CIS Banking Sector Outlook

A general overview of CIS banking systems

Elena Redko, Assistant Vice President – Analyst CIS Bankers Conference, Kyiv 2013

CIS Bankers Conference, Kyiv, June 2013

Moody’s rated banking systems in CIS

2

Russia Belarus

Ukraine

Kazakhan Azerbaijan

CIS Bankers Conference, Kyiv, June 2013 3

Moody’s rated universe in CIS

[1] Banking system outlooks (BSO) represent our forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of banks in a given system over the next 12-18 months. BSOs provide our view of how the operating environment for banks, including macroeconomic, competitive and regulatory trends, will affect asset quality, capital, funding, liquidity and profitability. BSOs also consider our forward-looking view of the systemic support environment for bank creditors.

[2] Long-Term Bank Deposit Rating reflects a bank’s stand-alone credit strength and support considerations. A bank’s standalone credit strength, as indicated by Bank Financial Strength Rating (BFSR), on a scale from A to E, mapped to a baseline credit assessment (BCA), reflects the institution’s creditworthiness without considering support.

Number of rated banks

Average standalone BFSR/BCA

(asset weighted)

Average long-term local currency deposit rating (asset weighted)

Banking System Outlook

Last published

Uzbekistan 13 E+/b2 B1 Stable August 2012

Russia 110 D-/ba3 Ba2 Negative October 2012

Ukraine 14 E+/b3 B2 Negative May 2013

Belarus 5 E+/b3 B3 Negative April 2013

Kazakhstan 13 E+/b3 B1 Negative June 2012

Azerbaijan 7 E+/b3 B2 Stable July 2012


Russia

4


CFOs response: What constrains banks’ growth?

Source: Moody’s CFO survey


Slow down of credit growth

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Source: Moody’s, Central Bank of Russia

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2010 2011 2012 2013F

Corporate Loans Retail Loans


Corporate lending stagnates: banks’ growth anticipation in 2013

7


AGREE: Moody’s anticipates up to 15% lending growth in 2013


Industries of lending interest: trading is targeted by 29% of banks

8

1%

2%

5%

13%

13%

13%

23%

29%

0% 5% 10% 15% 20% 25% 30% 35%

Fin Institutions

Other

Defense

RE & Construction

Energy

Retailers

Manufacturing

Trade



Overheated retail: growth expectation in 2013

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AGREE: Moody’s anticipates up to 30% retail lending growth in 2013


Retail products of lending interest: unsecured products is targeted by 54% of banks’ priorities



Where will interest rates go? … Banks anticipate growth

11

in lending … and funding


DISAGREE: CBR is likely to decrease its benchmark rates to support economic growth


0

2

4

6

8

10

12

14

16

18

Jan-‐08

Mar-‐08

May-‐08

Jul-‐08

Sep-‐08

Nov-‐08

Jan-‐09

Mar-‐09

May-‐09

Jul-‐09

Sep-‐09

Nov-‐09

Jan-‐10

Mar-‐10

May-‐10

Jul-‐10

Sep-‐10

Nov-‐10

Jan-‐11

Mar-‐11

May-‐11

Jul-‐11

Sep-‐11

Nov-‐11

Jan-‐12

Mar-‐12

May-‐12

Jul-‐12

Sep-‐12

Nov-‐12

Jan-‐13

%

Gross Margin Deposit rate Lending rate

Margins are squeezing…



Return on assets

13



Asset quality: banks expect only marginal improvement

14


DISAGREE: expect problem loans to reach the low teens this year, owing to macroeconomic challenges faced by Russia and the seasoning of loans originated

during the 2011-12 credit boom


Capital – banks anticipate limited pressure…

15


DISAGREE: we have negative expectations for 2013, mostly driven by higher problem loans and lower core earnings


Low N1 – diminished loss absorption capacity

16



Where to take new capital?

17



Ukraine

18


Ukraine – banking system outlook

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»  The operating environment will remain challenging, characterised by only marginal GDP growth

»  The very high volume of NPLs is insufficiently covered by loan-loss provisions

»  Depositor confidence remains low and could weaken further on expectations of local-currency depreciation, while banks’ access to wholesale funding will be reduced.

»  We expect Ukrainian banks to remain only marginally profitable in 2013, due to declining net interest margins, limited cost-cutting ability and the need to create additional loan loss provisions

»  Despite the expectation that system-wide capital adequacy ratios will be declining, most banks hold sufficient capital buffers to absorb anticipated credit losses

»  Ukrainian banks maintain adequate

liquidity buffers and have improved their loans-to-deposits ratios since 2009

STRENGTHS WEAKNESSES


Ukrainian banking sector – Moody’s scenario analysis

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ASSUMPTIONS: Most recent fin.crisis Central scenario Adverse

scenario characteristics (12-18 months horizon) (12-18 months horizon) 2008-2009

15% GDP contraction in 2009 40% local-currency depreciation in 2008 40% NPLs crystallisation in 18 months

Only marginal GDP growth 10% local-currency depreciation

10% loan-book growth Crystallisation of up to 35% NPLs in the

books (including unsettled NPLs from 2008-2009)

Annual 10% GDP contraction 25% local-currency depreciation

Crystallisation of up to 50% NPLs in the books (including unsettled NPLs from

2008-2009)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

CAR reported (1 Jan 13) CAR central scenario CAR adverse scenario

CAR Regulatory minimum

Source: Moody’s


Ukrainian banking sector – Liquidity vs UAH depreciation expectations

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Source: National Bank of Ukraine, Bloomberg

0%

5%

10%

15%

20%

25%

30%

-‐2.5-‐2

-‐1.5-‐1

-‐0.50

0.51

1.52

2.5

Jan-‐11

Feb-‐11

Mar-‐11

Apr-‐11

May-‐11

Jun-‐11

Jul-‐11

Aug-‐11

Sep-‐11

Oct-‐11

Nov-‐11

Dec-‐11

Jan-‐12

Feb-‐12

Mar-‐12

Apr-‐12

May-‐12

Jun-‐12

Jul-‐12

Aug-‐12

Sep-‐12

Oct-‐12

Nov-‐12

Dec-‐12

Jan-‐13

Feb-‐13

USD bn NBU net intervention volume (LHS) Net FX purchases by population (LHS) 3 m interbank rates (RHS)


Belarus

22


Belarus – banking system outlook

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»  the government has limited ability to extend support to the banks

and to the overall economy

»  banks’ asset quality and capital adequacy will deteriorate over the outlook period

»  the banks have low foreign-currency liquidity relative to high

levels of foreign-currency deposits

»  The low indebtedness of local retail borrowers, compared with peer banking systems, supports retail loan portfolios

»  Close industrial and economic links with Russia support demand for a significant portion (over 30%) of Belarus’ exports



Belarus banking sector – Moody’s scenario analysis

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ASSUMPTIONS: Most recent fin.crisis Central scenario Adverse scenario characteristics (12-18 months horizon) (12-18 months horizon)

2011-2012 5.3% GDP growth in 2011

109% inflation in 2011 NPLs have yet to crystallise

Annual 2% GDP growth 15% local-currency depreciation

20% loan-book growth Crystallisation of up to 20% NPLs in the

currently performing books

Annual 3% GDP contraction 60% local-currency depreciation

Crystallisation of up to 35% NPLs in the currently performing books


Kazakhstan

25


Kazakhstan – banking system outlook

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»  Credit demand will remain modest over the outlook period, as the largest companies driving the economy finance themselves outside the domestic banking sector; this will constrain banks’ lending growth

»  Weak asset quality requires higher loan loss reserves to cover all expected losses

»  A number of large banks are under-capitalised »  Profitability will remain low due to weak credit

growth, rising loan loss provisions and increasing funding costs (particularly for local-currency deposits).

»  Domestic economic growth remains robust thanks to high oil prices and rising oil output and government spending: 5% expected real GDP growth in 2013

»  Liquidity is supported by increasing customer funds, limited lending growth and manageable market debt repayments for most banks



Kazakh banking sector – Moody’s scenario analysis

27

ASSUMPTIONS: Most recent fin.crisis Central scenario Adverse scenario characteristics (12-18 months horizon) (12-18 months horizon) 2008-2009 1.2% GDP growth in 2009 No local-currency depreciation in 2008 40% NPLs crystallisation in 18 months

Annual 5% GDP growth 5% local-currency depreciation 5% loan-book growth Crystallisation of up to 15% NPLs in the


Annual 3% GDP growth 15% local-currency depreciation Crystallisation of up to 30% NPLs in the



Azerbaijan

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Azerbaijan – banking system outlook

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»  Corporate-governance deficiencies, including a lack of transparency, related-party exposures and key-man risk

»  The economy remains undiversified and relies heavily on the oil sector

»  Banks’ credit-risk appetite remains high, contributing to significant lending concentrations and a high share of FX denominated loans

»  Despite expected improvements, the level of problem loans remains elevated

»  The local deposit base – despite recent growth – remains relatively modest, at around 60% of banks’ liabilities; retail depositor confidence is weak

»  The benign, oil-driven macroeconomic environment and increasing government investments support the banking system’s growth, asset quality and profitability

»  Most banks have liquidity and capital buffers allowing them to cope with Moody’s central scenario

»  Healthy net interest margins and a lower provisioning will support profitability

»  Low banking penetration offers opportunities for long-term growth



Azeri banking sector – Moody’s scenario analysis

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ASSUMPTIONS: Most recent fin.crisis Central scenario Adverse scenario characteristics (12-18 months horizon) (12-18 months horizon) » 2008-‐2009 » 9.3% GDP growth in 2009 » No local-‐currency depreciation in 2009 » 25% NPLs crystallisation in 18 months

» Annual 5.7% GDP growth » No local-‐currency depreciation » 15% loan-‐book growth » Crystallisation of up to 6% NPLs in the currently

performing books

» Annual 5% GDP contraction » 10% local-‐currency depreciation » Crystallisation of up to 15% NPLs in the


Azerbaijani Banks’ Regulatory Capital Ratios under Moody’s Scenario Analysis

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

CAR reported (1 JAN 12) CAR central scenario CAR adverse scenario


Source: National Bank of Azerbaijan and Moody’s Investors Service


Uzbekistan

31


Uzbekistan – banking system outlook

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»  Problem loans remain high in the context of a rapidly growing economy, with low coverage by reserves

»  Many banks maintain high concentrations (mostly to large corporates) in their loan portfolios

»  Significant maturity mismatches exist between assets and liabilities, with a large portion of long-term project-finance exposures funded by customer accounts with short-term contractual durations

»  Whilst the sector’s overall capital adequacy is sufficient, some large banks’ capital levels are being weakened by high lending growth which makes them vulnerable to a down-cycle

»  Benign operating environment, owing to favourable macroeconomic conditions, high government spending and strong domestic consumption growth

»  The “under-banked” and rapidly developing retail and SME sectors provide growth opportunities for bank lending

»  Expanding local-customer funding supplies liquidity for loan growth

»  Due to the absence of cross-border exposures and low dependence on international funding, the credit profile of banking system is relatively shielded from the global financial crisis



Uzbek banking sector – Moody’s scenario analysis

33

ASSUMPTIONS: Most recent fin.crisis Central scenario Adverse scenario characteristics (12-18 months horizon) (12-18 months horizon)

No major shocks in last 20 years; we therefore use loss assumptions similar to the ones we apply in Russia, given similarities in the system-‐wide loan book composition

» Annual 7% GDP growth » 10% local-‐currency depreciation » 20% loan-‐book growth » Crystallisation of up to 15% NPLs in the


» Annual 4% GDP growth » 20% local-‐currency depreciation » Crystallisation of up to 20% NPLs in the


Uzbek Banks’ Regulatory Capital Ratios under Moody’s Scenario Analysis

0%2%4%6%8%10%12%14%16%18%20%

CAR reported (1 JAN 12) CAR central scenario CAR adverse scenario


Source: IFRS financials of Moody’s-‐rated banks and Moody’s Investors Service


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CIS Banking Sector Outlook

Economy & Finance

Transcript of CIS Banking Sector Outlook