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CORRECTED (OFFICIAL)-UPDATE 1-Lending boom makes Russian banks vulnerable to shocks
September 26, 2012 / 6:20 AM / 5 years ago

CORRECTED (OFFICIAL)-UPDATE 1-Lending boom makes Russian banks vulnerable to shocks

(Corrects after central bank changes estimates and says shortfall for banks was in liquidity and not capital)

* Retail lending up 26.1 pct, corporate loans up 9.4 pct to Sept. 1

* Overall banking system's capital growing slowly

* Local capital adequacy ratio lowest since end-1990s

By Oksana Kobzeva and Katya Golubkova

MOSCOW, Sept 25 (Reuters) - A lending spree by Russian banks may be piling up problems for the sector in future, especially if a sharp fall in oil prices puts a stop on the country's economic growth, a senior central bank official warned on Tuesday.

Central Bank First Deputy Chairman Alexey Simanovsky told reporters the regulator may demand banks set aside more money to cover potential bad loans to increasingly indebted Russians.

Recent stress tests by the central bank show the number of domestic lenders that could face liquidity shortfalls under an "extreme" scenario - where a drop in oil prices drags down the economy - has risen almost two times since earlier this year to 60 from 36, he said.

Retail lending in Russia jumped 26.1 percent in the first eight months of 2012, while corporate lending rose 9.4 percent. In the same period of last year, they grew by 19.6 percent and 13.0 percent respectively, according to central bank.

The central bank did not give updated figures on how much the banking system's capital has increased this year. As of Aug. 1, it was up 6.3 percent.

Banks are generally required to keep a minimum capital adequacy ratio, based on a percentage of a lender's risk-weighted assets, to absorb possible shocks and support lending.

The capital adequacy ratio across Russia's banking sector, which consists of around 1,000 lenders, is currently just over 13 percent, its lowest since the end of the 1990s. The central bank requires a minimum level of 10 percent.

Russians' indebtedness is currently twice what it was in 2008, with a local worker spending an average of about 10 percent of total income to repay loans, according to research by credit rating agency Fitch.

An upcoming share offering by Russia's non-state lender Promsvyazbank will be a test of the domestic banking sector's ability to boost capital via equity sales.

SEEKING A SOLUTION

The central bank stress tests have considered a pessimistic scenario, where Russia's economy slows to 2 percent growth, and an extreme one, where it contracts 1.4 percent if oil prices drop 15-20 percent.

The economy is expected to grow 3.5 percent this year.

Earlier this year, the tests showed some 120 local lenders would face a combined capital shortfall of 56 billion roubles ($1.8 billion) under the pessimistic scenario, while 223 banks would face a total shortfall of 405 billion roubles under the extreme one.

Oil, which along with gas is Russia's key source of revenue, rose above $111 a barrel on Tuesday, but it was 14 percent down from its year-highs seen in March.

Simanovsky said that number of banks which may face capital shortfalls under "extreme" scenario was slightly down to 200 but the total deficit estimate had risen to 450-460 billion roubles.

Stress tests are conducted twice a year. He added that the test scenarios were unchanged.

Simanovsky, a banking supervision veteran with a penchant for classic suits from the 1970s, told a banking conference earlier on Tuesday the central bank might tighten rules on the provisions that banks have to make to cover retail loans.

"We think that provisions made for non-collateralised loan portfolios and loans overdue by up to 30 days do not show losses adequately," he said.

The central bank requires a minimum provision of 1.5 percent of these two types of loan portfolios to absorb possible shocks. Lower provisions help banks to boost their profits.

The central bank expects the domestic banking system's total loan portfolio will increase by 20-25 percent this year, with the bulk coming from retail lending.

Domestic banks, including giants such as Sberbank and VTB, started to focus on retail lending after the financial crisis of 2008-09, when big companies turned more cautious due to a weaker global economic outlook.

$1 = 31.1565 Russian roubles Reporting by Oksana Kobzeva; Writing by Katya Golubkova; Editing by Lidia Kelly, Stephen Nisbet and Mark Potter

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