Translation. Region: Russian Federation –
Source: Central Bank of Russia
An important disclaimer is at the bottom of this article.
Good afternoon! Today we present Financial Stability Review for Q2–Q3 this year.
As a reminder, in recent years, we have identified five key vulnerabilities in the financial sector: corporate credit risk, household debt burden, housing market imbalances and project finance risks, structural imbalances in the foreign exchange market, and bank interest rate risk. Since the publication of the May Review, the profile of these vulnerabilities has changed somewhat. Two of them have recently become less relevant, and we no longer identify them as key: structural imbalances in the foreign exchange market and bank interest rate risk.
Let's briefly explain why we stopped highlighting them. The situation on the domestic foreign exchange market has largely stabilized, with exchange rate volatility this year at its lowest levels since 2022. Firstly, tight monetary policy makes ruble investments attractive. Secondly, structural factors such as import substitution and the repayment of a significant portion of foreign debt in previous years have played a role.
Meanwhile, new sanctions against Russian oil companies could lead to a temporary reduction in revenue for major exporters. However, experience shows that within a few months, sales and payment channels change, and the situation recovers. Therefore, we don't expect any problems in the currency market.
Regarding banks' interest rate risk, they have demonstrated that they can manage it well even in a high-interest environment. This was partly due to floating-rate lending and partly due to preferential lending programs. And now that rates have begun to decline, banking sector margins remain stable.
We now turn to the key vulnerabilities in the financial sector that we highlight in the current Review.
I'll start with the credit risk of companies.
Against the backdrop of a slowing Russian economy and persistently high interest rates, this issue remains our focus. Revenues in export industries have declined due to sanctions, reduced external demand, and lower prices for commodities, including oil and coal. Along with rapidly rising production costs, this has led to a decline in companies' operating profits. Meanwhile, their debt servicing costs have risen amid high interest rates. As a result, companies' debt burdens have increased.
Most companies are not experiencing debt servicing difficulties. However, their ability to further increase their borrowings has diminished. Companies whose operating profit is less than their interest payments are facing problems, but their debt ratio remains low.
In our baseline scenario, which assumes a gradual easing of monetary conditions next year, companies' debt burdens will decline. Our estimates show that even assuming a significant decline in profits for large companies, they will remain resilient. The share of companies at risk will increase, but only slightly. This suggests that most companies still have financial resilience reserves.
Small and micro businesses are facing a more difficult time today. We're seeing an increase in bad loans. But there's no systemic deterioration. When necessary, banks are extending repayment terms or changing interest payment schedules.
Thus, the financial position of the corporate sector as a whole remains stable. This is primarily evidenced by the slow growth of non-performing loans: their share has increased slightly since the beginning of the year, reaching 4% as of October 1.
But to ensure the situation remains stable, companies must avoid excessive debt accumulation. We've seen increased demand for loans in recent months, with the debt of large companies with high debt burdens growing faster than ever. Therefore, effective December 1, we doubled the surcharge applied to the increase in debt of large companies with elevated debt burdens. As a reminder, this surcharge only applies to large loans to large companies. We will increase it further if necessary. Banks must prevent borrowers from becoming over-indebted. We will ensure they have reserves and capital buffers to cover potential losses on corporate loans.
Now about retail lending.
The debt burden of citizens on bank loans has decreased. Firstly, people began taking out fewer loans, and secondly, household incomes continued to grow at a rapid pace. As a result, the share of income spent on loan servicing has decreased.
At the same time, the burden of individuals on loans from microfinance organizations and home purchase installments has increased slightly. We see that lending activity is partially shifting from banks to microfinance organizations. Moreover, loans from microfinance organizations affiliated with banks are growing the fastest. We plan to revise our approach to including microfinance organizations in banking groups when calculating standards, so that banks correctly account for these risks. To protect individuals from excessive indebtedness, it is also important to implement the microfinance organization reform we discussed earlier.
Now about the quality of loan servicing. The share of problematic unsecured consumer loans has increased by almost 4 percentage points since the beginning of the year, reaching 13%. This is primarily due to a contraction in the loan portfolio. It is also due to the delinquency of loans issued during the recent boom, when banks were willing to lend to higher-risk borrowers. Nevertheless, the share of problematic loans remains below historical peaks; 10 years ago, it reached almost 17%. If we had not taken measures in recent years to limit the debt burden of the population through macroprudential limits, the situation would be much worse. We see that even now, over-indebted individuals are much more likely to default.
Banks' loss reserves cover 120% of their non-performing loans. At the same time, banks have already accumulated a substantial macroprudential capital buffer. We can release it if necessary to help them cover loan losses. As a reminder, we made similar decisions in both 2020 and 2022. But for now, the situation is far from dire. On the contrary, banks are generating healthy profits, and there are no grounds for releasing the buffer.
Let's move on to the situation on the housing market.
It remains stable, driven by growth in mortgage lending. Amid falling rates, market mortgage lending in October nearly tripled compared to April, accounting for almost a quarter of all loans.
The quality of mortgage loans has deteriorated slightly: the share of non-performing loans increased from 1% at the beginning of the year to 1.7% as of October 1. This is largely due to loans for the construction of private homes that were not delivered on time. In this segment, the share of loans overdue for more than 90 days is approximately 4%. This is five times higher than for apartment loans. However, it is now possible to deposit funds for the construction of a private home into an escrow account, similar to the long-standing practice for purchasing apartments in multi-family buildings. This mechanism is now mandatory for government programs. There are also delinquencies on preferential and market-rate loans for the purchase of apartments. Overall, however, mortgage quality remains good.
At the same time, it's important to consider that some housing is sold on installment plans. As of October 1, household debt to developers totaled 1.4 trillion rubles. The practice of selling housing on installment plans is gradually declining, but in many housing projects, the share of such sales remains high.
According to our estimates, a significant portion of homebuyers with installment plans expect to take out a mortgage and repay their debt to the developer. However, not everyone is successful in obtaining a loan, and some are forced to terminate their equity participation agreements. We are discussing a bill with the government that would send installment plan information to credit bureaus so that banks can take a person's actual debt burden into account when issuing further loans.
A few words about the residential real estate market. Residential sales over the first 10 months amounted to almost 4 trillion rubles. This is comparable to the figures for the last two years. In terms of square meters, sales decreased by 10% compared to last year. But this is normal, given the surge in demand before the end of the mass preferential mortgage program. The overall sold-out rate for housing under construction remains acceptable at 32%. Some regions are experiencing oversupply, but as market rates decline, demand for housing will recover.
Most companies in the construction industry remain profitable. Data from the largest publicly traded developers for the first half of the year shows that their sales profitability remains stable. Given the high profits of previous years, most developers are positioned to remain sustainable.
In summary, the situation in both the corporate and financial sectors is stable. Bank capital adequacy has increased since the beginning of the year and stands at almost 13% as of October 1, while return on equity is 20.4%. Both indicators are comparable to the levels of the past two years. The gradual restoration of capital adequacy buffers will contribute to increased resilience in the banking sector. Banks will be able to provide loans to the economy and support borrowers through restructurings.
We will continue to closely monitor financial stability to respond promptly to new challenges.
Please note: This information is raw content obtained directly from the source. It represents an accurate account of the source's assertions and does not necessarily reflect the position of MIL-OSI or its clients.
