Prepare some change

Credit boom may start in the second half of the year, but hundreds of small banks will not reach it

In a year and a half, the mortgage rate will drop to 8.5% per annum, Dmitry Medvedev, then First Deputy Prime Minister, promised in the summer of 2007. The promised, as you know, is waiting for three years. Last week, the Government Agency for Housing Mortgage Lending (AHML) promised to launch a new loan program at rates of 8.75-10.5% by the end of the month.

The interest on this loan will be pegged to the Central Bank rate, which has been reduced ten times over the past year. The fact is that inflation in Russia continues to decline, and after it the Central Bank lowers the rate on loans. This summer, Bank of America - Merrill Lynch predicts, inflation will fall to 5%, and the Central Bank rate - to 6.5%. A government housing loan will then cost about 7–9% per annum in rubles.

DOWN, DOWN, DOWN

Of course, officials are trying to lower interest rates on loans - there are instructions from both the president and the prime minister on this score. But lowering the rate to 7-9% will not work with orders alone, this can only happen as a result of macroeconomic stabilization. And it seems to have come - at least in the financial market.

The government has completed its bank bailout program, Finance Minister Alexei Kudrin told Newsweek last week, and the unused 100 billion rubles in budget funds will be frozen. And the head of the Central Bank, Sergei Ignatiev, predicted last Friday that in 2010 banks would issue about 3 trillion rubles worth of new loans without any help. This is quite comparable with the indicators of the pre-crisis 2005-2006.

Only a small part of these three trillion will go to government housing loans at 7-9% per annum. AHML Director for Innovation Stanislav Dambrauskas says that only 10.5 billion rubles will fall on the government's Variable Rate program. The essence of the program is that the rate on the loan is tied to the rate of the Central Bank: it raises rates - the payment on a mortgage loan grows, lowers - falls. Dambrauskas promises that the program will include a mechanism to protect against sharp fluctuations in the Central Bank rate and, in addition, a maximum interest rate will be set - no more than 20%. However, in the foreseeable future, the Central Bank rate will decrease, analysts are sure, which means that the payment on the loan will also decrease.

But neither this nor other state programs will solve the problems of all borrowers. Most will still have to take loans from commercial banks on a regular basis. Here the situation is difficult, especially in mortgages. There are no signs of an increase in lending, nor a decrease in lending rates.

Igor Nikolaev from FBK draws attention to the difference between the Central Bank rate and the cost of real loans issued by banks (see chart). If before the crisis it was less than 1%, now it is 4%, and more recently it exceeded 5%. Other analysts, although they do not consider this comparison correct, recognize the fact of the problem. Indeed, today's Central Bank rate is 8.25% per annum. The rate on mortgage loans in rubles does not fall below 13-15%. This means that banks do not trust borrowers - or simply do not want to deal with them - and build their risks into a high interest rate.

LIKE A GUY WITH A GIRL

During the crisis, many were dissatisfied with the fact that the authorities are primarily helping banks: the Central Bank alone provided them with loans for about 3.5 trillion rubles. Even the notorious AvtoVAZ received 40 times less from the government. Now the bankers have something to answer: the prospects for a return on investment in saving the plant in Togliatti are still vague, and the banks have already returned most of the money issued to them: out of the 3.5 trillion rubles they received, loans in the amount of 2.5 trillion were repaid.

In fact, the picture in the banking sector is not so rosy. Banks are returning their debts - this is true, explains the head of the Association of Russian Banks Garegin Tosunyan, but the Central Bank does not give them new loans. Thus, the Central Bank pumped out about 1 trillion rubles from the banking system.

So, the Central Bank reduces lending. As a result, problems arise primarily in small and medium-sized banks, especially in the regions. They don't have enough money, they may not be able to make the necessary payments, for example, on deposits. You have to sell what you can find a buyer for. And these are their own loan portfolios - homogeneous loans collected in packages that they issued earlier. “We [with large banks] are like a guy with a girl: it’s clear where everything is going, but so far we just haven’t agreed,” one of the regional bankers describes the situation.

Poor regional bankers want to sell their portfolios at a premium, rich Moscow ones want to buy at a discount. Continuing his analogy, the banker believes that the girl will have to give in: the guy can wait for years, and the longer the girl has, the less likely she is to find a profitable game. The same is true in business: well-fed Muscovites can wait as long as they like, while thin regionals need to urgently resolve the issue, otherwise the prospect of bankruptcy is quite real. While there are few transactions, the parties are trading, but it is clear that most portfolios will be bought without a premium, most likely at a discount of 3-6%.

FROM BANKS TO AGENTS

Accordingly, large banks have a choice: to lend to borrowers in the traditional way today or, after waiting a bit, spend this money on buying out loan portfolios from small banks. It's more profitable. This is also why lending rates do not fall. Of those who want to take out a loan, only 10% actually receive money, says Denis Khadeev, deputy chairman of the board of the First United Bank. Why lend at 15% per annum today, if soon it will be possible to buy a portfolio of such loans at a discount and earn an extra 3-6%?

The account has been going on for weeks. Starting June 30, the Central Bank plans to cancel the special anti-crisis reserve procedure for "bad" loans. This means that banks that have loans on their balance sheets will have to deposit significant funds with the Central Bank. In such cases, it may be more profitable for a particular bank to sell a portfolio than to service it, says Philippe Bezier, managing director of the Russian division of Cetelem (a retail arm of the French BNP Paribas).

The head of the Association of Regional Banks, Anatoly Aksakov, wants this procedure to be introduced later. But he understands that the Central Bank will not make serious concessions. As a result, small banks are preparing to sell their loans - and rebuild their business. From credit institutions, they will simply become agents of large banks. “Large banks are not too willing to work directly with small clients and are not always effective in this. And for us, this is bread, and small banks could take on these functions - paperwork, network maintenance, control over loan servicing, ”says Igor Chagaev, Chairman of the Board of the Bank for Savings and Credit.

Then the functions of hundreds of small banks will be reduced to work for a commission for larger structures. They don't mind. Growing a loan portfolio using traditional methods is a long and laborious process. It takes about two months to open at least one credit and cash office in a city with a population of 200,000, says Dmitry Orlov, director of the marketing department at Moskommertsbank. “Recruitment and training of personnel, an advertising campaign, and so on, are millions of rubles of investment,” says Orlov. “Essentially, small banks are turning into agents of large financial institutions, working on commission,” says Ildar Muslimov of Uralsib Bank. “This is interesting, but it is necessary to prescribe clear conditions for cooperation from the very beginning.”

BRIGHT TOMORROW

At the congress of the Association of Russian Banks last Friday, the head of VTB24, Mikhail Zadornov, argued with the deputy chairman of the Central Bank, Gennady Melikyan. Zadornov believes that the Central Bank is too optimistic and there are no prerequisites for a rapid growth in lending. Melikyan objects: in the second half of the year there will be a credit boom in Russia.

These same bankers had already argued a year ago, in the spring of 2009. Then Zadornov said that everything was bad in the banking sector, the number of “bad” loans was growing, and there would soon be a second wave of the banking crisis. Melikyan argued that the situation was under control and that a second wave was out of the question. “Write the truth: everything is fine with us,” he admonished banking journalists. Then, a year ago, an official from the Central Bank turned out to be right. Melikyan will win even now, believes Yulia Tseplyaeva of Merrill Lynch.

Last week, Merrill Lynch raised its forecast for Russian GDP growth in 2010 from 5% to 7%. The logic is this: in 2009 the Russian economy failed more than in developed countries, so in 2010 Russia will show the most powerful rebound - that is, it will get out of the crisis faster than others. At the same time, Merrill Lynch considers its forecast conservative, since real growth figures may turn out to be even higher: the current situation has much in common with the post-crisis picture of 1999, and then the recovery from the crisis was very rapid. Andrey Illarionov, former economic adviser to President Putin, spoke about the same thing, that is, about the economic boom, three months ago.

Merrill Lynch predicts a consumer boom: the revival of the consumer market will add 2% to the forecast for economic growth - from 5% to 7%. The bank predicts that in the second half of 2010, Russians will stop saving money "for a rainy day" and start spending it, buying goods, including in installments, which will provoke a new credit boom. The profitability of the banking business will rise sharply, but dozens, if not hundreds of small banks will simply not make it to that time.