MOSCOW, December 24 (Itar-Tass) - Russian banks will suffer moderately, if the US regulator toughens its monetary policy next year, says the Central Bank of Russia’s (CBR) Financial Stability Review. Amid uneven global economic growth some developed countries, primarily the US, may start to unwind quantitative easing (QE) earlier than the others.
“The first consequence of QE tapering by the U.S. Fed will be growth of long-term interest rates, since the regulator targets short-term rates separately. The yield curve’s upward turnaround for long-term rates may have a negative effect on debt market environment. Sovereign debt markets of the countries with overly high state debt may prove the most sensitive to an increase of long-term rates. Troubled Eurozone countries may suffer most,” the CBR believes.
Meanwhile, Russia’s position in terms of sovereign and private debt risks looks quite steady. Russia is among the countries with the lowest state debt relative to GDP. As of October 1, 2013, Russian state internal debt accounted for 7.7 percent of the GDP, which is several times less than that of the other BRICS countries. Internal corporate debt (non-financial organizations’ loans in Russian banks and issued bonds) made up 36.5 percent of the GDP, whereas the total external debt amounted to 35.2 percent of the GDP, where private sector (banks and other sectors) makes up 31.3 percent of GDP.
“The effect of rate increase on the Russian banking sector’s net profit in foreign assets and liabilities may be limited because of low gapping. Interest risk’s impact on the non-financial sector is also moderate,” the Central Bank believes.
To estimate potential risks for Russian banks ensuing from financial market volatility following QE wind-up, the CBR has evaluated their securities portfolio. As of September 1, 2013, investments in bonds in shares accounted for 11 percent and 1 percent respectively. Revaluation of securities portfolio may have a substantial effect on certain banks and the banking sector as a whole. Stress scenario suggests an increase in yields on Russian sovereign bonds by 200 points, for other bonds - by 350 points, while stock prices are expected to dip 25 percent. The analysis has found out most of the banking system is resistant against negative scenarios in the stock market in terms of capital adequacy: capital adequacy ratio Н1 after stress is estimated at 12.1 percent (real figure as of October 1 was 13.4 percent).
Besides, adverse effect of tougher FRS policy may show in swap market, where transactions are prone to currency and interest risks. Interest rate swaps in one currency (more than half of the market) and cross-currency interest rate swap (about a third) prevailed in Russian interest rate swap market in the second and third quarters of 2013, with the rouble and dollar being the key currencies occupying over 90 percent of transactions, mostly medium-term. According to the CBR, if interest rates grow by 200 basis points, while the rouble depreciates 30 percent, Russian banks’ losses on the interest rate swap will not exceed 10 billion roubles (about $303 million). However, in the future, given dynamic development of the interest rate swap market, risks may escalate for certain market players.
The CBR report points out “a considerable share of non-residents in the market - in more than 95 percent of transactions, one of counterparties was a foreign company or a subsidiary of a foreign bank holding registered in Russia. Most transactions on the market are intragroup.”
The mentioned estimates indicate Russian banks’ potential interest losses are moderate. The estimated decline of Н1 below 10 percent as a result of stress-test of certain banks’ interest risk, is rather connected not to the scale of negative revaluation of loan portfolios but low capital adequacy before the stress, the regulator believes.