By Elena Fabrichnaya and Alexander Marrow
MOSCOW (Reuters) – Russian banks have rallied after an initial hit from last year’s Western sanctions against Moscow, with lenders now jostling for business from the state, particularly a burgeoning defence budget, and the country’s big corporate accounts.
The sweeping response to Russia sending troops into Ukraine, especially against major banks which were blocked from a global payments system, choked off much of their overseas business and contributed to an around 90% profit fall.
That forced a rapid rethink from the banks, the central bank and the government to stabilise a sector critical to the Russian economy, which contracted by around 2.1% last year, a far cry from Moscow’s early fears of a double-digit drop.
Meanwhile, Russia’s current account surplus hit a record high in 2022 as robust oil and gas exports kept foreign money flowing in, despite Western efforts to starve Moscow of cash.
But for banks, sanctions have meant changing how they attract deposits and allocate loans.
“The main tool now is large corporate clients and state budget resources, there is competition for them,” said a senior executive at a top-20 bank, speaking on condition of anonymity.
When the Bank of Russia hiked interest rates to 20% after Moscow launched what it calls a “special military operation” on Feb. 24 last year, it almost brought lending to a halt.
But the central bank has since gradually lowered its key rate to 7.5% and Russia’s banking sector has recovered from a combined 1.5 trillion rouble ($20 billion) first-half loss to a 203 billion rouble profit for 2022 as a whole.
Some analysts are now predicting a sharp uptick in profits, as Russian banks make the most of preferential state lending schemes, liquidity auctions and a defence sector hungry for financing as Moscow’s military campaign in Ukraine continues.
“Judging by the dynamics of recent months, we can speak about banks’ near complete adaptation to the challenges of early 2022,” said Mikhail Zeltser, a BCS World of Investments analyst.
“The biggest players have got on track in terms of net profit. And if we analyse the sector’s leader, Sberbank, then annual profits in 2023 could be no less than those pre-crisis in 2021,” Zeltser said, adding this could be extrapolated to the sector as a whole.
DEFENCE DRIVEN
Russian financial institutions were ordered to limit disclosures in 2022, making it hard for analysts and investors to gauge their performance, but they can resume reporting results under international accounting standards this year, which Sberbank will do on March 9.
One stark example of how Moscow’s military mobilisation is changing the face of Russia’s banks and offering a route to recovery is Promsvyazbank, which was nationalised in 2017 and has serviced the defence sector since 2018.
Promsvyazbank Chairman Pyotr Fradkov told President Vladimir Putin last month that it now ranks among Russia’s top five banks by assets, a rapid rise from ninth place in 2019, the last time it disclosed financial results.
Fradkov said the bank’s loan book growth has tripled in recent years and it now has almost 5 trillion roubles in assets.
“As far as the defence industry is concerned, most of this financing and lending is offered at so-called preferential rates,” Fradkov said.
Russia discloses little about defence sector finances, but Moscow is diverting nearly a third of this year’s budgetary funds to its military operation in Ukraine.
Promsvyazbank has lent on projects to the defence ministry, the industry ministry and the Roscosmos space agency, Fradkov said, helping to fill out cash gaps with regular financing.
VTB, however, has not been as successful. Russia’s second-largest lender, which bought Otkritie Bank from the central bank in what amounted to a recapitalisation, has blamed its undisclosed losses for 2022 squarely on sanctions.
“Unfortunately our central bank was sanctioned, which was already quite force-majeure,” VTB Chief Executive Andrei Kostin said, ruing the bank’s inability to defend itself against currency fluctuations as the rouble plummeted in March.
The SWIFT global payments system block and the freezing of more than $300 billion worth of central bank reserves abroad took Russia by surprise.
The top executive at the top-20 Russian bank said Moscow was unprepared in particular for liquid assets being blocked and euro and dollar swaps becoming unavailable.
“No one expected that the central bank would come under sanctions, and that it would be unable to help with foreign currency liquidity at that difficult moment,” they said.
‘BEST FRIEND’
For banks, central bank support was crucial to weathering the initial hit to their business.
“The regulator went from being a punisher to a best friend,” one banker told Reuters.
The central bank also flooded the market with cash, via repo auctions, and provided refinancing secured by credit claims and other rouble loans, keeping rates well below market levels.
Maxim Osadchiy, head of BKF Bank’s analysis department, said that in the absence of “powerful negative shocks”, Russia’s banking sector could approach the 1.6 trillion roubles net profit of 2020 or even 2021’s record 2.4 trillion roubles.
The central bank’s forecast is more restrained, at around 1 trillion roubles.
But there are potential pitfalls if they perform too well.
“It is currently dangerous to show big profits due to the threat of the ‘voluntary contribution’,” Osadchiy said.
Moscow expects to raise around 300 billion roubles from a one-off “voluntary” tax, which Finance Minister Anton Siluanov said last week would be collected from businesses based on the “dynamics” of their results over the last few years.
($1 = 74.0980 roubles)
(Reporting by Elena Fabrichnaya and Alexander Marrow; Writing by Alexander Marrow; Editing by Alexander Smith)
