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. Last Updated: 07/27/2016

Moody's Issues Grim 2010 Warning to Banks

MOSCOW — Russian banks face a tough 2010 as macroeconomic fundamentals fail to provide enough support to their generally weak credit base, Moody's Investors Service said in a negative outlook for Russian banking issued on Tuesday.

"The risk of further instability in the banking system remains relatively high due to negative pressures on capitalization and profitability, against a background of deteriorating asset quality and liquidity," Moody's said.

Moody's estimates that Russia's economy will contract by 8.5 percent this year and rebound slightly next year, with growth in gross domestic product near 1.7 percent.

"For many banks, these growth expectations would require at least 12 months of reducing financial leverage, combined with working out problem loans, attracting new capital, repaying foreign debt and reassessing their funding strategies."

The ratings agency praised the Russian government and the Central Bank for appropriately containing the impacts of the financial crisis over the past year, but said the Central Bank's exit strategy was unclear at this stage.

"Moody's believes that this process would be gradual in order to avoid destabilizing the banking system," the agency said. "However, the weakest institutions could find it difficult to repay borrowings from the Central Bank."

The agency estimates that about 11 percent, or $70 billion, of Russian banks' total outstanding loans were problematic at midyear and that an equally high level of loans had been restructured.

The stock of nonperforming loans was likely to exceed $110 billion, or 20 percent of gross loans, by the end of the year, Moody's said. The government expects the level to be about 12 percent.

The agency said even the 20 percent level should be manageable for the sector, absorbed by available capital and reserves.

However, Moody's sees the pile rising in 2010 to 25 percent, "driven by impairment in restructured loans and moderate new lending."

Additional problems come from the fact that a big chunk of the outstanding loans, most of them taken before the crisis, will suffer from foreign exchange losses.

Moody's estimates losses on loans taken in foreign currencies to be 70 percent 100 percent higher than ruble-denominated loans. The agency expects a 10 percent depreciation for the ruble against the dollar by the end of 2009.

Moody's said it had taken negative rating action on about one-quarter of rated Russian banks since the beginning of the crisis in September of last year.