Russia’s banks are feeling the effects of granting free-spending consumers loans for everything from mobile phones to household appliances and foreign holidays as late repayments surge amid U.S. and European sanctions.
Non-performing retail loans jumped 49 percent in the 12 months through July to 588 billion rubles ($15 billion), taking the ratio versus total consumer credit to an almost three-year high of 5.4 percent, according to Russian central bank data. That compares with 37 percent increase in Turkey in the period and a bad-debt ratio of 2.4 percent.
For an economy where growth over the past decade has been fueled partly by consumers’ willingness to borrow, rising delinquencies risk exacerbating the worst slowdown since 2009. By forcing policy makers raise interest rates to shore up markets, President Vladimir Putin’s conflict with Ukraine is serving to spur debt-servicing costs and curtail lending.
“Russians have taken out expensive unsecured loans to buy iPhones, microwaves, do renovations, or go on vacation,” Yulia Safarbakova, a senior financial-industry analyst at BCS Financial Group in Moscow, said by phone on Sept. 18. “The current situation of banks is rather dire. The bad-debts portfolio is making losses, while it’s harder to grow out of them.”
As non-performing loans rise, growth in lending to individuals in the world’s largest energy exporter slumped to 22 percent in June, the slowest pace since February 2011, from 36 percent a year earlier, according to central bank data.
That’s signaling the end of a boom that saw banks triple their retail loan books in the four years through 2013. Russia’s delinquent-loan ratio climbed by 1.1 percentage points in the 12 months to July while the equivalent Turkish measure increased 0.4 point.
The crisis in Ukraine, where Putin is accused of stoking separatist unrest in the east after annexing Crimea in March, interrupted credit growth as the central bank raised interest rates by 250 basis points to 8 percent to stem the ruble’s slide. Turkey’s benchmark one-week repurchase rate is 8.25 percent, up from 4.5 percent at the beginning of the year.
“What we’re seeing is a rebalancing after that galloping growth from 2010 onward,” Fedor Bizikov, a money manager at GHP Group in Moscow, said by phone on Sept. 19. “It’s clear the double-digit growth creates imbalances, which this year were exacerbated by the cut-off of Western funding.”
Russian banks have been virtually blocked from Western financing after the U.S. and the EU banned the provision of new liquidity to some of the biggest Russian lenders and energy companies with maturity of more than 30 days.
While growth in bad debt has accelerated quickly, “levels are not too alarming, yet,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail on Sept. 19. “The Russian banking system is far from crisis levels of 2008-2009, when the share of consumer’s overdue debt of total debt exceeded 8 percent.”
Gross domestic product will expand by just 0.25 percent this year, according to a Bloomberg survey of economists, the slowest since the economy shrank 7.8 percent in 2009. Growth may halt next year with falling consumption being one of the culprits, according to Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp.
“The only components we expect to show growth are net exports and government spending,” Osakovskiy said by phone from Moscow on Sept. 19. “Consumption will decline by 1 percent.”
Retail lending is suffering because expansion in the past four years wasn’t supported by an improvement in disposable income, according to Safarbakova of BCS. The increase in real Russian wages slowed to 1.4 percent in July and August, the least in more than three years.
The ruble has fallen 15 percent against the dollar this year, while yields on 10-year government bonds surged 1.72 percentage points to 9.54 percent, the largest climb among 20 developing countries monitored by Bloomberg.
“Banks might have hoped to sit through this rough spot, but this year they were hit by, in succession, the ruble’s weakening, Crimea, the war, sanctions,” Safarbakova said. “The cost of funding spiked on the one hand and the attitude of borrowers worsened on the other.”