Banks are capable to absorb risks related to restructured loans
Bank of Russia’s decision to terminate the regulatory easing related to provisioning for restructured loans (for large companies — in April 2021 and for individuals and small and medium-sized enterprises (SMEs) — in July 2021) will not significantly affect banks’ revenues and the banking sector’s stability, as evidenced by the Bank of Russia’s survey.
Banks have been using this easing to a limited extent, increasing their actual provisions before the termination to nearly the required level. However, they may need additional provisions further on because not all borrowers will be capable to restore their financial standing.
Since the outbreak of the pandemic, the banking sector has restructured loans totalling over 7 trillion rubles (about 12% of the overall loan portfolio) in order to support borrowers. Large companies account for the largest portion of the restructured loans (5.5 trillion rubles). Approximately 40% of them had a high leverage, which makes them financially vulnerable. This is especially relevant for borrowers in real estate and construction, oil and gas production, and metallurgy (two-thirds of all loans restructured to large corporates), although the rise in oil and metal prices observed since 2020 H2 will probably help them improve their financial performance. As regards households and SMEs whose loans have been restructured, up to 30% of them may still default.
According to conservative estimates, additional provisioning will possibly amount to 1.4 trillion rubles. The banking sector is capable to cope with this task, given its profit (1.6 trillion rubles in 2020) and capital cushion (5.8 trillion rubles as of 1 January 2021). It is also important to note that banks do not need to create provisions instantly. This process will be gradual, as problems arise in their portfolios. After the previous crisis, this took up to two years as regards retail and SME loans and up to four years for loans to large companies.
Moreover, banks may ultimately incur lower losses on these loans since the majority of them are secured, and banks will be able to subsequently sell the collateral.