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. Last Updated: 07/27/2016

Bad Loan Forecast Cut, Critics Say Worst Ahead

NIZHNY NOVGOROD — The Central Bank on Thursday cut its forecast for bad loans in the banking sector in a sign of cautious optimism, but analysts believe that statistics show only the tip of the iceberg.

The pace of growth in Russian banks’ nonperforming loans has halved since the start of 2009, and lenders now have enough reserves to handle the bad debts, Central Bank board member Mikhail Sukhov told a banking conference.

“Under an optimistic scenario, the share of bad loans will rise to between 9 percent and 10 percent of the total loan portfolio. And we are optimists,” Sukhov said, adding that bad loans stood at about 5.4 percent as of Aug. 1.

The Central Bank had previously forecast that 10 percent to 12 percent of the total portfolio would be classified as nonperforming by the end of 2009, under what it called a “conservative” scenario.

The 10 percent threshold for bad loans is psychologically important, with the Central Bank forecasting the whole sector’s profit would be wiped out if delinquent loans breach that level.

“We are satisfied with the current level of provisions as a whole. As for today, banks’ loan portfolios are already with enough provisions,” Sukhov said. Provisions stand at 11 percent of retail portfolios and 7.9 percent of corporate portfolios.

Rising provisions have seen Sberbank post a tiny net profit in the first quarter, while VTB reported a loss.

The Central Bank does not expect total provisions to rise significantly from the 1.6 billion rubles ($51 million) now.

But some experts see the Central Bank’s optimism on the banking sector as premature.

“We believe that seriously impaired loans of Russian banks could be at least three times higher than is indicated by the official statistics,” Barclays Capital said in a report.

Greg Alton, a senior investment officer for Central and Eastern Europe at the International Finance Corp., estimates that the real number of nonperforming loans is near 10 percent.

“Some of the banks are just hiding their difficulties,” Alton said. Additionally, the discrepancy in the estimates is because of differences between Russian accounting standards and international accounting standards, he said.

He added that the share of toxic assets will only grow as a lot of outstanding corporate debt comes due in the second half. “Banks will have to recognize their losses,” he said.

For its part, the Central Bank is also looking at ways to make commercial lenders more transparent on bad loans.

Under current legislation, any bank that posts losses for three consecutive quarters is banned from attracting new retail deposits until it returns to profit. But Sukhov said the rules could be changed in September, potentially leading to greater honesty from banks on nonperforming loans.

“The moratorium will let banks feel freer in forming honest financial documentation,” he said.