Good afternoon,
Today, we are presenting the Financial Stability Review for 2023 Q2—Q3. Over this period, the list of vulnerabilities remained relevant overall. Besides, some of them realised to a certain extent. The Russian economy continued to expand fast. The steady rise in domestic demand, supported by the surge in lending, was increasingly exceeding the potential to ramp up supply. In these conditions, inflation soared. In order to reduce inflation risks, the Bank of Russia raised the key rate from 7.5% to 15% per annum.
I would first give an assessment of the effect of tight monetary conditions on financial stability. Moreover, many countries have also been tightening their monetary policies recently, and policy rates have reached their 10–15 year peaks, which has started to adversely affect the financial sector: there is a growing number of corporate defaults, housing prices are adjusting, and the commercial real estate sector is experiencing problems. Such issues as US regional banks’ crisis and Credit Suisse’s instability this spring have been tackled, but there are other vulnerabilities that might materialise amid high interest rates globally. Policy rates in these countries had been kept close to zero (or even at a negative level in Europe) for a very long period. Consequently, market participants were engaged in risky strategies, seeking to increase profits, while failing to properly manage their interest rate risk.
The situation in Russia is different. According to our analysis, the real and financial sectors of the national economy will remain stable in the conditions of tight monetary policy. The current situation is diametrically opposed to the key rate increases in 2014 and 2022 when the Bank of Russia abruptly raised the key rate largely to mitigate financial stability risks in order to stop the outflow of people’s funds from ruble deposits and reduce volatility in the financial market. Today, the key rate increase is the response of monetary policy to soaring inflation.
As regards the corporate sector, its outstanding debt remains quite small statistically, with the net debt-to-operating profit ratio of the 70 largest companies equalling 1.6 as of the middle of the year. This is more than last year when exporters had larger earnings amid record-high oil and gas prices and foreign countries had not yet imposed the embargo on Russian oil. Nevertheless, this is notably less than 2.1 during the pandemic in 2020. The review publishes the results of the analysis of these companies’ sensitivity to tight monetary conditions next year. According to our estimates, they will remain resilient overall, and restructuring might be needed only for some borrowers. A large number of companies facing difficulties restructured their loans before the key rate increase.
It should be noted that banks are generally cautious in lending to companies at variable interest rates: such loans are mostly issued to large corporates that are able to properly manage their risks. Specifically, loans at variable interest rates account for 60% in lending to oil and gas producers and metallurgical enterprises and 35% in lending to small and medium-sized businesses. The quality of corporate loans at variable interest rates is higher on average, compared to loans at fixed interest rates: as of 1 October 2023, bad loans accounted for 3% and 8%, respectively. In contrast to last year, the rise in the key rate did not entail extensive loan restructuring. In August—October, the amount and number of restructured loans were comparable with the figures of the previous months.
Speaking of the real estate market, we do not have mortgage lending at variable interest rates, as opposed to a number of foreign countries. Therefore, the key rate increase does not involve higher debt burden for people who already have mortgages. Until recently, mortgage lending demonstrated very high growth rates (34% in annualised terms, as of 1 November). This trend was accompanied by easing in the lending standards. Over the past two years, the proportion of loans issued to borrowers with debt service-to-income ratios (DSTI) exceeding 80% nearly doubled, approximating 50%. Loans with a small down payment of no more than 20% accounted for over 50% in the total amount of mortgages issued over Q3.
Subsidised programmes are the main driver in mortgage lending, accounting for 63% of the total amount of mortgages issued in Q3. Besides, this share increased to 71% in October. In these conditions, the price gap in the housing market had been expanding: in Q3, new housing prices were already 42% higher than prices in the secondary market. Before the launch of large-scale subsidised mortgage lending programmes, this gap did not exceed 10%. When market rates go up, activity in the subsidised segment increases even more. The main task today is to prevent a ‘bubble’. To this end, it is crucial to modify subsidised programmes replacing them with targeted ones and to enhance the lending standards. We raised the add-ons for risky mortgages from 1 October. Next year, jointly with State Duma deputies, we will be developing a mechanism of macroprudential limits in mortgage lending.
As to developers, they have been recording a surge in demand and an inflow of funds into escrow accounts in recent months. Even if this inflow contracts in the future because of a slower expansion of mortgage lending, we do not expect that developers might face any problems. Firstly, owing to the escrow mechanism, interest rates for housing construction projects are considerably lower than those on corporate loans in general. Secondly, most projects are sufficiently stable. Thirdly, developers have earned significant profits in recent years, having created a safety cushion.
The same is also relevant for the financial sector. In July—October, the yield curve of federal government bonds rose by 310 basis points on average. In such a situation, banks faced a negative revaluation of the bond trading portfolio in the amount of nearly ₽300 billion, which is 1.6% of the nominal value of the portfolio. Losses expected over a one-year horizon due to materialised interest rate risk in the banking book, considering the actual rise in interest rates, will approximate ₽600 billion as a decline in net interest income. However, these losses are minor relative to banks’ net interest margin of 4.8%, as these losses make about a half of a percentage point.
The negative revaluation of bonds affected the segment of non-bank financial institutions as well. Nevertheless, its impact on their financial performance was also minor. As regards insurers and non-governmental pension funds, their profits from the beginning of the year reached about ₽400 billion. Hence, we do not expect that interest rates might have any negative effects on financial stability.
I would now speak about vulnerabilities associated with foreign exchange and sanction risks. In August, the Russian foreign exchange market was experiencing elevated volatility amid shrinking exports and growing demand for imports. Concurrently, the liquidity and the depth of the market decreased, that is, smaller foreign currency purchases started to influence the exchange rate more strongly. Consequently, the ruble weakened by 21% over June-September. Nevertheless, in October—November, the ruble appreciated by 10% amid higher oil prices and the restoration of the balance of trade. The key rate increase by the Bank of Russia also contributed to the ruble strengthening, limiting excessive demand for imports and encouraging companies to more quickly convert their foreign currency earnings into rubles. Besides, the President’s executive order on the mandatory sale of foreign currency earnings by exporters also accelerated the conversion of earnings. In October, net sales of foreign currency by the 29 largest exporters increased by 36% month-on-month, reaching $12.5 billion. From the beginning of November, net sales already exceeded this amount.
Future dynamics will depend on foreign trade and the level of oil prices that have become more volatile recently. On the one hand, there are growing concerns that the global demand for energy commodities will be contracting due to the slowdown in the world economy. On the other hand, the conflict in the Middle East is not over yet. In addition, unfriendly states are regularly toughening the sanctions on Russian exports. Nevertheless, the influence of the financial account on the foreign exchange market continues to weaken. Russian companies do not plan any significant repayments of their external borrowings in the next few months. There is a monthly cap limiting the amount of purchased foreign currency within transactions for non-residents’ withdrawals from Russian assets.
Overall, companies and the financial sector are gradually adjusting to the current level of the sanctions and altering the channels for their cross-border settlements in order to reduce their exposure to new restrictions. The largest companies’ export earnings in ‘toxic’ currencies notably decreased, specifically from 96% in early 2022 to 17% this September. The Chinese yuan is becoming the main foreign currency in the Russian market. Cross-border payments in rubles have been increasing as well. However, the offshore market of the ruble is still quite limited. Foreign companies receiving payments for imports to Russia in rubles and non-residents paying for Russian exports in rubles predominantly sell and purchase rubles in the Russian market. Foreign banks’ funds in correspondent accounts and deposits with Russian banks in rubles totalled about ₽550 billion as of 1 October, which is approximately the same as last year, but the share of banks from friendly countries surged to 75%.
Dedollarisation of banks’ balance sheets is progressing, which enables banks to reduce the open foreign currency position and, accordingly, their exposure to foreign exchange risk. Besides, the share of friendly states’ currencies in the structure of foreign currency funds has also been growing, accounting already for 49% in companies’ foreign currency deposits and 29% in foreign currency loans as of 1 November.
As noted in our reviews beginning from 2020, an increase in people’s investment in foreign instruments is a vulnerability. In the first place, this growth involves higher risks, including credit, infrastructure and sanction ones, for people themselves. At the macrolevel, the expansion of such investment causes a reduction in the amount of resources in the Russian financial system that could be used to boost the national economy. Risks associated with investment in foreign instruments have actually materialised: the U.S. Department of the Treasury enacted sanctions against PJSC SPB Exchange. It should be noted that over 80% of the investors whose shares were blocked are qualified. Nevertheless, this situation is yet another proof that any foreign investment involves sanction risks for Russians. This is typical of investment made through not only the Russian infrastructure, but also foreign brokers, as well as of deposits with foreign banks.
In view of this, the reduction in individuals’ cross-border money transfers is a favourable factor: over the period under review, people’s transfers nearly halved to ₽1.5 trillion. Besides, individuals’ money transfers are often not held in deposits with foreign banks, but are used to cover expenses abroad and to increase balances in foreign bank cards. Overall, Russians have decreased their exposure to risks associated with foreign investment: the proportion of their savings in foreign currencies, including deposits with foreign banks, contracted by 1.6 pp to 20.2%.
Furthermore, we do not record a rise in Russian users’ activity in the cryptoasset market: the number of visits to websites of the largest cryptocurrency exchanges declined by 2% over the past six months. However, the number of transactions, including cryptoasset purchases, that were identified by banks increased by 54% in annualised terms to ₽82 billion on average per month. However, this growth was associated with the enhancement of banks’ approaches to detecting such transactions as a result of the supervision. Overall, people’s risks related to participation in the cryptocurrency market persist, and we will be monitoring them.
Finally, I would like to speak on risks associated with households’ debt burden — this is also an issue that we have been discussing in our reviews for a long time. The annual growth rate of lending is close to that of wages. However, we are concerned that lending is expanding due to loans issued to over-indebted individuals. As of 1 July, the proportion of borrowers having three or more loans increased to 47% of the consumer loan portfolio.
From the beginning of the year, in order to contain the increase in debt burden, the Bank of Russia applies the macroprudential limits (MPLs) that restrict the percentage of risky consumer loans issued to individuals. Initially, the limits were targeted at the group of borrowers having the highest debt burden, whose DSTI exceeded 80%, and helped improve the lending standards. However, the proportion of loans issued to borrowers with DSTI of 50–80% increased. Therefore, already in Q4, we also introduced the limits on the percentage of loans issued in this range, and reduced the maximum allowable share of loans issued to borrowers with DSTI above 80% to 5%.
In order to accelerate the transition to a better-balanced structure of lending, the Bank of Russia has tightened the limits on loans to borrowers with DSTI of 50–80% to be issued in 2024 Q1: the MPL on credit cards decreases from 20% to 10% and that on other loans — from 30% to 25%. The tightening of the limit on credit cards is associated with the fact that the MPL is only applicable to new cards and cards with an increase in the credit limit. This is why the MPL influences the structure of lending with a time lag. We expect that the new measures will make the growth of lending better-balanced. Besides, the macroprudential buffers remain in effect — they enable banks to accumulate capital buffers that the Bank of Russia can permit to use in the case of materialisation of systemic risks (as in 2020 and 2022).
Overall, the experience of Russia and other countries proves that mitigation of emerging vulnerabilities, creation of capital buffers through macroprudential measures, and timely cancellation of regulatory easing are important tasks for the regulators that help pursue flexible monetary policy. Russia is still exposed to the risks of new sanctions and, therefore, this safety cushion is vital for the country.
Thank you for attention.
