assets and liabilities and take into account various scenarios of interest rate movements when structuring their credit products.
Accumulated unrecognised revaluation (HTM portfolio) and negative revaluation of the trading book (accumulated total), RUB billion
Assessment of the financial sector’s resilience
Owing to increased operating earnings, annual returns on the banking sector’s assets remained high over the period under review, approximating 1.9% as of 1 October 2024. However, banks’ capital adequacy declined from 13.2% to 12.1%. This was due to credit risk growing faster than capital adjusted for dividend payments. The capital buffer accumulated due to macroprudential add-ons expanded by 48% to RUB 1.1 trillion as of 1 October 2024 (the contribution of the rise in the macroprudential add-ons to the change in N1.0 equaled −0.4 pp). Effective from 1 February 2025, the Bank of Russia has set the national countercyclical buffer for banks’ capital adequacy ratio (CCyB) at 0.25% of risk-weighted assets. From 1 July 2025, the CCyB is raised to 0.5%. This measure is aimed at enhancing the resilience of the banking sector and ensuring a balanced growth in lending to the economy.
Losses from the asset revaluation in an environment of rising interest rates reduced the profitability of insurers and non-governmental pension funds (NPFs). As of the end of the first nine months of 2024, net profit in the insurance sector declined by 15% YoY, annualised returns on pension savings and pension reserves stood at 6.9% and 5.8% respectively. In order to mitigate the impact of interest rate risk, insurers expanded the proportion of short-term deposits, and NPFs decreased the share of the trading book subject to revaluation. Leasing companies also reduced their exposure to interest rate risk by increasing the proportion of lease contracts with variable payments. Concurrently, the leasing industry recorded a rise in the credit risk level amid slower business growth.
Source: Bank of Russia, Investing.com.