Russian Retail Banking Not for Fainthearted Bondholders

By Natasha Doff  

Photographer: Andrey Rudakov/Bloomberg

Employees speak with customers inside the headquarters of OAO Sberbank in Moscow.... Read More

Bondholders are signaling concern that Russian banks focused on retail lending are suffering as international sanctions prompt consumers to retrench.
The yield on ZAO Russian Standard Bank’s dollar bonds due in April 2018 doubled since the end of September to a record, while notes of lender TCS Group Holding Plc peaked at 19.65 percent this month, compared with 11.12 percent in July. Both exceeded the average gain in yield this quarter for a Bloomberg index of the nation’s corporate bonds.
Non-performing loans are growing faster at banks catering to consumers as Russia’s $2 trillion economy teeters on the edge of a recession from U.S. and European penalties imposed over the conflict in Ukraine. Retail sales growth stalled last month as joblessness jumped to
the highest level since April amid rising interest rates, the fastest inflation in three years and a 32 percent plunge in the ruble this year to a record yesterday.
“Russian retail banks are in a survival mode,” Peter Varga, who manages $1.2 billion in emerging-market corporate bonds at Erste Sparinvest in Vienna, said by e-mail yesterday. “Yields are rising because investors think NPLs will soar.”
Non-performing retail loans jumped to 630 billion rubles ($13 billion) in September, taking the ratio versus total consumer credit to a three-year high of 5.68 percent, from 4.42 percent at year-end 2013, according to Russian central bank data.

Bad Loans

Russian Standard Bank’s ratio of bad debt to total loans climbed to 13 percent in the first half from 10 percent at the end of last year, according to Standard & Poor’s. For TCS, it jumped to 12 percent from 7 percent, the company said.
Renaissance Credit Bank’s rate increased to 20 percent from 12 percent in the period, Moody’s Investors Service said last month. Chief Executive Officer Alexey Levchenko said yesterday the bank has “not seen a new wave of credit deterioration,” declining to give further details on bad loans.
TCS (TCS) said it was “prioritizing risk management and is tightening collections,” according to an e-mailed statement yesterday. Russian Standard Bank’s press service didn’t respond to e-mailed requests for comment.
“People are overleveraged and can’t refinance their loans,” Yulia Safarbakova, a financial-industry analyst at BCS Financial Group in Moscow, said by phone on Nov. 21. “Their real income is decreasing due to the worsening economic situation and the ruble devaluation.”

Extending Maturity

Russian retail sales rose 1.7 percent in October, down from 3.5 percent growth a year earlier, the Federal Statistics Service said Nov. 21. Unemployment rose to 5.1 percent as the ruble tumbled 8 percent, its worst month in more than two years.
Russian Standard Bank proposed this week to extend its 2018 Eurobond by two years and increase its coupon after the yield climbed to 32.38 percent. The yield rose 51 basis points to 32.77 percent at 2:40 p.m. in Moscow. S&P lowered its assessment of the bank’s risk position to weak from moderate on Nov. 26, citing a “sharp deterioration” in its asset quality and increasing stress in Russia’s retail lending segment after years of “aggressive” growth.
While non-performing-loan ratios will probably rise next year, lenders can limit the damage issuing fewer risky retail loans, according to Andrey Klapko, an analyst at OAO Gazprombank in Moscow.
“All banks are concerned with quality now and tend to grant loans only to their payroll clients which are safer for them, rather than to outside clients,” Klapko said by phone on Nov. 26.

Limiting Damage

OAO Sberbank, Russia’s biggest lender, said two days ago it was cutting credit-card approvals to less than 50 percent, after reporting its non-performing loan ratio increased to 3.5 percent at the end of September from 2.9 percent at the end of last year.
Some private banks asked for financing from the country’s National Wellbeing Fund, Russian newspaper Vedomosti reported yesterday, citing unidentified officials.
“The retail banking sector may become the weakest link next year, because we’re seeing a very sharp change in consumer behavior,” Ivan Tchakarov, an economist at Citigroup Inc. in Moscow, said by phone on Nov. 26.