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Russian rate cuts to ease banks' concerns over rising bad debt
Russian rate cuts to ease banks' concerns over rising bad debt
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By Elena Fabrichnaya After recording record profits thanks to robust demand for loans even at sky-high interest rates, Russian banks are now hoping a cycle of rate cuts will nip concerns about rising overdue consumer debt in the bud. Analysts polled by Reuters expect the Bank of Russia to slash borrowing costs by 200 basis points to 18% when it meets on Friday in what would be its deepest cut since 2022, as an easing cycle after nearly two years of monetary tightening gathers pace.With such high rates, credit risk is currently the main concern among banks, Renaissance Capital economist Andrei Melashchenko told Reuters, something that a mere 1% cut would not fundamentally change. "But if the (easing) cycle continues...then towards the end of the year we will see lower spending on reserves by banks," Melashchenko said. "And as the growth of the loan portfolio recovers, the share of problem debt will decrease." Russian banks' combined profits of 1.7 trillion roubles in the first half of this year have enabled them to build up capital reserves as loan servicing has deteriorated with the central bank holding its key rate steady at a more than 20-year high of 21% from October to June. State-owned VTB Bank RUS:VTBR told Reuters this month that every 1% interest rate cut gave it an extra 20 billion roubles in profit. CFO Dmitry Pyanov said VTB stands to benefit above all others because its high proportion of loans at floating rates carries greater risks of defaults and debt restructurings. "What can undermine a bank's financial sustainability?" Pyanov said. "It is the default of corporate clients, because problematic retail will hardly cause significant harm."BAD DEBTS 'CONTROLLABLE'Overdue consumer loans are nevertheless on the rise, even as rates have eased, although Central Bank Governor Elvira Nabiullina has sought to quash rumours of a looming crisis and said all bad debt is provisioned for. A source close to the central bank told Reuters that a rate cut will boost banks' profits and strengthen the sector's capital position.German Gref, CEO of Russia's largest lender Sberbank RUS:SBER drew attention to the growth of overdue consumer loans earlier this month but said everything was covered by reserves.Sberbank is majority-owned by the Russian state and its shareholders, most of whom are in Russia and cut off from Western capital since the imposition of sancti...