Filipp Gabunia’s speech at Financial Stability Review 2023 Q4–2024 Q1 press conference
Good afternoon,
Today, we are presenting the Financial Stability Review for 2023 Q4—2024 Q1.
By the time the review was released six months ago, the Bank of Russia had significantly tightened its monetary policy, and we were focused on the resilience of businesses and the financial sector to high interest rates. It is now clear that the Russian economy is sustaining strong economic growth, businesses are resilient to the high rates, there has been no increase in restructuring, and lending is still growing rapidly, especially retail lending.
Nevertheless, our financial system is still marked by vulnerabilities. A portion of these vulnerabilities originate from the continued threat of sanctions, and others originate from domestic issues. Similar to last time, we have identified five key vulnerabilities in the financial sector. Furthermore, we see a new vulnerability, the increased concentration of corporate lending, and the risks of individual citizens’ investments in foreign instruments have been excluded from the list of key vulnerabilities.
Let me begin with the financial risks for individuals. The Bank of Russia has been making efforts to limit the debt burden of households. At the macro level, the overall debt burden of Russians looks acceptable, and the growth in lending is accompanied by rapidly growing incomes. Having said this, the debt burden of unsecured loans is already high. It is above the level of many advanced economies, even though they run much higher mortgage debts. We see that a large share of the expansion in lending is generated by overindebted borrowers. Borrowers with three or more loans account for half of the retail loan portfolio.
Since last year, we have relied on macroprudential limits to limit the growth of the debt burden. This has led the issuance of loans to overindebted borrowers to drop by almost half, from 63% at the end of 2022 to 34% in Q1 of this year. Overindebted borrowers are those who spend more than half of their income on loan payments.
Nevertheless, the loan portfolio is gradually changing and is still dominated by loans to people whose payment-to-income ratios exceed 50%. Therefore, we have decided today to limit the issuance of credit cards to borrowers whose payment-to-income ratios are greater than 80% and to reduce the limit for loans to borrowers with payment-to-income ratios of
One month ago, we decided to increase the macroprudential add-ons for unsecured loans and for car loans, effective from 1 July. The fact is that the increase in rates has not cooled the demand for loans, but it has been instrumental in expanding lending to high-risk borrowers. Such borrowers are not necessarily overindebted. They may be people without credit histories. Flash indicators are increasingly showing an increase in overdue cash and car loans. The higher add-ons will propel banks to accumulate capital buffers more rapidly. These buffers are expected to total 1 trillion rubles by the end of the year, or 7% of the portfolio of unsecured loans.
While on the subject of household savings, our previous reviews identified a vulnerability associated with foreign investments. These risks materialised once again when the United States imposed sanctions against SPB Exchange in November 2023. Our previous measures helped reduce the scale of the negative effects. Any fresh investments by individuals in foreign instruments are now limited: in 2022, they made up 35% of the total growth of investments by individuals, and their share fell to a mere 8% in 2023. This risk is therefore no longer on the list of key vulnerabilities.
This issue of the review has highlighted the risks of the concentration of the corporate portfolios of banks for the first time. With solid financial results, the average debt burden of major companies has declined, with only a few exceptions. However, the liabilities have undergone marked structural changes in the context of sanctions. While external loans accounted for 26% of the total debt at the beginning of 2022, their share has now shrunk to 14%, primarily replaced with loans from Russian banks. This has led to the liabilities of the five largest Russian companies surpassing half of the banking sector’s capital. The probability of default by any of these companies is extremely low, but if it were to happen, both the stability of individual creditor banks and financial stability as a whole would come under threat. This is why it is imperative that concentration risks be monitored, and we intend to gradually limit them.
Specifically, we no longer plan to roll over the temporary relaxations for the calculation of per borrower exposure (N6 ratio). Initially, this measure was intended to provide targeted support for sanctioned organisations. At the time, many banks avoided lending to sanctioned companies, and those willing to lend were constrained by the concentration ratio. However, with a wide range of companies and banks hit with sanctions, these relaxations are no longer relevant. We are also working to finalise the concept of a new consolidated concentration ratio for systemically important banks (N30), which will help better measure large exposures to the largest companies.
Concentration risk may be reduced by syndicated lending and the use of bonds and shares to raise funding. This will help distribute the risk more broadly across the financial system and investors. In addition, it is crucial to ensure that the debt burden of our major companies remains optimal in current circumstances.
In addition to the loss of access to external borrowing, problems with international payments and the loss of correspondent relations are another channel for sanctions by unfriendly countries. All of this complicates business operations and creates periodic imbalances in the currency market. The payments for imports and exports are sometimes delayed with increased compliance requirements. The market for yuan/foreign exchange swaps is not always quite liquid, and short-term shortages of yuan liquidity were reported in February and March. To support the market, the Bank of Russia increased the daily limit of exchange swap transactions from 10 billion to 20 billion yuan at the beginning and end of the month. Yuan liquidity remained steady in April and May.
Now I will talk about the impact of a tight monetary stance and high domestic market rates on the stability of the financial sector.
Inflationary pressures are still significant, which has led us to maintain the high key rate for longer than was previously forecast. Furthermore, there remains uncertainty over the specific sources of financing for future additional budget expenditure. All of this is accompanied by an upward shift of the OFZ curve. The yields on
The interest rate risk of banks is a vulnerability that has partially materialised. In Q1, the net interest margin of banks dropped, if only slightly, from 4.8% to 4.5%. This was largely due to the rather high share of corporate loans issued at floating rates. Nevertheless, the interest rate risk, which is driven by the prevalence of short-term deposits, remains, and banks are currently not covering it with regulatory capital. This is why, under the proposed legislative amendments we published in April, banks would have stronger incentives to increase the share of long-term liabilities. In addition, we have begun to standardise the regulation of the interest risk of the banking portfolio, which will be implemented in 2025.
As for the interest risk of the trading portfolio, the actual revaluation of bonds in the last two quarters was less than 1% of banking sector capital. Although the revaluation of securities held to maturity is not recorded in the balance sheet of banks, the recent example of US regional banks shows the importance of tracking unrecognised losses. Risks may be realised in the event of a liquidity outflow, triggered by the need to sell such securities at a loss, even if they are now part of the portfolio held to maturity. As of 1 April, the revaluation amount of the portfolio of banking sector bonds accumulated but not recorded on balance sheets (since this is a portfolio held to maturity) was about ₽500 billion. This can be considered of limited scale, as it is a mere 0.4 percentage points of the capital adequacy of banks. In addition, a significant part of this portfolio is securities that are fit for refinancing with the Bank of Russia. At this moment, this risk is insignificant, but we will monitor it.
Another channel through which the high rates are impacting the financial sector is the potential growth of credit risks. A large share of floating-rate loans may lead to interest risk increasingly translating into credit risk. As outlined, we have not seen a deterioration in credit quality, since high profits enable companies to make increased interest payments. Having said this, mortgage loans and project finance are more sensitive to high rates. The crucial factor for developers is not rising interest on their own loans but trends in household demand for housing, which in turn depend on the market rates.
Mortgage lending is currently growing at a slower rate. Our estimates suggest that this slowdown will not create problems for developers. A significant portion of apartments in new builds to be delivered this year have been sold, and developers have earned solid profits.
At the same time, the mortgage market is still marked by imbalances. At the end of Q1, the market showed a rather large price gap between houses under construction and finished housing. This is a result of subsidised mortgage loans for new builds constituting the lion’s share (70%) of mortgages. In addition, the developer fees that banks introduced last quarter have been passed on to house prices. This is the reason why the gains in prices for new builds in the first quarter once again overtook those for finished housing.
Our macroprudential measures and the Government’s tightening of the subsidised programmes have helped lower the share of high-risk mortgage loans in the first quarter. In the primary market, mortgage loans with downpayments smaller than 20% declined from 60% to 2% over the last two quarters. Mortgage loans extended to overindebted borrowers (those with payment-to-income ratios greater than 80%) are also gradually declining. They accounted for 34% in the first quarter, compared to 45% in the fourth quarter of last year. Nevertheless, this is a large amount and brings risks, given that citizens take on mortgages for long periods of time. As of today, we can use only macroprudential add-ons to limit mortgage risks, but we expect to expand our toolset moving forward on the back of macroprudential limits.
To sum up, it is fair to say that the Russian financial sector is now stable. However, in a setting of positive economic developments and rapidly expanding lending, capital buffers need to be accumulated — to draw on in the event of stress — and action is needed to reduce vulnerabilities. We will continue to monitor financial stability closely and respond to new challenges in time.