Russia’s Banks Feel Capital Squeeze in Grip of Sanctions

Russia’s biggest state-run banks are seeing profits plunge, forcing some to seek government help, after the U.S. and European Union slapped them with sanctions over the conflict in Ukraine.

A drop in earnings led VTB Group, Russia’s second-largest bank, to eliminate more than a third of its staff in Europe and seek state support to replenish capital. OAO Gazprombank, the nation’s third-largest lender, and Russian Agricultural Bank, are also seeking government aid. OAO Sberbank (SBER), the largest, yesterday cut its profitability forecast for 2014.

The conflict is saddling Russian banks with widening losses in Ukraine, even as the sanctions restrict their access to international capital markets. Sputtering economic growth at home looks set to push up loan losses in Russia, further eroding capital and profitability.

“Russian banking is moving slowly along the crisis path with all classic aspects of capital, funding, asset quality and liquidity feeling the stress as we go,” David Nangle, head of research at Renaissance Capital, wrote in a note to clients. “The main risk we see is on the longevity of sanctions and specifically closed funding markets.”

Sberbank reported a 25 percent decline in third-quarter profit after setting aside 104.5 billion rubles ($2.2 billion) for doubtful loans, more than double the amount in the same period of 2013. The bank, run by President Vladimir Putin’s former economy minister, Herman Gref, said return on equity, a measure of profitability, will be 15 percent this year, below its previous forecast of 20 percent.

Ukraine Loan

Risks tied to Ukraine are hurting the three largest state-controlled banks the most, a report from Standard & Poor’s said. Their combined operating income will be reduced by about 420 billion rubles this year, or 25 percent, because of events in Ukraine, analyst Sergey Voronenko estimated.

Sberbank expects to continue boosting corporate loan provisions on Ukraine in the fourth quarter, Senior Vice President Anton Karamzin said yesterday on a conference call.

Putin has asked why the U.S. and European Union are limiting Russian banks’ access to global capital markets if their aim is to help Ukraine.

“Russian banks have currently extended a $25 billion loan to the Ukrainian economy,” Putin, 62, said in an interview with German TV ARD earlier this month. “Do they want to bankrupt our banks? In that case they will bankrupt Ukraine.”

VTB, which converted a more than 200 billion-ruble subordinated loan from the government into preferred shares to boost capital, asked for additional state support of 250 billion rubles, Finance Minister Anton Siluanov said last week.

Curbing Lending

The Moscow-based lender, which posted a 90 percent slump in third-quarter profit, eliminated more than 600 positions in Europe in the three-month period and said it may review its strategy.


Losses related to Ukraine reached 14.4 billion rubles in the quarter, Chief Financial Officer Herbert Moos said.

Banks will have to curb growth or turn to the state for additional funding after the sanctions shut them out of foreign capital markets, said Nadezhda Bozhenko, a fixed-income analyst at UralSib Capital.

“Gazprombank needs to contain their loan-book growth or rely on the government,” Bozhenko said by phone. “The state has offered to convert existing loans into preference shares, but the terms aren’t clear and it may be very expensive.”

Natalia Yalovskaya, a director of financial institution ratings at S&P, said Gazprombank will “sooner or later” convert its loans to increase capital. The lender’s press service didn’t return calls or e-mails seeking comment.

Retail lending growth slowed to a 16.6 percent annual pace in October from 18 percent in September, data published on the central bank’s website show. Corporate lending growth accelerated marginally to 13.4 percent in October.

Banks Stretched

“The financial system is going to be under a lot of pressure in coming months,” Matias Pino, an emerging markets analyst at GoldenTree Asset Management, which sold its holdings in Russian banks’ bonds months ago, said in e-mailed comments.

“Bad loans, a slowdown in consumer demand for credit and a need to support Russian companies with limited access to foreign capital is stretching the banks,” Pino said. “Not to mention the run on foreign currency and the devaluation effect on inflation, which should lead to an increase in local rates.”

Sberbank raised its forecast for corporate loan growth in 2014 to more than 20 percent from between 12 percent and 14 percent, as more companies turn to state-run banks for funding.

Russia’s ruble has depreciated about 30 percent this year against the dollar, the worst performance after Ukraine’s hryvnia among about 170 global currencies tracked by Bloomberg.

The seven-company Micex financial index has tumbled 28 percent this year, compared with a 2.2 percent gain for the wider 50-stock benchmark Micex index. Sberbank tumbled 27 percent and VTB dropped 4.9 percent.

‘Grim’ Prospects

Banks unaffected by sanctions have been able to tap capital markets this month. Alfa Bank, Russia’s largest privately-owned lender, raised $250 million by selling a subordinated bond yielding 9.5 percent on Nov. 13. Promsyvazbank got a $120 million syndicated loan on Nov. 17, five days after Bank Otkritie Financial Corp.


(NMOS) borrowed a similar amount, according to data compiled by Bloomberg.

Russia’s economy is set to expand 0.3 percent this year and stagnate in 2015, according to the central bank’s main outlook, which assumes oil prices will average $95 a barrel next year and sanctions will stay in place through 2017.

Russia, the world’s largest energy exporter, has also had to contend with a 31 percent slide in the price of crude oil since June, leaving it on the brink of recession. Brent crude oil futures fell as low as $77.30 a barrel in London yesterday.

“We see the macro prospects as relatively grim even in our base-case scenario,” Natalia Berezina, a banking analyst at UralSib Financial Corp., said by phone. “There are also increasing risks that our more negative scenario of economic recession could materialize.


In this scenario, all banking stocks would be much overvalued at the current levels.”

Source: Bloomberg / Nov. 27, 2014


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