BOFIT Weekly 15 • 9.4.2009 approaching, in part backed by the fact that the oil price Russia has recently remained at levels above $50 a barrel. The growth in non-performing loans is expected to cause banks problems meeting their capital requirements. Small banks called on to increase their capital base or To increase bank capital (and thus keep the allowed share leave the market. Under banking law amendments that of non-performing loans below the limit), the CBR is entered into force last month, currently operating banks considering allowing banks to book a part of their state- must increase their minimum capital to 90 million roubles issued subordinated loans as tier one capital. Another by the beginning of next year and to 180 million roubles alternative under discussion to recapitalise banks is that by the beginning of 2012. New banks are subject to the the state issue special bonds to purchase shares in banks 180- million-rouble minimum when they start operations. through their new share emissions. The earlier version of the law required a minimum As bank lending to companies has fallen precipitously, capital of €5 million as in most EU countries. The large the CBR at end-March gave banks guidelines that state swings in the rouble’s exchange rate, however, led deci- holding companies and their subsidiaries will be treated as sion-makers to set the limit in roubles. At current ex- individual entities rather than a single company for the change rates, 180 million roubles equals €4 million. The purposes of borrowing. This should increase lending, earlier minimum capital requirement did not apply to which is regulated by limiting credit to one borrower to banks already in operation. 25 % of bank’s total credit portfolio. The reform of capital requirements is part of govern- The government has also sought to revive lending by ment measures to deal with the financial crisis. The objec- offering bank guarantees for corporate loans. The state tive is to strengthen the banking sector in tough times and guarantees can cover up to 70 % of loans taken by firms enhance the effectiveness of banking supervision by clear- involved in the defence sector and up to 50 % of loans to ing the field from very small banks. Finance minister companies operating in other sectors that are seen as criti- Alexei Kudrin said smaller banks only have marginal cal to the national economy. Some 300 billion roubles significance in the economy. Moreover, these include (about €7 billion) have been set aside under the current banks engaged in money laundering, which has increased budget for such guarantees. So far, this arrangement has in the current recession. not led to increased lending as banks find the system com- Kudrin estimated that about 150 of the approximately plicated and feel the remaining risks are still too high. 1,000 banks operating in Russia will be unable to meet the new capital requirement by the beginning of next year. Putin tells Duma about the impact of economic crisis Last year, the Central Bank of Russia cancelled the li- on reforms. Prime minister Vladimir Putin’s recent pres- censes of 33 banks due to violations. This year already 16 entation to the Duma followed a constitutional amendment banks have had their licenses pulled. last December at the initiative of president Dmitri Medve- dev, making the government annually report on its activi- Risk of growing bank credit losses causes concern. ties to the Duma. CBR figures show that in February 3 % of business loans Putin said that, in spite of proposals from the finance and 4 % of household loans were non-performing. In au- and economy ministries to the contrary, the current eco- tumn of 2008, the shares were 1 % and 3 %, respectively. nomic crisis does not justify postponing the reforms in the Finance minister Alexei Kudrin said the share of non- social security payment system agreed on last autumn. The performing loans could actually be as high as 10 % of current regressive social tax will be replaced next year by bank loan stocks given that banks use bookkeeping tricks separate pension, social and health insurance payments. to hide the true situation. Peter Aven, the head of Russia’s Hikes in contribution rates, however, have been put off largest private bank, Alfa Bank, warned that the share of until 2011. The hikes will raise company social contribu- non-performing loans could reach as much as 15–20 % of tions from about 26 % at present to 34 % of the wage bill. the loan stock by the end of this year. Many banks cannot The reform is needed to deal with an ever-widening deficit sustain such massive loan losses, while state resources are in the pension fund. The pension fund deficit is currently insufficient to make up such losses for small players. covered by transfers from the federal budget and the na- According to experts, the problem is most acute for tional welfare fund. banks that are established to serve one company only (so- Despite the economic crisis, the government continues called pocket banks) or are heavily involved in real estate to incrementally hike regulated prices. For example, in- investment. Such banks are said to constitute a third of all creases in electricity rates will continue as planned as banks operating in Russia. foreign companies that have committed to investing in The CBR takes the view that the risk of credit losses is Russia are basing their investment decisions on an as- not that high, despite the growth in losses at the moment. sumption that Russian rates will continue to rise so that CBR chairman Sergei Ignatyev justifies his more positive they eventually align with international pricing. outlook with a belief that a turnaround in the economy is Bank of Finland • Institute for Economies in Transition, BOFIT Editor-in-Chief Seija Lainela P.O. Box 160 • FI-00101 Helsinki The information here is compiled and edited from a variety of sources. Phone: +358 10 831 2268 • Email: firstname.lastname@example.org • Web: www.bof.fi/bofit The Bank of Finland assumes no responsibility for the completeness or accuracy of the information. BOFIT Weekly 15 • 9.4.2009 China The sale of stakes in China’s largest commercial banks to foreign strategic investors three to four years ago oc- curred in conjunction with large IPOs. Now that the three- China wins several lower-profile decisions at last year lockup agreements have expired, Royal Bank of Scot- week’s G20 summit. While China failed to do little more land and UBS have divested their stakes in Bank of China. than generate discussion on two of its most-publicised Bank of America also reduced its holdings in China Con- goals at the G20 summit in London (i.e. an agreement to struction Bank. Two weeks ago, Goldman Sachs an- refrain from protectionist measures and a general com- nounced its intentions to retain a significant share of its mitment to fiscal stimulus policies), it won commitments current holdings in ICBC. by G20 members to take actions indirectly beneficial to As part of China’s fiscal stimulus package, commercial China. These include expanding IMF resources, a boost in banks are encouraged to increase lending. For 2009, the World Bank financing and a pledge to create additional government is targeting a 5 trillion yuan increase in the $250 billion in IMF special drawing rights (SDRs). The loan stock, of which over half was already achieved in the first two commitments will help in reviving the global first two months of the year. At the end of last year, the economy, and thereby increase demand for Chinese ex- stock of non-performing loans relative to all commercial ports. The increased SDR reserves will give national cen- bank loans was 2.5 %. The ratio of non-performing loans tral banks greater room to manoeuvre and relax monetary contracted in the first two months of this year to 2.2 %. policy at the global level. Large-scale borrowing, however, is ultimately feared to In addition to these agreed-upon measures, central ac- increase non-performing loans, especially if economic tors in the global economy in relation to regulation are growth slows further. likely to take China’s economic advantage better into account. China promised to increase its contribution to Industrial firms expect a tough year. Official figures IMF reserves, while receiving a boost in its IMF quota. By show profits of industrial firms with annual net sales ex- providing funds to the IMF, China gets increased say at ceeding 5 million yuan rose 5 % y-o-y during the first the Fund. At the meeting, the EU and the United States eleven months of 2008. In contrast, the financial state- agreed to relinquish their long-held traditional right to ments of several of the listed companies show profitability name the heads of the World Bank and the IMF. This was down significantly last year. Moreover, losses of change potentially gives China and India a shot at the top companies reporting losses nearly tripled last year. slots in both organisations. Indeed, many large industrial firms expect no im- China generally views the additional financial market provement in the situation this year. Chinese steel giant regulation in a positive light, with the reservation that Baosteel predicts its sales revenues will fall by more than a China would not like to see the new regulation weaken its quarter. The large aluminium producer Chalco issued a own financial system. China managed to dictate some of profit warning for the first quarter and expects weak de- the content of a communiqué on G20 plans to eliminate mand to prevail for the rest of the year. Logistics compa- tax havens by successfully managing to have Hong Kong nies and coal producers see a very difficult year ahead, and and Macao special administrative regions omitted from the the construction sector is suffering from falling housing OECD list of tax havens. prices. On the other hand, telecom companies and carmak- ers are cautiously hopeful for better times ahead as they Profitability down at China’s largest commercial are counting on domestic demand to hold up as a result of banks. In the fourth quarter of 2008, profits of Bank of the government’s huge stimulus package. Changes in China were down nearly 60 % y-o-y and the profits of profitability can influence the fixed asset investment deci- China Construction Bank fell 30 %. Industrial and Com- sions of Chinese companies as much of this investment is mercial Bank of China (ICBC), China’s largest commer- financed out of pocket. cial bank (which, like China’s other major commercial According to the latest purchasing manager survey re- banks, is mostly state owned) managed to match profit- leased by the China Federation of Logistics and Purchas- ability in 4Q08 with the same quarter a year earlier. For all ing (CFLP), 52 % of respondents at industrial firms re- three banks, profits for 2008 overall were somewhat ported that the business outlook for March improved from higher than in 2007. For last year overall, Bank of China’s February. The index usually reaches its highest (i.e. most profits were up 14 %, China Construction Bank up 34 % optimistic) values in the springtime. A second index, the and ICBC up 35 %. Bank of China, the most international CLSA purchasing manager index, indicated that the out- of China’s commercial banks, has suffered the largest look for industrial firms continued to weaken in March. losses in securities tied to subprime mortgages and other foreign investments. Bank of Finland • Institute for Economies in Transition, BOFIT Editor-in-Chief Seija Lainela P.O. Box 160 • FI-00101 Helsinki The information here is compiled and edited from a variety of sources. Phone: +358 10 831 2268 • Email: email@example.com • Web: www.bof.fi/bofit The Bank of Finland assumes no responsibility for the completeness or accuracy of the information.