Translated material
Problem debt
The state has been increasing the transparency of Russian banks for ten years, but has not learned how to count their problem loans
Last week, the State Duma approved the next tranche of state aid to Russian banks, reserving 150 billion rubles. in the 2009 budget for their recapitalization by issuing federal loan bonds. In this way, the state is preparing to counter the increase in the volume of “bad” debts and the second wave of the crisis, which could be provoked by a sharp deterioration in the quality of bank loan portfolios. Meanwhile, the state still does not have a clear understanding of the scale of the banks’ problems and the potential costs associated with these problems. Until recently, the Ministry of Finance planned to allocate up to 210 billion rubles for recapitalization in 2009, but Deputy Minister of Finance Tatyana Nesterenko, speaking in parliament last Friday, said that for these purposes “maybe 20-25 billion will be required.” At the same time, Ms. Nesterenko suggested that the deputies still approve a level of spending that is six times higher than this estimate.Difficulties with budgeting for financial rescue operations also exist in other countries. In the US and Europe, assessing the state of the financial sector is complicated by the fact that for many years “bad” debts were removed from the balance sheets of creditors and acquired complex instruments for redistributing risk, the real value of which neither the banks themselves, nor regulators, nor rating agencies could estimate. It is not surprising that in June, when, after another stress test, the Obama administration allowed the largest banks to return $68 billion to the treasury ahead of schedule (more than a quarter of the funds issued to them under the TARP program since October 2008), experts asked whether the banks could recently on the verge of bankruptcy, can they do without government support if the macroeconomic situation worsens?
In Russia, the problem is of a different, lower level: the quality of debts on the balance sheet of the entire banking sector and individual credit institutions remains uncertain. Moreover, the level of this uncertainty is very high. In the spring, the Central Bank conducted its own stress testing of banks, but unlike the Americans, it chose not to disclose its results. Answering questions about the stress test, First Deputy Chairman of the Central Bank Alexei Ulyukaev stated only that “the situation in the banking system is quite satisfactory” (at the same time, the official called for “tearing off the legs” of VTB head Andrei Kostin, who suggested the presence of “negative” in the test results). How realistic is it to assess the quality of assets and stability of the banking sector under these conditions?
Quality indicators
According to official data from the Central Bank, the volume of overdue loans to non-financial organizations and individuals as of August 1 amounted to 899.6 billion rubles, or 5.5% of the banks’ loan portfolio (excluding loans to the financial sector). At the end of the year, as the leadership of the Central Bank expects, this figure will not exceed 10-12%. However, it is impossible to estimate the volume of “bad” debts based on these data. Firstly, according to the Central Bank’s methodology, not the entire loan is considered overdue, but only those payments that the borrower did not repay on time, whereas in international practice it is customary to take into account the entire amount of the “bad” loan. Secondly, the regulator does not publish complete statistics on restructured and extended loans, which usually also fall into the category of problem loans, as they reduce the net present value of the loan portfolio.
There are more realistic estimates. The other day, the rating agency Standard and Poor's published a report entitled “Risk Analysis of the Russian Banking Sector” and announced its basic scenario for economic development, according to which in 2009-2011 “the total volume of problem assets (including restructured loans) of Russian banks could reach 38% of gross loan debt, which is about $213 billion.” The S&P methodology is one of the most stringent. The agency considers problem assets not only overdue and restructured loans, but also “real estate and other assets seized to repay loan debt, as well as problem assets transferred to the management of special purpose companies.” In addition, in cases where a bank lends to several companies of the same holding and at least one of them defaults on its loan, the agency classifies the entire debt of the holding to the bank as problematic. However, the agencies’ data are just an expert assessment, and in its report, S&P admits that it is impossible to assess the level of problem loans in accordance with international approaches (under IFRS) in the Russian banking system due to the “lack of necessary information.” At the same time, international standards are now also being revised due to the lack of a generally accepted benchmark for assessing the value of assets - “a fair, informed and non-insider market,” reminds Alexey Terekhov, vice president of FBK. According to him, “the assessments (of delinquency - Ed. ) of many practicing bankers and experts are pessimistically objective and reach 30% in banks with undeclared problems and from 50-80% in banks with declared problems.”
Another important indicator of the level of “bad” debts is the reserves formed for issued loans. In accordance with the regulatory documents of the Central Bank, banks classify all loans into one of five quality categories and, depending on the category, create a reserve (from 0% to 100% of the book value of the loan). When classifying loans, banks are guided by “professional judgment” and are expected to take into account many factors, including the financial condition of the borrower, the quality of debt service, etc. Moreover, since contributions to reserves are essentially expenses that reduce profits and, as a result, capital , banks are interested in minimizing reserves, and the supervisor responsible for the stability of banks, on the contrary, strives to ensure that low-quality assets are covered by provisions. So far, judging by the statistics, supervision is losing in this confrontation - as of August 1, the volume of reserves for possible losses amounted to only 7.2% (1.465 trillion rubles) of the volume of loans, deposits and other placed funds of banks.
Many analysts base their assessments of “bad” debt on the share of loans of the lowest quality categories - doubtful, problematic and hopeless - in the loan portfolio of top-30 banks. As of August 1, according to the Central Bank, it was 16.6%. This figure also appears to be inaccurate. An interlocutor of Vremya Novostey, who thoroughly knows the banking supervision system, answering the question of how market participants create reserves, says: “In the overwhelming majority of cases, banks can bypass the requirements of the Central Bank on the merits, observing instructions only formally. For example, they can negotiate with borrowers to conceal the facts of debt restructuring (extension). This has always been, is and will be in the conditions of strict formalization of the rules of the Central Bank. And the Central Bank has always turned a blind eye to this. Banks reserve exactly as much as they can afford, and no instructions from the Central Bank can prevent them from doing this.” Moreover, during the crisis, in order to make life easier for banks, the regulator liberalized the rules for classifying loans by issuing Directive No. 2156-U in December 2008. According to this document, valid until December 31, 2009, banks can recognize the quality of debt servicing for loans with a high (30-60 days) level of delinquency as good. In addition, the instruction allows not to worsen the assessment of the quality of debt service for extended and restructured loans and makes it possible (subject to certain formalities) not to classify them as doubtful or problematic. “In my practice, I have never met a bank that did not take advantage of this relaxation to assess the borrower’s credit history,” says Alexey Terekhov from FBK. The Association of Russian Banks recently even asked the Central Bank to extend the validity of Directive No. 2156-U for another year. However, as another Vremya Novostey interlocutor believes, the significance of this document should not be exaggerated: “This instruction allows banks to only slightly reduce the scale of their usual “creative accounting.”
Meanwhile, while some banks are practicing “creative accounting” and others are honestly admitting losses, the range of sentiments in the forecasts for the development of the crisis voiced by officials and analysts is becoming wider. In mid-September, the first deputy chairman of the Central Bank, Alexei Ulyukaev, said in an interview with Reuters that he “never shared the apocalyptic predictions about the second wave of the crisis,” and “the real problems of recapitalizing the banking system are not visible.” Regarding creative accounting, the official stated that it “does not fundamentally change our assessment of the situation in the banking sector and does not change the forecast of what may happen to them, just as the difference in approaches between Russian and international standards does not affect.” A few days after this speech, Standard and Poor's released its report on the banking sector. “We believe that the financial position of Russian banks will worsen as a result of the economic downturn,” the report said. “Further growth in problem loans will make the process of restoring the banking system longer and more painful, increasing the exposure of Russian banks to new potential stresses.”
The head of the Deposit Insurance Agency, Alexander Turbanov, also shared his forecast about the development of the crisis in September, saying that “the second wave may be associated with the crisis of “bad” assets... and may have a latent and extended nature.” According to Turbanov, banks have the opportunity to work with “bad” assets, improving their quality, but the results of this work are still unknown: “There may be a negative result, or maybe a positive one.” The problem with the banking system and the economy is that a “negative result” will cost the budget or the private sector another several billion rubles or dollars, and the 150 billion rubles that the Ministry of Finance asked deputies to reserve may not be enough, sums up one of Vremya Novostei’s interlocutors. .
The most important duty
The 1998 crisis (unlike the current one) marked the beginning of an active discussion about banking reform, restructuring the system of banking regulation and supervision. In 2000, the first deputy chairman of the Central Bank, Tatyana Paramonova, named the tasks in this area: “The problem now is to identify risks and realistically assess the financial position of banks. Problem number one is identifying these risks, assessing how adequately the banks themselves assess the risks... how reliably the financial statements are presented.” Later, these goals were spelled out in general terms in the development strategies of the banking sector (the second of them, adopted in 2005, is signed by the current head of the Central Bank, Sergei Ignatiev) and were declared more than once by the leadership of the Central Bank.
It would seem that in ten years the regulator has managed to do a lot. The Central Bank's assets include a campaign to combat fictitious capital, a radical improvement in the banking regulatory framework, the creation of a deposit insurance system, and an increase in the overall level of stability of the banking sector. However, identifying risks and preventing costly failures of individual banks is still a supervisory weakness. A year ago, when the banking sector was on the verge of the second systemic crisis in its history, the Ministry of Finance, the Central Bank and state-owned companies had to allocate hundreds of billions of rubles to avoid the bankruptcy of Svyaz-Bank, KIT Finance, Globex Bank and a number of others (the amount of real losses related to bank reorganization is still unclear). Later it turned out that Svyaz-Bank had a low-quality loan portfolio and a huge imbalance in the real maturity of assets and liabilities, KIT Finance circumvented the Central Bank regulations by financing the purchase of Rostelecom shares, and also funded the mortgage business with short-term loans, and the Globex business was tied to investments in commercial real estate, the value of which collapsed due to the crisis.
How many banks similar in terms of reliability remain on the market remains to be seen. We may not find out about this soon. “Due to the peculiarities of its professional culture, the Central Bank will not make “sudden movements”, but will turn a blind eye to the poor quality of banking assets and the insufficiency of the capital base,” one of the newspaper’s interlocutors is sure. - Thus, a large number of “half-dead” banks will remain, which will barely make ends meet with the tacit consent of the Central Bank. In essence, these are time bombs laid under the economic foundation of the country. Moreover, the timer of these mines is broken. Everyone knows that the mines will explode, but no one knows exactly when.” It turns out that so far the Central Bank has not been able to fulfill its obligations to strengthen banking supervision and increase the stability of the banking sector. The quality of this debt leaves much to be desired.