February 5, 2011
The panel speakers held a comprehensive discussion of how to manage the growth cycle in the CIS banking industry. A few of the questions raised by the panel include the following: how to manage the credit cycle while defending profitability; which lessons have been learned, and which have not; which risks have not been addressed post the crisis; how competition will evolve; and how the regulator should manage its involvement.
The Russian banking sector is emerging from the crisis quite successfully – not many EM countries have managed to post 20% y-o-y loan growth over the past nine months (Turkey, Argentina and China, but not many more). This is occurring even though Russia was not a country that passed through the crisis easily (relative to Asia, Latin America and Turkey). Ukraine and Kazakhstan were among the hardest hit by the crisis in the EM world, but Ukraine has seen its banks’ lending appetites improve over the past four to five months, while lending terms on select products are close to pre-crisis levels. Kazakhstan will need to maintain its focus on post-crisis problems this year, not only on impairments, but also on minimal pre-impairment profit due to very thin margins.
Lessons have clearly been learned from the crisis, the most important of which is to re-focus from growth to balanced growth with efficiency. The crisis also taught banks the patterns of borrowers’ behavior, information that they could not learn in normal times. That being said, risk aversion in thought appeared to be stronger than in practice – banks are understandably targeting profitability, which will force them to reduce risk aversion.
Russia’s regulator agrees that crises rarely eliminate future risks from systems entirely. This is mainly due to state interference, which is hard to avoid given the importance of softening the social and economic consequences of crises. But even in this context, the panelists agreed that the Central Bank took the right steps in a timely fashion. Going forward, it plans to impose more responsibility on the owners and management of banks, will focus on risk concentration, and is firmly committed to following the Basel 3 principles in Russia, including the timing of their implementation.
The state’s significant presence in the banking system is not unique for CIS banking – it is also high in Brazil or China, and a change in competition should not be narrowed to the question of a reduced state presence in the banking system. More important is fragmentation of the private sector, which is a clear weakness in Russia. For foreign banks, Russia remains an interesting market and their presence in Russian banks’ capital will increase gradually. The Central Bank agrees with this assessment. In Ukraine, foreign banks still hold over 30% market share in the system, although their positions have weakened in the past year, mainly to the benefit of Russian banks (which gained more than a 10% share). Growth in market-based demand (versus state-backed activity) leaves enough room for competition among local players.