Russian Banking Sector Continues To Avoid Crisis Amid Slowdown

Fitch Solutions / Banking & Financial Services / Russia / Wed 31 Aug, 2022

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Key View

  • We at Fitch Solutions believe that the threat of an imminent banking sector crisis in Russia has eased, but there are clear signs of a slowdown in lending, in particular to businesses.
  • We expect that the impact of Western sanctions on Russia’s banking sector will be severe in 2022, but take several quarters to materialise fully.
  • The increasing insulation of Russia’s banking sector from international financial conditions since the imposition of sanctions in 2014 will mitigate the direct impact of bank sanctions, however, a tightening of sanctions could increase the damage to the sector.


At Fitch Solutions, we believe that the Russian banking sector is weathering the initial shock from the imposition of Western sanctions in early March 2022, but expect their impact to become more severe in the quarters to come. The structure of the Russian banking sector, which is heavily weighted towards large, state-owned banks, alongside relatively solid capital buffers has mitigated the initial shock to the sector from sanctions. The three largest banks by assets, Sberbank, VTB and Gazprombank, are all state-owned, and collectively account for almost 60% of total banking sector assets.

Russian banks’ balance sheets were relatively strong before the invasion of Ukraine and subsequent sanctions, with record profits recorded in 2021. Non-performing loans (NPLs) were 7.9% of total loans in December 2021, low by historical standards and well below the high of 17.7% seen in March 2017. As of December 2021, the sector-wide capital adequacy ratio (CAR) was 12.3%, well above the legal requirement of 8.0%. Of the 10 largest banks by assets, five had a CAR below the legal limit as of Q321, but four of these were state-owned lenders and the government has shown willingness to inject capital into state-owned institutions at times of crisis. No data have been published on capital or NPLs since the start of the year, and the impact of the invasion on sector liquidity or solvency cannot therefore be assessed yet.

Russian banks also have the option to borrow heavily from the Central Bank of Russia (CBR). In the 12 months to February 24 2022, banks in Russia had, on a net basis, an average of RUB1.2trn deposited at the CBR, representing a structural liquidity surplus for the sector. This reversed following the invasion, with net borrowing reaching RUB7.0trn on March 3. This too has receded following the initial surge and net deposits at the central bank sat at RUB2.0trn on May 31 2022. Similarly, on February 25, RUB1.4trn was withdrawn from banks in cash, more than 20 times larger than the next highest daily net withdrawal since January 2021. Since then, confidence in banking sector liquidity appears to have been restored, as between March 9 and May 30 a total of RUB3.0trn in cash was deposited on a net basis, representing the return of more than the RUB2.9trn that was withdrawn in the two weeks prior, while between May 31 and August 11 net withdrawals were close to zero.

Cash Withdrawals Stabilise

Russia - Change In Cash In Circulation Outside The CBR, RUBbn

Source: CBR, Fitch Solutions

Financial conditions eased substantially in June and July following post-invasion tightening. The Goldman Sachs Russia Financial Conditions Index (GSFCI) has been especially volatile, rising from 100.2 on the eve of the invasion to 136.9 on March 15 (and thus illustrating tighter financial conditions), before easing back to 110.6 on March 21. It then rose again to a record level of 162.1 on May 27, despite the Central Bank of Russia (CBR) cutting its benchmark interest rate by 300 basis points (bps) to 11.00% on May 26. This has been followed by a further 300bps of cuts, bringing the policy rate to 8.00%. It appears that these cuts fed through into broader financial conditions in June, as the GSFCI dropped from 145.4 on June 23 to 113.5 June 24, indicating a very rapid, substantial loosening of financial conditions. The easing of monetary policy has been possible due to the easing of inflationary pressures, with weekly inflation rate declining from 2.2% on March 4 to -0.1% on August 1. In addition, the imposition of capital controls and the continued flow of export revenues have reduced the need for the CBR to defend the Ruble with rate hikes.

Financial Conditions Ease Close To Pre-Invasion Levels
Russia - Goldman Sachs Financial Conditions Index, Weekly (LHS), Daily (RHS)
Source: Bloomberg, Goldman Sachs

We expect that economic sanctions on Russia will impact the domestic banking sector mainly through the investment, private consumption and growth channels. We forecast client loan growth to contract by 6.0% in 2022 and 7.0% in 2023. This indicates a precipitous drop in credit growth, which rose to 15.8% in January 2022, the highest growth rate since 2015. Banking sector assets will fall from 92.0% of GDP in 2021 to 90.7% and 77.5% in 2022 and 2023 respectively, according to our estimates. As aforementioned, we foresee a lag between the introduction of sanctions and credit growth turning negative, mirroring the experience of 2014-17, in the aftermath of Russia’s invasion of Crimea. Given strong growth in client loans in the first two months of 2022, we flag upside risk to the 2022 forecast on the basis that the lag time may be longer than expected. That said, outstanding client loans declined slightly in both April and May and growth is negative year to date.

Client Loan Growth To Turn Negative In 2022

Russia - Client Loan Growth, % y-o-y

Source: CBR, Fitch Solutions

Following a sharp slowdown in April, consumer lending appears to have begun to grow again on a month-on-month basis, but remains well below pre-invasion levels. Lending to consumers can be broken down into housing lending, accounting for an average of 25% of total consumer lending since January 2019, and all other consumer lending, which makes up the remaining 75%. Following the invasion of Ukraine, other consumer lending declined first, falling by 34.2% m-o-m in March, before a further 11.7% decline in April, whereas housing lending grew by 9.3% in March, but then fell 68.9% in April. Lending in both channels has since picked up, growing by 16.4% and 30.7% on an overall basis in May and June respectively, but as of June 2022 remains 35.3% lower than in December 2021.

Consumer Lending Recovers But Remains Below Pre-Invasion Level

Russia – Loans Extended To Consumers, Index (Jan 2019 = 100)

Source: CBR, Fitch Solutions

Overall consumer lending between March and June 2022 was 35.7% down on the same two months in 2021. Data on outstanding debt, which is similar to but distinct from client loans, shows that this fall in lending caused the m-o-m growth in outstanding household debt to decline from 1.6% in February to -0.9% in April, While this rose to 0.4% in June, the y-o-y rate continues to drop sharply, reaching 12.1% in June, down from 22.5% in February. It should be noted that consumer debt makes up only around 30% of total outstanding debt, excluding financial institutions, with the remaining 70% owed by the non-financial sector. When sanctions were first introduced in 2014, this portion of the outstanding debt was more resilient, taking an additional 17 months for y-o-y growth to turn negative compared with household debt and the y-o-y contraction lasted for only 4 months, versus 15 for household debt. There were early signs of this pattern repeating, with household debt growth intially falling faster than non-financial sector debt growth, but in June non-financial sector debt continued to contract, by 1.9% m-o-m, even as household debt grew by 0.4%.

Growth In Outstanding Debt Slows Sharply

Russia – Growth In Outstanding Debt, % y-o-y

Source: CBR, Fitch Solutions

We expect that economic activity will decline over the coming months, and forecast real GDP to contract by 7.5% in 2022. As shortages of imported inputs broaden, this will depress investment and commercial credit demand. Meanwhile, unemployment will rise, negatively impacting consumers’ ability to service their debt. In addition, the introduction of EU sanctions which seek to phase out imports of Russian crude, coupled with the commitment to cut imports of Russian gas, will negatively affect output later in the year.

US, EU And UK Sanctions Imposed On Largest Russian Banks By Assets
    US EU UK
  Assets (RUBbn) Full Blocking Sanctions (SDN) Dollar Clearing (CAPTA) Debt and Equity Restrictions Asset Freeze SWIFT Blocking Debt and Equity Restrictions Asset Freeze Sterling Clearing
Sberbank 41,166    
VTB 20,859  
Gazprombank 8,722        
Alfa-Bank 5,346        
Russian Agricultural Bank 3,886        
Otkritie Bank 3,780      
Promsvyazbank 3,678      
Credit Bank of Moscow 3,286         ✓​​​​​​​  
Sovcombank 1,913        
Raiffeisenbank 1,598                
Note: Bold denotes state-owned bank; italics denotes foreign bank. Source: Fitch Solutions

Current bank sanctions are likely to have a somewhat limited impact on the banking sector. The Russian government’s efforts to insulate the sector from sanctions since 2014 and the exclusion of energy transactions from the current bank sanctions underpin this view. While economic sanctions would hit demand for credit via lower investment, private consumption and economic growth, sanctions targeting banks will have a smaller impact on the banking sector and will affect lending mainly via 3 channels. First, almost all domestic Russian banks face restrictions on issuing debt and equity abroad. However, Russia’s largest banks are not heavily reliant on external financing with the average loan-to-deposit ratio across the 10 largest banks sitting at 87.4% as of the end of Q321. This will mitigate the impacts of sanctions.

Second, the sanctions significantly curtail Russian banks’ ability to operate abroad. Sberbank and VTB have shut down their European operations, and in some cases regulators have begun to wind down or sell off the business units. There is little data to illuminate the impact on operations within Russia, but at end-2020, Sberbank Europe reported total assets worth EUR12.9bn (equivalent to around RUB1.2trn at the time). This represented just 3.3% of Sberbank’s total assets at that time. The equivalent calculation shows that the European arm accounted for just 2.6% of the group’s book equity. VTB’s European arm represented a slightly larger proportion of the balance sheet, accounting for 4.1% of total assets and 5.7% of equity.

Third, Western sanctions, specifically those relating to SWIFT as well as the CAPTA and SDN lists, reduce the ability of Russian banks to carry out international payments. This is problematic for Russian exporters, but the continued facilitation of energy payments mean a large proportion of Russian exports are not affected. While the EU plans to cut oil and gas imports from Russia, ending payments for Russian energy is not feasible in the short term, even if the value of these hard currency flows decline.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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