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. Last Updated: 07/27/2016

CB: Banks Disguised $5Bln as 'PR'


Central Bank Chairman Sergei Ignatyev

In a rare affront to the sector he oversees, Central Bank Chairman Sergei Ignatyev lashed out at the banking industry Wednesday for spiriting offshore the ruble equivalent of $5 billion last year under the guise of paying for "marketing services."

Russian banks say they are suffering from lower margins and declining interest rates, but Ignatyev said their profits are plenty, just hidden through tax-avoidance loopholes or outright money laundering.

The central banker told the 14th annual conference of the Association of Russian Banks that the $5 billion figure was absurd, given the fact that Russia's entire advertising and PR market was estimated at just $2 billion last year.

This can only mean, he said, "that either banks' management want to legalize criminal money or transfer money abroad or avoid taxes."

In reality, bankers and industry watchers say, all three are true because many banks continue to find creative ways of hiding their profits, but also to meet the demand of their clients -- big Russian corporations.

Schemes such as "marketing service contracts," which are exempt from the 24 percent profit tax, are the most popular and allow banks to send money offshore through a myriad of front companies.

"Until recently many banks preferred to keep their profits in the shadows and they used different schemes to send their money offshore," said Vadim Adlerberg, head of treasury at Stroikreditbank. "But the situation is improving as banks become more transparent, and I think we will see more showing real profits this year," he said.

Ignatyev said the average return on capital for Russia's 100 biggest banks is currently about 18 percent. But while some banks in the top 100 show profits greater than the average, "at least eight" have never officially done better than 3 percent.

The Central Bank, he said, believes there were several possible reasons for the discrepancy: bad management, artificially inflating capital or artificially reducing profits to avoid paying tax.

Analysts said there were other reasons in addition to the ones singled out by Ignatyev, such as having a bad loan portfolio.

Andrei Ivanov, banking analyst at Troika Dialog, said the profitability of a bank should be around 25 percent if it is developing normally.

At the same time, Richard Hainsworth, banking analyst with Renaissance Capital, said the Central Bank's opinion usually differs from the banks' own estimates.

"It is very hard to measure the profitability of banks in Russia because most of them are not transparent," said Hainsworth, who also heads RusRating, which rates banks. "It is hard to say which portion of their capital is real."

"I don't think that it makes any sense to measure banks' performance based on return on equity, since it changes every day and doesn't really mean much in Russia," Stroikreditbank's Adlerberg said. "Several years ago we thought that an 18 percent return was nothing, while today we are happy with 12 percent."