CIS Banking Sector Outlook
 

CIS Banking Sector Outlook

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Elena Redko, Assistant Vice President, Analyst, Moody's Investor Services, Russia

Elena Redko, Assistant Vice President, Analyst, Moody's Investor Services, Russia

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CIS Banking Sector Outlook CIS Banking Sector Outlook Presentation Transcript

  • A general overview of CIS banking systemsElena Redko, Assistant Vice President – Analyst CIS Bankers Conference, Kyiv 2013
  • CIS Bankers Conference, Kyiv, June 2013Moody’s rated banking systems in CIS2RussiaBelarusUkraineKazakhanAzerbaijan
  • CIS Bankers Conference, Kyiv, June 2013 3Moody’s rated universe in CIS[1] Banking system outlooks (BSO) represent our forward-looking assessment of fundamental credit conditions that will affectthe creditworthiness of banks in a given system over the next 12-18 months. BSOs provide our view of how the operatingenvironment 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 bankcreditors.[2] Long-Term Bank Deposit Rating reflects a bank’s stand-alone credit strength and support considerations. A bank’sstandalone credit strength, as indicated by Bank Financial Strength Rating (BFSR), on a scale from A to E, mapped to abaseline credit assessment (BCA), reflects the institution’s creditworthiness without considering support.Number ofratedbanksAveragestandaloneBFSR/BCA(asset weighted)Average long-termlocal currencydeposit rating(asset weighted)BankingSystemOutlookLastpublishedUzbekistan 13 E+/b2 B1 Stable August 2012Russia 110 D-/ba3 Ba2 Negative October 2012Ukraine 14 E+/b3 B2 Negative May 2013Belarus 5 E+/b3 B3 Negative April 2013Kazakhstan 13 E+/b3 B1 Negative June 2012Azerbaijan 7 E+/b3 B2 Stable July 2012
  • CIS Bankers Conference, Kyiv, June 2013Russia4
  • CIS Bankers Conference, Kyiv, June 2013 5CFOs response: What constrains banks’ growth?Source: Moody’s CFO survey
  • CIS Bankers Conference, Kyiv, June 2013Slow down of credit growth6Source: Moody’s, Central Bank of Russia0%5%10%15%20%25%30%35%40%45%2010 2011 2012 2013FCorporate  Loans Retail  Loans
  • CIS Bankers Conference, Kyiv, June 2013Corporate lending stagnates:banks’ growth anticipation in 20137Source: Moody’s CFO surveyAGREE: Moody’s anticipates up to 15% lending growth in 2013
  • CIS Bankers Conference, Kyiv, June 2013Industries of lending interest:trading is targeted by 29% of banks81%2%5%13%13%13%23%29%0% 5% 10% 15% 20% 25% 30% 35%Fin  InstitutionsOtherDefenseRE  &  ConstructionEnergyRetailersManufacturingTradeSource: Moody’s CFO survey
  • CIS Bankers Conference, Kyiv, June 2013Overheated retail: growth expectation in 20139Source: Moody’s CFO surveyAGREE: Moody’s anticipates up to 30% retail lending growth in 2013
  • CIS Bankers Conference, Kyiv, June 2013 10Retail products of lending interest: unsecured productsis targeted by 54% of banks’ prioritiesSource: Moody’s CFO survey
  • CIS Bankers Conference, Kyiv, June 2013Where will interest rates go? … Banks anticipate growth11in lending … and fundingSource: Moody’s CFO surveyDISAGREE: CBR is likely to decrease its benchmark rates to support economicgrowth
  • CIS Bankers Conference, Kyiv, June 2013 12024681012141618Jan-­‐08Mar-­‐08May-­‐08Jul-­‐08Sep-­‐08Nov-­‐08Jan-­‐09Mar-­‐09May-­‐09Jul-­‐09Sep-­‐09Nov-­‐09Jan-­‐10Mar-­‐10May-­‐10Jul-­‐10Sep-­‐10Nov-­‐10Jan-­‐11Mar-­‐11May-­‐11Jul-­‐11Sep-­‐11Nov-­‐11Jan-­‐12Mar-­‐12May-­‐12Jul-­‐12Sep-­‐12Nov-­‐12Jan-­‐13%Gross  Margin Deposit  rate Lending  rateMargins are squeezing…Source: Moody’s, Central Bank of Russia
  • CIS Bankers Conference, Kyiv, June 2013Return on assets13Source: Moody’s, Central Bank of Russia
  • CIS Bankers Conference, Kyiv, June 2013Asset quality: banks expect only marginal improvement14Source: Moody’s CFO surveyDISAGREE: expect problem loans to reach the low teens this year, owing tomacroeconomic challenges faced by Russia and the seasoning of loans originatedduring the 2011-12 credit boom
  • CIS Bankers Conference, Kyiv, June 2013Capital – banks anticipate limited pressure…15Source: Moody’s CFO surveyDISAGREE: we have negative expectations for 2013, mostly driven by higherproblem loans and lower core earnings
  • CIS Bankers Conference, Kyiv, June 2013Low N1 – diminished loss absorption capacity16Source: Moody’s, Central Bank of Russia
  • CIS Bankers Conference, Kyiv, June 2013Where to take new capital?17Source: Moody’s CFO survey
  • CIS Bankers Conference, Kyiv, June 2013Ukraine18
  • CIS Bankers Conference, Kyiv, June 2013Ukraine – banking system outlook19»  The operating environment will remain challenging,characterised by only marginal GDP growth»  The very high volume of NPLs is insufficientlycovered by loan-loss provisions»  Depositor confidence remains low and could weakenfurther on expectations of local-currencydepreciation, while banks’ access to wholesalefunding will be reduced.»  We expect Ukrainian banks to remain only marginallyprofitable in 2013, due to declining net interestmargins, limited cost-cutting ability and the need tocreate additional loan loss provisions»  Despite the expectation thatsystem-wide capital adequacyratios will be declining, most bankshold sufficient capital buffers toabsorb anticipated credit losses»  Ukrainian banks maintain adequateliquidity buffers and haveimproved their loans-to-depositsratios since 2009STRENGTHS WEAKNESSES
  • CIS Bankers Conference, Kyiv, June 2013Ukrainian banking sector – Moody’s scenario analysis20ASSUMPTIONS:Most recent fin.crisis Central scenario Adversescenariocharacteristics (12-18 months horizon) (12-18 months horizon)2008-200915% GDP contraction in 200940% local-currency depreciation in 200840% NPLs crystallisation in 18 monthsOnly marginal GDP growth10% local-currency depreciation10% loan-book growthCrystallisation of up to 35% NPLs in thebooks (including unsettled NPLs from2008-2009)Annual 10% GDP contraction25% local-currency depreciationCrystallisation of up to 50% NPLs in thebooks (including unsettled NPLs from2008-2009)0%2%4%6%8%10%12%14%16%18%20%CAR  reported  (1  Jan  13) CAR  central  scenario CAR  adverse   scenarioCAR   Regulatory  minimumSource: Moody’s
  • CIS Bankers Conference, Kyiv, June 2013Ukrainian banking sector – Liquidity vs UAHdepreciation expectations21Source: National Bank of Ukraine, Bloomberg0%5%10%15%20%25%30%-­‐2.5-­‐2-­‐1.5-­‐1-­‐0.500.511.522.5Jan-­‐11Feb-­‐11Mar-­‐11Apr-­‐11May-­‐11Jun-­‐11Jul-­‐11Aug-­‐11Sep-­‐11Oct-­‐11Nov-­‐11Dec-­‐11Jan-­‐12Feb-­‐12Mar-­‐12Apr-­‐12May-­‐12Jun-­‐12Jul-­‐12Aug-­‐12Sep-­‐12Oct-­‐12Nov-­‐12Dec-­‐12Jan-­‐13Feb-­‐13USD  bn NBU  net  intervention  volume  (LHS) Net  FX  purchases  by  population  (LHS) 3  m  interbank  rates  (RHS)
  • CIS Bankers Conference, Kyiv, June 2013Belarus22
  • CIS Bankers Conference, Kyiv, June 2013Belarus – banking system outlook23»  the government has limited ability to extend support to the banksand to the overall economy»  banks’ asset quality and capital adequacy will deteriorate overthe outlook period»  the banks have low foreign-currency liquidity relative to highlevels of foreign-currency deposits»  The low indebtedness oflocal retail borrowers,compared with peer bankingsystems, supports retail loanportfolios»  Close industrial andeconomic links with Russiasupport demand for asignificant portion (over30%) of Belarus’ exportsSTRENGTHS WEAKNESSES
  • CIS Bankers Conference, Kyiv, June 2013Belarus banking sector – Moody’s scenario analysis24ASSUMPTIONS:Most recent fin.crisis Central scenario Adverse scenariocharacteristics (12-18 months horizon) (12-18 months horizon)2011-20125.3% GDP growth in 2011109% inflation in 2011NPLs have yet to crystalliseAnnual 2% GDP growth15% local-currency depreciation20% loan-book growthCrystallisation of up to 20% NPLs in thecurrently performing booksAnnual 3% GDP contraction60% local-currency depreciationCrystallisation of up to 35% NPLs in thecurrently performing books
  • CIS Bankers Conference, Kyiv, June 2013Kazakhstan25
  • CIS Bankers Conference, Kyiv, June 2013Kazakhstan – banking system outlook26»  Credit demand will remain modest over the outlookperiod, as the largest companies driving the economyfinance themselves outside the domestic bankingsector; this will constrain banks’ lending growth»  Weak asset quality requires higher loan loss reservesto cover all expected losses»  A number of large banks are under-capitalised»  Profitability will remain low due to weak creditgrowth, rising loan loss provisions and increasingfunding costs (particularly for local-currencydeposits).»  Domestic economic growthremains robust thanks to high oilprices and rising oil output andgovernment spending: 5%expected real GDP growth in 2013»  Liquidity is supported byincreasing customer funds, limitedlending growth and manageablemarket debt repayments for mostbanksSTRENGTHS WEAKNESSES
  • CIS Bankers Conference, Kyiv, June 2013Kazakh banking sector – Moody’s scenario analysis27ASSUMPTIONS:Most recent fin.crisis Central scenario Adverse scenariocharacteristics (12-18 months horizon) (12-18 months horizon)2008-20091.2% GDP growth in 2009No local-currency depreciation in 200840% NPLs crystallisation in 18 monthsAnnual 5% GDP growth5% local-currency depreciation5% loan-book growthCrystallisation of up to 15% NPLs in thecurrently performing booksAnnual 3% GDP growth15% local-currency depreciationCrystallisation of up to 30% NPLs in thecurrently performing books
  • CIS Bankers Conference, Kyiv, June 2013Azerbaijan28
  • CIS Bankers Conference, Kyiv, June 2013Azerbaijan – banking system outlook29»  Corporate-governance deficiencies, including a lack oftransparency, related-party exposures and key-manrisk»  The economy remains undiversified and relies heavilyon the oil sector»  Banks’ credit-risk appetite remains high, contributingto significant lending concentrations and a high shareof FX denominated loans»  Despite expected improvements, the level of problemloans 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 macroeconomicenvironment and increasing governmentinvestments support the bankingsystem’s growth, asset quality andprofitability»  Most banks have liquidity and capitalbuffers allowing them to cope withMoody’s central scenario»  Healthy net interest margins and a lowerprovisioning will support profitability»  Low banking penetration offersopportunities for long-term growthSTRENGTHS WEAKNESSES
  • CIS Bankers Conference, Kyiv, June 2013Azeri banking sector – Moody’s scenario analysis30ASSUMPTIONS:Most recent fin.crisis Central scenario Adverse scenariocharacteristics (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  currently  performing  books  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   scenarioCAR   Regulatory  minimum  Source:  National  Bank  of  Azerbaijan  and  Moody’s  Investors  Service  
  • CIS Bankers Conference, Kyiv, June 2013Uzbekistan31
  • CIS Bankers Conference, Kyiv, June 2013Uzbekistan – banking system outlook32»  Problem loans remain high in the context of arapidly growing economy, with low coverage byreserves»  Many banks maintain high concentrations (mostly tolarge corporates) in their loan portfolios»  Significant maturity mismatches exist betweenassets and liabilities, with a large portion of long-term project-finance exposures funded by customeraccounts with short-term contractual durations»  Whilst the sector’s overall capital adequacy issufficient, some large banks’ capital levels are beingweakened by high lending growth which makesthem vulnerable to a down-cycle»  Benign operating environment, owing tofavourable macroeconomic conditions,high government spending and strongdomestic consumption growth»  The “under-banked” and rapidlydeveloping retail and SME sectors providegrowth opportunities for bank lending»  Expanding local-customer fundingsupplies liquidity for loan growth»  Due to the absence of cross-borderexposures and low dependence oninternational funding, the credit profile ofbanking system is relatively shielded fromthe global financial crisisSTRENGTHS WEAKNESSES
  • CIS Bankers Conference, Kyiv, June 2013Uzbek banking sector – Moody’s scenario analysis33ASSUMPTIONS:Most recent fin.crisis Central scenario Adverse scenariocharacteristics (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  currently  performing  books  » Annual  4%  GDP  growth    » 20%  local-­‐currency  depreciation  » Crystallisation  of  up  to  20%  NPLs  in  the  currently  performing  books  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  scenarioCAR   Regulatory  minimum  Source:  IFRS  financials  of  Moody’s-­‐rated  banks  and  Moody’s  Investors  Service  
  • CIS Bankers Conference, Kyiv, June 2013What to read?34
  • CIS Bankers Conference, Kyiv, June 2013 35Moody’s Recent Research
  • CIS Bankers Conference, Kyiv, June 2013Q & A36THANK YOU!
  • 37Елена РедькоМладший Вице-президент – АналитикТел.: +7 (495) 228 60 74Elena.Redko@moodys.com
  • CIS Bankers Conference, Kyiv, June 2013 38© 2012 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODYS INVESTORS SERVICE, INC. (“MIS”) AND ITS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES,CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S PUBLICATIONS”) MAY INCLUDEMOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THERISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGSDO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. 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