Moody's changes outlook on Russia's banking system to stable from negative

Moody's changes outlook on Russia's banking system to stable from negative

Moody's Investors Service's outlook for Russia's banking system has been revised to stable from negative, given emerging signs of the country's economic recovery which will likely benefit its banks. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Russia over the next 12-18 months. Moody's report, entitled "Banking System Outlook - Russia" is available on Moody's subscribers can access this report via the link provided at the end of this press release.

"Slow economic recovery and stabilisation of macroeconomic indicators in Russia will support the operating environment for Russian banks," says Irakli Pipia, a Vice President -- Senior Credit Officer at Moody's. "We therefore expect improvements in banks' profitability and capital retention."

The rating agency expects the Russian economy to contract by only 1% this year, with a stabilisation in oil prices and strong government stimulus fuelling prospects for positive growth in 2017, as noted in September 2016.

Russian banks are therefore likely to post positive net profitability in 2016 and show a gradual improvement over the outlook horizon. However, net interest margins remain below historic averages, at just under 4% in H1 2016. In addition, provisioning expenses will remain elevated given the need to improve nonperforming loan coverage.

Asset quality will likely to continue to deteriorate, albeit more slowly. The rating agency expects problem loans of rated banks to rise to an average of 14%-15% of total loans over the next 12-18 months from 12% at end-2015.

At the same time, however, the system's capitalisation has improved owing to government-led injections, and Moody's forward-looking analysis suggests a moderate but manageable decline in the system's capitalisation over the outlook horizon.

The Russian banking system's funding and liquidity metrics are also improving; the average loan-to-deposit ratio has improved to 109% in June 2016 from more than 115% a year earlier and Russian banks have continued to reduce their dependence on the wholesale market.

Finally, the rating agency expects government support to remain a stable influence on bank ratings over the outlook period for the largest systemically important banks, as supported by a number of policy initiatives and announcements made by the Central Bank of Russia and the Russian government pledging assistance to Russian banks affected by sanctions.


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