Annual Report 2011
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Russian Economy and Banking Sector

In 2011, the Russian economy continued to recover after the crisis. Compared with 2010, overall GDP growth did not change, but the economic situation improved in many respects, and numerous industries rebounded to pre-crisis growth. Last year, the main drivers of economic growth in Russia were strengthening domestic demand and high international oil prices. At the same time, the major uncertainty in the global economy, escalating debt crisis in Europe, and volatility on financial markets restrained the Russian economy.

In 2011, Russia’s GDP increased by 4.3%, industrial production by 4.7%, and investment in fixed assets by 6.2%. GDP growth was driven mainly by an increase in commercial reserves, whose share in GDP was 4.4%, compared with 1% in 2010. In addition, the share of net exports increased from 8.1% to 8.5%. The share of ultimate consumption decreased from 69.5% to 66.5% and that of investments in fixed assets from 21.4% to 20.6%. In absolute terms, however, all of these indicators rose. The key drivers of GDP growth were agriculture (16%), manufacturing (6.5%) and mining (1.9%).

The rapid recovery of the economy and record low inflation for Russia of 6.5% had a positive effect on the banking sector. Overall, 2011 was successful for Russian banks: by the year-end, the aggregate profit of credit institutions had reached a record RUB 848.2 billion, 46% higher than in 2010. The key profit drivers were income from the difference between interest on retail loans and expenses on deposits, as well as income from trading operations.

Key indicators for the Russian economy, %

Profits of Russian banks, RUB billion

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Download XLS

Last year, the assets of the Russian banking sector increased by 23.1% to RUB 41.6 trillion. The four largest domestic banks had a combined share of 51.0%, 4.7 percentage points more than in December 2010. The rapid asset growth was due to an increase in penetration of banking services, defined as the ratio of total bank assets to GDP, from 75% to 77%.

Deposits by businesses and individuals remained the main source of funding in 2011. The volume of corporate funds in accounts and deposits climbed by 25.9% to RUB 13.7 trillion, while that of individual savings in deposits and securities rose by 20.9% to RUB 11.9 trillion. The Central Bank also played a more prominent role as a source of funding.

In 2011, there was a significant revival in lending to the real sector, which more than doubled year-on-year. The increase in loan portfolio growth took place in the second half of the year, largely due to the devaluation of the ruble, and was dominated by significant foreign-currency lending: at the year-end, foreigncurrency loans accounted for 18% of the loan portfolio.

Overall, the loan portfolio of Russian banks climbed by 29.6% to RUB 28.7 trillion. The most rapid growth in lending was in the retail portfolio, which increased by 35.9% to RUB 5.6 trillion. Unlike in 2010, all types of lending increased in 2011. The volume of loans to the non-financial sector of the economy expanded by 26.0% in 2011, compared with 12.1% in 2010.

Key indicators for the Russian banking system, RUB billion

Corporate and retail deposits, RUB billion

Download XLS

Download XLS

Increased lending in Russia was accompanied by a marked reduction in the share of overdue loans, which totaled 3.9%, compared with 4.7% in 2010. As of 1 January 2012, the share of overdue loans to non-financial organizations was 4.6%, compared with 5.3% a year earlier, while that of consumer loans was down by 1.67 percentage points to 5.24%. Stricter requirements for borrowers and the general improvement in the Russian economy helped improve loan repayments in the second half of 2011.

Bank lending in Russia, RUB billion

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The fall in the share of bad debt and higher asset quality allowed banks to reduce allocations to provisions. Hence the share of provisions in the total portfolio fell to 8.5% at the year-end, compared with 10.5% at the end of 2010. The NPL coverage ratio remained at a comfortable level of 179%, slightly lower than 186% in 2010.

Seeking to maximize profits, Russian banks remained active in the securities market in 2011, and the securities portfolio of the sector expanded by 6.6% to RUB 6.2 trillion. However, unlike 2010, the share of securities in banking assets declined amid a rising loan portfolio share.

In the second half of 2011 there was a liquidity squeeze in the banking system coupled with strong demand for loans and low interest rates on retail deposits. Because of the worsening debt crisis in the US and Europe, Russian companies’ access to international funding sources was temporarily closed and capital outflows increased, causing the ruble to weaken. Rates on the interbank market rose and the volume of funds provided in the form of Finance Ministry deposits and via Central Bank repo operations increased. Competition for retail customers intensified and banks began to raise rates on deposits, which made them more attractive given the relatively low inflation. By the year-end, the liquidity situation stabilized and demand for credit remained strong, helping to boost interest rates: from July to December, the average rate on corporate loans rose from 7.9% to 9.3%.

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Outlook for 2012

This year, the outlook for the economy worldwide and in Russia, as well as the domestic banking sector, will remain uncertain. However, given the trends in the banking industry, we expect demand for loans to remain quite high, while requirements for borrowers may tighten. In 2012, the Central Bank believes that lending growth in Russia will slow slightly and is unlikely to exceed 20%, while deposits will expand by no more than 15-19%. However, the slowdown will not allow the banking sector to grow faster than other parts of the economy, and this consequently reduces the risk of the 2009 crisis reoccurring.

The major factors that could hinder lending growth in Russia are funding and capital adequacy. Nonetheless, overall profits are expected to be RUB 600-700 billion in 2012.

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Fax: +7 (495) 620 1953
Web-site: http://www.vbank.ru
Email:  investor@voz.ru

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