Saturday, March 28, 2009

Banking: Hundreds of Russian banks could go to the wall

Hundreds of Russian banks could go bankrupt by the end of this year, said Peter Aven, president of Alfa Bank. The main reason for bankruptcy is than the level of bad loans may hit 15-20 percent. Peter Aven hopes that about 20-30 major Russian banks will receive the support from the Russian government.

"We can expect that the level of overdue loans for the whole system might reach 15-20 percent by the end of the year," said Aven in interview with the Financial Times.

"Maybe the 20-30 biggest banks, including Alfa, will receive state support - we're sure. But the future of hundreds of small banks is under big question... I believe that hundreds of banks will disappear by the end of the year," he said.

Russian banks can count on further state help, possibly seeing all profits erased in 2009 if bad loans rise to 10 percent. This could force them to make provisions of $45 billion, Russia officials said earlier this week.

Russia Finance Minister Alexei Kudrin said Thursday that, in reality, overdue loans are at around 10 percent already, Reuters reports.

Russia 's 1,200-plus banks have been hit hard by the credit crunch, the rouble's depreciation, a collapse in domestic stock markets and the first recession in a decade.

Russia plans to swap sovereign ruble bonds for shares in banks to boost their capital without spending budget money, Finance Minister Alexei Kudrin said.

The initiative could start within two or three months, Kudrin told reporters in Moscow today after meeting with about 40 Russian bankers, Bloomberg reports.

“It doesn’t take cash, it doesn’t increase the money supply,” Kudrin said. “It’s one of the proposals I find interesting and it will be developed.”

Russian banks may need $90 billion of new capital by the end of the year as the volume of bad loans grows amid the country’s worst financial crisis in a decade, according to Alfa Bank. The government has provided about $110 billion of relief to banks via subordinated loans and lower reserve requirements since September, UralSib Financial Corp. said.

“The new program allows the government to kill three birds with one stone,” said Andrey Markov, a credit analyst at Renaissance Capital investment bank in Moscow. “It doesn’t spend money from the budget, it increases the capital of banks and gives them the option of increasing liquidity through the central bank.”

Kudrin said it was “too early” to talk about the size of the program or which banks will be involved. Participants, though, will probably be required to buy back their shares within three years, Kudrin told the bankers in their meeting.

Published by Mike Hitchen, Mike Hitchen Consulting
Putting principles before profits