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. Last Updated: 07/27/2016

Bust Looms for Banks, Experts Say

Russia's banks will face a conundrum in 1996: While the economy as a whole is expected to grow and become healthier, the banking sector is seen as being in decline.


Some experts even predict a crisis worse than that in August 1995, when a liquidity crisis in the interbank market brought several close to collapse.


"It will not only mean a liquidity crisis," Galina Panova, an associate professor with the banking department of the Financial Academy. "It will last for more than a few days and mean more bankruptcies."


She explained that the reasons that caused the August crisis -- general economic instability, severe difficulties due to non-payment and inter-company debts, plus new high reserve requirements stipulated by the Central Bank -- were still present, and their cumulative effect was growing.


Other experts said economic stabilization and slowing inflation would ignite the crisis by reducing the profit margins of Russian banks accustomed to making high rates of return on currency speculation made possible by inflation and a rapidly falling exchange value of the ruble.


In recent years, many Russian banks have made huge profits, playing on shifts in the ruble-dollar exchange rate and through extending short-term, or even overnight, credits on the interbank market.


As a result, Russian banks have overall been more profitable than their foreign counterparts, with profit/assets ratios as high as 3.9 percent, while in the United Sates, for instance, the ratio is one-half or one-third of this, according to the Institute of Economic Analysis.


The prolongation of the ruble corridor, slowing inflation, and the cut in the Central Bank refinancing rate -- so far from to 160 percent from 170 percent annually -- will encourage commercial banks to change tack and invest in industry and into expanding their retail operations, said Sergei Zatsepilov, head of the analytical department with Inkombank.


"Those banks which have experience in retail business and in technology, and a wide network of branches, will be at an advantage," he said.


He also said the interbank market will "inevitably" become smaller, while continuing reductions in government funding for industry will mean that companies will have less and less money to place with banks. At present, few banks pay interest on company deposits in current accounts.


These so-called "free liabilities" make up 75 percent of the money deposited in Moscow banks, according to research by the Institute of Economic Analysis.


"It will be a year of depression for the banks," agreed Boris Sergeyev, member of the board of Tokobank. "I cannot see any optimistic perspectives."


He said that the banks were not yet organized to work under conditions of economic stabilization.


"Only those banks which have long-term ties with their clients and international institutions will have an advantage," he said. "They will be the banks that have experience in extending hard currency credits." Many small banks do not grant credits at all, but live off their activities in the interbank and currency markets.


The "completion of financial stabilization will seriously complicate the position of ... most Russian banks," the Institute of Economic Research says. "First of all, banks will have to attract more deposits from individuals, the proportion of which in Moscow banks' balances remains extremely low. The reworking of the structure of banking operations must be so significant that it may cause a deep banking crisis. Many banks are likely to go out of existence, or will have to seriously cut back their operations."


While restructuring would undoubtedly bring less profits at first, in the long-term it is a healthy process, said one Western analyst.


"I regard restructuring as a positive feature," said Steven Connolly, senior manager in charge of banks with Coopers & Lybrand in Moscow. "There are too many banks in Russia. There will be merging and weeding out of small banks. It will be a tough time, but to their advantage."


A wave of banking bankruptcies is also anticipated by Zatsepilov of Inkombank.


Since the August crisis, the Central Bank has revoked the licenses of about 300 banks of the 2,500 in Russia, and Zatsepilov predicted that it would revoke 500 to 600 more by summer 1996.


"Out of Russia's 25 biggest banks, a minimum seven will finish 1995 with losses," he said. "Some of them are on the verge of bankruptcy," he said, citing Natsionalny Kredit as a prime candidate.


"The Russian banking system will continue growing," Connolly of Coopers & Lybrand said. "They've made a great progress in the last three years and the August crisis has served them a very good lesson.


"Banks are now doing their business more prudently and sensibly," he added. "They've understood that there are more aspects to banking than dealing on the interbank market. They will become more universal and more positive to customer service."


Another reason for a more stable banking atmosphere was identified by Sergeyev of Tokobank, in the form of the appointment of Sergei Dubinin as the new chairman of the Central Bank. "The Central Bank is headed by a sensible, reasonable man," he said. "It is possible to predict what the Central Bank will be doing. Besides, Dubinin promised to listen to the banks and he will better understand 'submerged rocks' that may endanger new regulations."


Another trend for 1996 was, in the opinion of Inkombank's Zatsepilov, stiff competition for the Moscow and St. Petersburg banks from regional banks.


"Already in 1995 Moscow and St. Petersburg banks have had problems in curtailing the expansion of regional banks," he said, citing Nizhegorodsky Torgovy Dom from Nizhny Novgorod and the so-called "oil" banks from Bashkortostan as examples of regional banks making moves on the two main cities.He said that regional banks had been conducting marketing research "with an ultimate goal to squeeze out Moscow banks which will become unstable by summer 1996."


At the same time, Moscow and St. Petersburg banks may face more difficulties in extending their operations to the regions.