Large private banks in Russia take market share amid recession

Amid Russia’s recession, the country’s largest private banks are consolidating their market share — a credit positive trend likely to continue in 2016, Moody’s Investors Service said.

“The share of assets at the top five privately owned banks increased to 12.5% in mid-2015, from 10.8% at the end of 2014 and 8.4% at the end of 2013,” said Elena Redko, an Assistant Vice President at Moody’s. “The share of smaller private banks, on the other hand, fell to 18.9% from 23.4% at end2013.”

“We view the consolidation of Russian private banks as credit positive because stronger private banks will enhance overall competitive dynamics in the banking system,” said Redko. “In addition, integration risks for most of the transactions seem manageable and unlikely to erode credit fundamentals of the leading banks.”

A number of trends are driving consolidation at the top of the privatesector Russian banking market. The Russian regulator, for example, is encouraging “rehab” takeovers of small weak banks by financially stronger institutions.

“Many privately owned banks have weak capital buffers which are eroding further in the current environment,” explained Redko. “If current shareholders are unable to provide additional capital, in many cases the Central Bank of Russia has been providing regulatory and liquidity support to encourage poorly capitalised banks to integrate into larger institutions.”

In addition, the CBR is also pushing problematic banks out of the market entirely by revoking banking licenses for reasons including dubious transactions, misrepresentation of financial statements, and excessive credit risk — more than 100, mostly small, institutions have had their banking licenses revoked by the CBR in 2014 and 2015.

Moody’s expects the regulator to encourage further shrinking of the number of banks as it encourages consolidation into strongly capitalised, well-run institutions.

Furthermore, subsidiaries of

many foreign

Russian banks are downsising - they simply do not have the appetite to take increased credit risk in the current environment, according to the rating agency - and are likely to further deleverage their Russian operations in 2016 in Moody’s view. Market share has already dropped to 8.2% of assets as at July 1, 2015 from 9% as at year-end 2013.

Finally, international sanctions against major state-owned banks are creating opportunities for large private banks to take business.

As these sanctions (in some cases) prevent the state banks from providing Russia’s largest companies with needed foreign-currency credit, private banks have been able to compete for high-quality borrowers when such borrowers refinance maturing international debt.