Russian banks’ mortgage lending gains momentum as risk appetite increases

Moody's Investors Service said it views the development of mortgage lending business in Russia as generally credit positive for the banks involved.
“This lending provides the banks with a granular source of income, which is also stable, albeit low-yielding, and recurring," explained Olga Ulyanova, author of the report. "In addition, the credit quality of Russian mortgage loans has been reasonably solid to date."
Moody's expects that the volume of newly issued mortgage and housing loans in Russia will increase by about 30% annually in 2011 and 2012. This forecast reflects opportunities stemming from the current low loan stock and assumes only a slight loosening in recently enhanced underwriting standards. Under this base case scenario, which represents a revival of the sector post-crisis, total volumes of new mortgages would reach RUB570 bln ($19 bln) in 2011, up from RUB437 bln in 2010.
"Risks to this base case are centred on Russian banks assuming a much more aggressive stance to obtain larger shares of the reviving market by substantially loosening underwriting standards," added Ulyanova. "While we view this as a low probability outcome, the crystallisation of these risks would trigger a deterioration in the quality of new vintages and delay post-crisis clean-up of loan books."
The Moody's report said that the continued development of mortgage lending in Russia is underpinned by recent structural enhancements in underwriting practices and court decisions upholding creditors' rights to foreclosure on collateral property.
Since the financial crisis hit Russia in 2008, Russian mortgage lenders have been applying tighter underwriting standards by introducing more prudent loan-to-value (LTV) ratios, imposing stricter income criteria and further reducing the issuance of foreign currency-denominated mortgage loans. Moreover, although the legal process remains cumbersome and lengthy, the majority of court decisions on delinquent mortgages since the early stages of the financial crisis have been taken in favour of creditors.
The rating agency explained that mortgage and housing loans account for only a small portion (less than 7%) of Russian bank lending and are therefore unlikely to significantly affect most banks' financial fundamentals. However, as the mortgage market will likely grow at a robust pace, Moody's expects its contribution to Russian banks' overall financial fundamentals will increase in the long run and thus gain more weight in determining ratings.