08.02 Review

Record Bank Swing: Super-high bank profits are a manifestation of market volatility and macroeconomic conditions that may lead to a systemic crisis

Despite Western sanctions and disconnection from the SWIFT system, Russian banks made a record profit of 3.3 trillion roubles in 2023. However, in 2022, there was almost no profit (0.2 trillion), and the first half of the year witnessed a loss of 1.5 trillion. Thus, it can be considered that the average annual profit for the last two years was 1.75 trillion, which is noticeably lower than the pre-war values from 2021, as noted in a review by the Central Bank. Last year's record was facilitated by currency revaluation due to the weakening of the rouble, regulatory easing (lower reserve requirements), economic recovery, which led to an increase in the credit portfolio, as well as a boom in preferential mortgages, as a result of which part of the bank profit was provided by budget subsidies. However, at the end of the year the situation began to change in the opposite direction: the Central Bank’s rate is at 'crisis' levels, regulator requirements for reserves are tightening, and the government has started to restrain preferential mortgages, resulting in a sharp decline in bank profits. Such profit volatility and the alternation of phases of credit market acceleration and deceleration may cause a banking crisis, the likelihood of which is currently assessed as high, as noted in the overview of the Center for Macroeconomic Analysis and Short-Term Forecasting. A sharp increase in the key rate in combination with the tightening of conditions of preferential mortgages creates the danger of 'price swings' in the property market and triggers a mechanism well known from previous crises, which leads to the accumulation of 'bad' debts on bank balance sheets.

In 2023, the total net profit of Russian banks reached a record 3.3 trillion roubles, according to a review of the banking sector by the Central Bank. However, almost half of the record profit came from Sberbank, which earned 1.5 trillion roubles last year. VTB expects a profit of 430 billion roubles for 2023, after a loss of 757 billion roubles in 2022.

Such high results in the banking sector were 'somewhat of a surprise' for the Central Bank, admitted Alexander Danilov, Director of the Department of Banking Regulation and Analytics (back in March 2023, they expected profit growth of 1 trillion roubles). However, they should not be considered in isolation from the 'weak' results of 2022, the Central Bank warns. The impact of sanctions led to banking system losses in the first half of 2022 amounting to 1.5 trillion roubles, and at the end of the year the sector earned only about 0.2 trillion, according to the Central Bank’s estimates. In this logic, the average annual profit of the sector for 2022-2023 was 1.7 trillion roubles, which is almost 30% lower than the profit in 2021 (2.4 trillion roubles). 

One of the factors behind such income volatility was currency revaluation (in 2021, the dollar cost an average of 73.7 roubles, in 2022 it was 68.6 roubles, and in 2023 — 85.3 roubles). In addition to this, last year Russian banks were able to recover their main sources of income. Primarily, the increase in net interest income by 43% and net commission income by 20% contributed to the growth in profit. 

The total portfolio of corporate loans in 2023 increased by 20% to 73.8 trillion roubles (compared to just 14% in 2022), including the financing of transactions related to the exit of foreigners from Russian assets amounting to 0.5 trillion roubles, the Central Bank notes. The second most significant factor influencing the size of profit is regulatory. This involves a 26% reduction in provisioning costs due to the dissolution of part of the reserves (0.64 trillion roubles), which were created in 2022. Finally, overall lending growth amid economic recovery and low interest rates in the first half of the year was supported by a real boom in mortgage loans. 

According to the analytical centre Dom.RF (operator of the main mortgage state programmes), in 2023, the 20 largest Russian banks issued 2 million mortgage loans worth 7.8 trillion roubles. The growth in mortgages was mainly driven by government support programmes (which accounted for 61% of all disbursements, or 4.7 trillion roubles), while the subsidised rates were not affected by the increase in the Central Bank's key rate. Although normal mortgage market rates were around 14%, subsidised housing loans were issued at 8% (and 6% for young families), with the difference covered by the budget. Russians sought to invest in real estate amid the depreciation of the rouble and high inflation expectations. Citizens rushed to take out mortgages due to concerns that preferential programmes would end in the summer of 2024, aiming to quickly invest devalued roubles in real estate.

Preferential programmes mitigate the effect of monetary tightening and heat up property prices. In mid-December 2023, the authorities significantly toughened the requirements for borrowers, the Ministry of Finance is assuming that the preferential mortgage programme at 8% per annum will end in July 2024, according to the head of the department, Anton Siluanov.

In 2024, the net profit of Russian banks, according to the Central Bank's forecast, is expected to decrease to 2.3–2.8 trillion roubles, with the most likely scenario being a fall to 2.5 trillion roubles. Against the backdrop of rising interest rates on loans, banks' profitability will decline (at least the number of loans will decrease), and they will have to build up reserves and liquidity again. The regulator is reinstating requirements for the volume of short-term liquidity, which were relaxed after the imposition of sanctions against the Russian banking sector. In December 2023, bank profits decreased fourfold compared to the previous month, amounting to 64 billion roubles, while contributions to reserves almost doubled (reaching 240 billion roubles), mainly due to the recognition of losses on old problematic corporate loans and other requirements. At the same time, the growth rate of mortgage lending, which totalled 35% in 2023, slowed to 3% in December. The growth rate of corporate loans slowed to less than 2%, while retail loans in December declined by 2% for the first time in a year amid rising interest rates.

Such volatility – sharp profit growth after its steep decline and the alternation of phases of credit market acceleration and subsequent deceleration – may lead to a banking crisis, the probability of which is currently assessed as high, according to a December report by the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF). The sharp increase in the Central Bank's key rate, combined with a serious tightening of conditions for mortgage lending under preferential programmes creates the risk of triggering 'price swings' in the real estate market. A reduction in mortgage lending may lead to a fall in prices on the primary property market. This, in turn, will reduce the value of collateral for such loans and stimulate banks to further tighten lending conditions. At the same time, the profitability of developers will fall, which may negatively affect their ability to fulfil their obligations on corporate loans. In aggregate, this may lead to the accumulation of bad debts on bank balance sheets and provoke the onset of a systemic banking crisis, the experts at CMASF warn, referring to the experience of previous crises.