Fitch: Russian retail banks most exposed to full NPL provisions

Russian banks would have to create around RUB100bn (bn) of additional provisions if the Central Bank of Russia (CBR) requires them to fully reserve non-mortgage consumer loans that are overdue by more than 90 days, Fitch Ratings says.

This potential extra charge would amount to only 1.5% of sector equity, so is not a major issue for the system as a whole. But it could be challenging for consumer finance banks, which account for about 27% of sector non-mortgage loans over 90 days overdue (non-performing loans or NPLs) and have credit profiles that are already under pressure from significantly increased credit losses and the deteriorating operating environment.

Overall NPL coverage in consumer finance banks' regulatory accounts ranges from 90% to 150%, but this includes reserves against loans that are less than 90 days overdue, while specific coverage of NPLs could be lower than 100%. We estimate capital ratios for rated consumer finance banks would decrease by between one and three percentage points if such a regulatory requirement is introduced. Russian Standard Bank and Orient Express are potentially most vulnerable due to their already low capitalisation. Their Tier 1 capital adequacy ratios were just 30bp and 110bp, respectively, above the regulatory minimum at end-January 2015 (end-September 2014 for Russian Standard).

Home Credit & Finance Bank, Tinkoff and Sovcombank would be more resilient due to their larger capital buffers. Specific coverage of NPLs at Tinkoff is already substantially higher than currently required by the regulator, which should cut the burden of potential provisions. OTP Bank's stock of NPLs, although large, consists to a significant degree of loans overdue by more than 360 days, which are already fully reserved. The potential negative effect on the bank's fairly tight regulatory capitalisation (the total capital ratio was just 11.8% at end-January 2015) would therefore be manageable.

Our RUB100bn estimate for the sector is based on fully reserving non-mortgage consumer loans overdue over 90 days using latest available published system data on retail NPLs and reserves. The CBR currently requires banks to create at least 50% provisions against unsecured retail loans that are 91-180 days overdue and 75% against loans that are overdue by 181-360 days.

The CBR's recommendation that its regional divisions assume 100% losses on non-mortgage retail NPLs when assessing banks' financial positions appeared in the press on 25 February. We believe this is effectively a stress-testing assumption (which does not account for minor recoveries of NPLs), and is not a recommendation or a regulatory requirement for banks to increase reserves. However, it does suggest that the regulator is considering whether current provisioning requirements in the consumer finance segment are sufficiently robust.