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TEXT-Fitch: Russia bank reserves increase shows Central Bank concern
September 26, 2012 / 2:26 PM / 5 years ago

TEXT-Fitch: Russia bank reserves increase shows Central Bank concern

Sept 26 - Yesterday's announcement by the Russian Central Bank that it will
increase reserve requirements for unsecured retail lending shows the regulator
is closely monitoring the country's rapid retail loan growth, Fitch Ratings
says. We view the sharp rise in retail lending as one of the most significant
potential risks facing the Russian banking system because of the weakening of
underwriting standards at some banks, and the significant increase in household

At Fitch Ratings' IX annual Russian conference yesterday, CBR First Deputy
Chairman Alexei Simanovsky announced that reserve requirements on unsecured
retail lending by Russian banks may be tightened, citing concerns that current
provisioning may not adequately reflect potential losses on these portfolios.
Mr. Simanovsky reportedly later clarified in separate comments that reserves on
portfolios of unsecured retail loans that are performing or overdue by 30 days
or less may be doubled, and provisions on loans overdue by more than a year
could be increased to 100% from 75%. At present, performing loans are subject to
a 1% general reserve and loans overdue by less than 30 days require a 3%

We believe that rapid growth, albeit from a low base, has involved higher
approval rates, which at some banks have meant a weakening of underwriting
standards. We estimate that the cost of servicing retail debt is currently equal
to about 10% of aggregate household income, and is likely to be significantly
higher for households that have actually taken out loans, potentially straining
their debt servicing ability.

Total retail loans increased by 26% in the eight months to end-August 2012,
while growth in unsecured lending has been higher still. The aggregate portfolio
of seven leading specialized consumer lenders rose by 36% in the same period.

We believe that the direct impact of the measures reportedly announced by the
Central Bank will be moderate, as the resultant increase in loan reserves, and
hence reduction in regulatory capital ratios, will be limited. In our view, the
central bank may tighten regulation if it sees a further increase in risks in
the retail sector. Attempts to limit loan growth at individual banks cannot be
excluded. However, we believe the authorities' ability to effectively regulate
underlying retail lending risks (rather than just the reserves/capital held
against these risks) is constrained by the lack of a comprehensive unified
database of credit information and the still high share of unofficial personal

In our view, asset quality risks at rated specialized consumer lenders - Home
Credit and Finance Bank ('BB-'/Positive Watch), Russian Standard Bank
('B+'/Stable), OJSC OTP Bank ('BB'/Negative), CB Renaissance Capital
('B'/Stable) and Tinkoff Credit Systems ('B'/Positive) - should be for the most
part manageable. This reflects these banks' already significant experience and
track record in the sector and their generally solid loss absorption capacity.
However, risks may be considerably higher at banks that have come later to the
consumer lending sector with limited experience, and are targeting aggressive
growth, often with weak underwriting standards.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at
All opinions expressed are those of Fitch Ratings.

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