Russian banks outlook negative
The outlook for Russia's banking system remains negative, says Moody's in a new Banking System Outlook published today. The main drivers of the outlook are Moody's expectations of ( 1) modest and decelerating economic growth in Russia, which remains highly sensitive to global oil prices; (2) weaker asset quality and capital adequacy; and (3) pressured funding and liquidity profiles.
Moody's says that operating conditions for Russian banks are likely to remain challenging through the remainder of 2012 and into 2013. The rating agency estimates that GDP growth will slow to 3.5% in both 2012 and 2013, compared with 4.3% in 2011.
Moreover, Russian economic performance faces material downside risks due to uncertainties around oil prices and potential capital flight if the euro area crisis intensifies. International and domestic investor sentiment towards Russia will likley remain weak over the next 12- 18 months, which is credit negative as it will continue to sup- press the banks' ability to attract market-based funding and capital.
Moody's expects an increase in the share of problem loans to around 11% at year- end 2013, from an already high 9% in both 2012 and 2011, due to slower economic and credit growth. While the share of problem loans decreased in 2011, this was mainly attributed to high credit growth, which Moody's does not expect to see in the next 12-18 months. In addition, high single- name and related-party exposures will continue to represent a significant source of credit risk for many banks.
The capital adequacy of the banking system will remain weak, following a decline in regulatory capital ratios in 2011 and 2012 due to credit growth and the introduction of new regulatory measures ahead of Basel II's implementation in 2014. According to Moody's central scenario analysis, the system regulatory Tier 1 ratio could decrease to around 7.5% at year-end 2013, from 9.5% at mid-2012, due to higher credit provisions and investment losses.