Russian Banks - What We Know at This Stage

In this note, we sum up a few thoughts on the current situation for Russia's banks.> Immediate pressure weathered... Since the initial brief depositor panic in late February, deposit flows have stabilized and even turned into net inflows as banks have hiked short-term deposit rates to around 20%, in line with the key rate.> ... and the CBR has experience of crises. The CBR is well versed in supporting the banking system through crises and has already made important moves in providing liquidity and capital forbearance. The banking sector recapitalization that we saw in 2008-09 and 2014-15 is not yet on the cards but clearly remains an option.> Over half of sector assets subject to material new sanctions. One indicator of the scale of the potential impact on Russia's banks is that more than half of sector assets are exposed to material new sanctions (and that's not including those on new debt/equity), with almost one quarter of assets held by banks facing blocking sanctions. This will have long-term ramifications, with certain business flows, such as those relating to exporters, likely migrating to non-sanctioned banks. It also looks increasingly likely that several of the longstanding foreign banks operating in Russia may cease operations.> Looking to 2014-15 for clues about near-term challenges. While it looks likely that the longer-term implications for the structure of the Russian banking sector will be much more profound than we saw in 2014-15, that period can provide some pointers about the near-term challenges. We look at what happened then in terms of banking sector balance sheet growth, liquidity, FX mix, asset quality, margins and recapitalization to help gauge things to look out for in the coming months, though our economists expect a much more dramatic economic slump this year (a 10-15% GDP contraction versus 2% in 2015). > Amid the many challenges, new opportunities will also open up. It will of course take time to see how the changes in the Russian economy and banking sector play out. As with all crises, amid the numerous challenges the current one will also open up new opportunities for the Russian financial sector. We have already seen the CBR grant Sber a license for the creation and exchange of digital assets, and the shift away from dollar and euro transactions will no doubt open up opportunities in Asian markets, while dependence on the local capital markets is also likely to increase, although the depth of such markets amid the economic fallout is questionable.