Russian banks need $ 40 bln for recapitalisation

Moody's Investors Service estimates in a report published Monday that recapitalisation needs from external sources for the Russian banking system in 2009 will be RUB1.3 trln (US$ 40 bln).
The report identifies the critical issues for Russian banks in 2009, assessing the risks and challenges associated with the recent devaluation of the Russian rouble against the background of Russia's economic downturn which has already had a significant impact on Russian banks' balance sheets. The report also illustrates — via stress tests developed specifically for Russian banks — the rating implications of loan book impairments and asset quality deterioration.
Moody's has already taken a number of negative rating actions on Russian banks and expects capital erosion to be the major trigger for rating downgrades in 2009. The outlook on the Russian banking system is negative.
Moody's Special Comment observes that impairment of banks' assets in the course of the current economic slowdown will be a major challenge for the 102 rated Russian banks. The report highlights that government support in the form of capital injections is predominantly directed toward large, government-owned banks, while smaller, privately owned banks have not yet received any notable capital support from the government. The rating agency notes that CBR funding accounted for 13.5% of Russian banks' total non-equity funding as at year-end 2008 (2007: 0.2%).
"In the challenging operating environment, the weaker macroeconomic performance will lead to an erosion of asset quality and pre-provision income, which, in turn, impairs banks' capital bases," said Semyon Isakov, author of the report. The need for recapitalisation is therefore expected to be high, accompanied by a decrease in pre-provision income and, in turn, a reduced ability of banks to internally replenish their deteriorating capital levels.
"Moreover, banks could also face a strong increase in non-performing loans (NPLs) which, according to Moody's, could increase sharply by the end of 2009," added Isakov.
Moody's estimates that the current level of NPLs in Russia more than doubled to 11% of total loans at the beginning of the second quarter in 2009, from 4.6% at the beginning of 2008. An additional 10%-15% of loans have been restructured to avoid payment default. By the end of 2009, Moody's expects that NPLs could increase to 20%, further aggravated by the impact of the economic downturn. Such an increase would challenge Russian banks' collection systems, which are still developing.
In Moody's opinion, Russian banks are likely to face challenges in obtaining new capital from shareholders as they also face difficulties in the current operating environment. Thus, the Russian banking sector is currently strongly dependent on government support. Government support in capital injections that banks have received so far amounts to RUB 757 bln (US$ 23.6 bln).
Additional pledged capital support could amount to another RUB 500 bln (US$ 15.6 bln). While this roughly matches Moody's estimate of the banking system's total recapitalisation requirements in 2009, this does not necessarily imply that the capital needs of all Russian banks will be fully met by the government.
So far, the lion's share of this capital support has been allocated to government-owned banks, while capital support for medium-sized and small banks has been insignificant. Thus, Moody's believes that the Russian banking sector might experience further consolidation in the form of mergers and acquisitions as a result of weakening credit fundamentals of banks not directly benefiting from government support.