S&P: Russian Banks Have Recovered Over The Past Decade But Could Still Take A Fall

/Standard & Poor's, Paris, 10.09.08/ - Standard & Poor's foresees gradual reform and improvement of the Russian banking sector--and perhaps possible setbacks - in an article published today, "A Decade After The Crisis, Russia's Banks Are Healthier, But Still Susceptible To Shock ." One of the biggest victims of Russia's 1998 financial crisis was the banking system. "To its credit, the sector has recovered strongly in the 10 years since then, and our prognosis is cautiously good, but with some reservations," said Standard & Poor's credit analyst Ekaterina Trofimova, author of the report. The recovery is reflected in the rise over the decade in the average rating on Russian banks from 'CCC' to 'B+'--still one of the lowest in the world. Standard & Poor's Ratings Services' Banking Industry Country Risk Assessment (BICRA) for The Russian Federation (foreign currency BBB+/Positive/A-2; local currency A-/Positive/A-2) is another healthy sign: We've raised it twice in the past two years, most recently on Aug. 6, 2008, when it improved to Group 7 from Group 8--joining the ranks of Latvia, Romania, and Turkey. The banking system is more resilient, though there are many ifs, ands, and buts. Russian banks are still supported more by favorable extrinsic factors--like the robust macroeconomic climate. However, intrinsic enhancements such as reform of the sector, improvements to banks' franchises, and development of risk management, are still uncertain, fragmented, and slow. "Lending portfolios are relatively new, but as they start seasoning and the credit environment deteriorates in Russia and globally, credit risks are a growing concern. Still, they should not threaten the ratings, at least in the near future," said Ms. Trofimova. Liquidity remains a key issue, and it's caught between opposing forces. It's partly benefiting from favorable export prices on natural resources, government injections, and international borrowings. "On the downside, we foresee renewed, albeit manageable, liquidity shortages-- especially as the global credit crunch drags on and cooler relations with the West exacerbate tight funding conditions and lead to more volatile market conditions," Ms. Trofimova added. Loans and deposits will continue to grow, but at a slower pace. The number of banks is set to decline due to a regulatory cleanup, but consolidation and mergers and acquisitions will still remain limited. Banks that survive will be bigger and more diversified. "If the patient was on life support in 1998, it's now up and walking. But what's not certain is whether it will take a fall on the path to better health," Ms. Trofimova said. This article is part of the special Standard & Poor's report, "Ten Years After Default, New Risks Emerge For A Resurgent Russia," in the Sept. 17, 2008, issue of CreditWeek, our weekly magazine on credit risk. For more information: Ekaterina Trofimova, Paris (33) 1-4420-6786; ekaterina_trofimova@standardandpoors.com [2008-09-11]