Sberbanks Position in the Financial Market

The year 2010 was a period of recovery for Russia after the crisis. GDP growth, as estimated by Rosstat, amounted to 4.0% yet was uneven during the year with the third quarter seeing GDP decline due to extremely hot summer weather conditions. Industrial output gained 8.2% year on year. An accumulation of stock and increased consumption at the beginning of the year, combined with a resurgence of investment activity at the end of the year, were major contributors to industrial output growth.

During 2010 we also saw a turning point in inflation. By mid-summer, Russia’s inflation rate had slowed to 5.5% year on year but accelerated in August to close the year at 8.8% year on year with the outlook being for a further increase. Two factors were substantially responsible: rising global commodity prices and the inflationary effect of monetary policy that saw money supply increasing at a year on year rate of 31%.

In 2010, the Russian banking system maintained a strong customer deposit growth rate that substantially outstripped loan growth, as loan demand had just started to pick up. Customer deposits rose 23.4% during the year while customer loans lagged behind at only 13.1% growth for the same period.

Growth of customer loans and deposits in the russian banking system

This resulted in a substantial boost to liquidity and lower interest rates on both bank loans and deposits. During the first half of the year, real interest rates were stable; however, in the second half, higher inflation put downward pressure on real interest rates on loans, with interest rates on deposits dipping below inflation. The result was more affordable bank loans which encouraged customer demand and re-invigorated the lending market. Sberbank lent comparatively less than the market and as result the Bank’s market share in this segment shrank.

Despite the decrease in rates, lending grew at a slower pace compared to the increase in customer deposits and consequently banks continued building up their securities portfolios. Russian banks as a whole saw investments in securities expand by more than one third over the year, with Sberbank seeing an increase 1.7x which is significantly greater than the market average. This was the main driver behind Sberbank’s increased share of banking sector assets.

With sufficient available liquidity, banks repaid funds received during the crisis to the Bank of Russia. In May 2010, Sberbank paid back a RUB 200bn tranche of its subordinated loan from the central bank, with a subsequent reduction of its share of banking sector capital.

At the same time, encouraged by the improved situation on global financial markets, banks resumed international borrowings. Sberbank tapped global capital markets several times during the year to replenish its foreign currency liquidity; funds raised totalled USD 4.75bn and CHF 400m in 2010.

Abundant rouble liquidity supported by a steady inflow of customer deposits allowed Sberbank to lower interest rates on its liabilities and thus cut its interest expenses. This, in turn, decreased the Bank’s share of the deposit market.

The stable economic environment was also conducive to better bank loan-portfolio quality. Non-performing loans to legal entities, which increased from 5.9% to 6.3% from January to May, began to decline and ended the year at 5.1%. Non-performing loans to individuals decreased only in the fourth quarter to reach 6.9% by year-end; this is slightly above the 6.8% recorded at the beginning of the year. Non-performing debt increased but at a far slower rate; consequently no additions were made to provisions for loan impairment. Provisions increased by only 4.6% over the year, compared with twofold growth in 2009, and the provisions-to-loans ratio dipped to 8.6% from 9.2%.

At Sberbank, the situation was similar, with the quality of its loan portfolio showing signs of improvement. Provision charges dropped substantially year on year, becoming the Bank’s key profit driver and increasing its share of the banking sector’s aggregate profit.

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