On countercyclical buffer to capital adequacy ratio
The Bank of Russia Board of Directors has decided to retain the countercyclical capital buffer (CCB) rate for Russian credit institutions at zero per cent of risk weighted assets. Growth in lending varies across its segments: consumer and mortgage lending shows an acceleration in growth rates, while the rate of growth of non-financial organisations’ debt remains moderate against a declining share of foreign currency in credit portfolios. The Bank of Russia’s recent measures to limit the systemic risks of unsecured consumer lending and support high standards in mortgage lending have yet to make impact on banks’ lending activity. Their impact may be evaluated based on 2018 Q2 data.
In making its countercyclical buffer decision, the Bank of Russia has recognised the following factors.
Credit activity. Credit activity is expanding at varying paces across its segments.
Credit portfolios in the lending to non-financial organisations segment, the largest of all by total outstanding loans, is seeing reduction in the share of foreign currency. As a result, as of 1 June 2018, total outstanding loans of corporations for the 12 months grew 4.3%1. The period’s total outstanding loans in rubles increased 8.5%, while those in foreign currency dropped 5.7%.
There is further acceleration in growth of lending activity in unsecured consumer lending. Loan receivables increased 15.7% over the last 12 months as of 1 June 20182. Their annualised growth paces3, leading indicators for lending activity, amounted to 17.8% per annum in the March to May 2018 period. Further growth potential is possible on the back of reduced interest rates in cash loans — the major segment of unsecured consumer lending.
Annual growth in loan receivables in the housing mortgage lending segment totalled 22.4% as of 1 June 20184. Expanded lending in this segment is driven both by banks’ review of price conditions and the easing of down payment requirements. The share of newly extended mortgage loans with down payments ranging from 10% to 20% edged slightly higher from 42.4% in 2017 Q4 to 44% in 2018 Q1.5 Loans extended in 2018 Q1 with down payments under 10% total less than 1.0%.
Against the backdrop of a mixed recovery in lending across various segments, estimated credit gaps for both corporate and retail lending (defined as the difference between the credit-to-GDP ratio, adjusted for FX revaluation, and its long-term trend) remain in negative territory. This suggests that credit activity is so far below a long-term trend.
Capital adequacy ratios. Credit institutions are seeking to ramp up sources of their capital amid growing credit activity. In the twelve months, capital adequacy (N1.0) went up 0.6 pp to reach 15.1% as of 1 June 2018 (excluding several major banks undergoing resolution including with the involvement of the Banking Sector Consolidation Fund).
Bank of Russia action to limit retail lending risks. Although mortgage lending has been showing growing paces, the unchanged debt burden of borrowers confirms that the current growth so far brings no substantial financial stability risks. The Bank of Russia’s measures effective 1 January 2018 aimed at sustainable development of the mortgage segment (see the 29 March 2018 press release for further detail) had little bearing in Q1 on the proportion of loans with down payments ranging from 10 to 20%. This is driven by a substantial lag between loan application approval and disbursement dates. The efficacy of these measures can be analysed based on Q2 results.
Unsecured loans extended after 1 May 2018 with the effective interest rate between 15% and 25% are subject to increased risk ratios. The efficacy of these measures can be judged based on Q2 results.
Higher risk ratios on certain credit claims increase banks’ capital cushion necessary to cover potential losses. In these circumstances and taking into account the heterogeneous recovery of lending activity, it is not reasonable to set the countercyclical buffer for the capital of Russian credit institutions above zero.
The Bank of Russia Board of Directors will hold its next CCB rate review meeting in September 2018.
1 For credit institutions that were operating as of the last reporting date including banks that underwent restructuring. Adjusted for FX revaluation.
2 Credit institutions’ financial statements as per Form 0409115 (Section 3, Loan receivables on other consumer loans grouped into a homogeneous loan portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring.
3 Seasonally adjusted.
4 Calculated using Bank Reporting Form 0409316. For credit institutions operating as of the last reporting date, including previously reorganised banks. Adjusted for foreign currency revaluation.
5 According to the quarterly survey of banks which account for over 70% of household loan receivables.
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