Inflection Point: Credit Turns the Corner

Cristina Marzea
Co-Head of EEMEA Financials Research

Bank of America-Merrill Lynch

We are finally seeing signs that Russian credit has stabilized and growth is slowly emerging. According to Central Bank First Deputy Chairman Gennady Melikyan, in April credit growth accelerated to 1 percent (retail), 1.7 percent (corporate) for the sector excluding Sberbank — a second month in a row since March, when lending to real economy also increased by 0.2 percent. In our view, this suggests that we are seeing an inflection point in the trend — lending is finally starting to recover in line with the broader economy, albeit at a smaller pace. We expect this trend to continue in second half of 2010 and see sector loan growth at 10 percent for the full year (vs. minus 0.9 percent in Q1).

We believe that this pickup in credit growth will please the monetary authorities that perceived lending recovery to be their main target, reinforced by rate cuts and quantitative easing. With the re-emergence of loan growth, already significant M2 growth momentum and vocal opposition to further cuts from the government, the regulator may take a more cautious stance toward further rate cuts. However, as May’s consumer price index looks set to decline below 6 percent year on year, the Central Bank may be tempted to continue easing in line with our base case.

Ivan Bokhmat
EEMEA Financials Analyst

Bank of America-Merrill Lynch

Re-emergence of top-line growth has considerable implications for Russian banks, as this could offset the margin pressure that hurts earnings. Lending rates have followed the track set by the policymakers — one-year ruble corporate rates declined 530 basis points since January 2009, in line with a 500 basis point cut in the Central Bank refinancing rate. Russian corporates have been successfully negotiating down the pricing on existing loans. The deposit rates have also come down, but it takes more time to get through to the bottom line, as deposit repricing normally only takes place after the deposit expires — thus damaging net interest margins, or NIMs. Q1 2010 has been particularly painful for the banks in terms of margin pressures — sector data suggests that NIMs declined by 47 basis points to 6.41 percent, and we expect a similar effect for the listed banks.

Q1 NIM pressures are, we believe, well-understood (and priced) by the market. While loan yields have come off 210 basis points year to date, we are also seeing aggressive repricing of retail deposits — best rates for new deposits are down 350 basis points year to date to 9.8 percent, above Sberbank’s best rate of 8 percent. Clearly the recent NIM guidance from Sberbank — its CEO suggested 100 to 150 basis point declines vs. a previous guidance of 50 to 100 basis points — unnerved the market, explaining the stock’s relative underperformance. With Q1 results due by the first week of June, we believe that the market will look beyond the — very likely — NIM decline. Recent UniCredit Russia results in fact show good top-line delivery on accelerating volume growth combined with sharp declines in provisions, confirming good bottom line momentum for Russian banks.