Russia takes US$6.2billion bite out of banks

Bloomberg

It’s been blamed for fighting inflation at the expense of the economy and turning its targets into ‘fetishes.’ Now Russian lenders say the central bank’s latest swipe at price risks is putting pressure on their bottom line and credit.
Reserve-ratio requirements will be increased by 75 basis points from Aug 1 for ruble and foreign-currency liabilities, policy makers said. That will force lenders to set aside almost 400 billion rubles (US$6.2 billion), according to Russia’s biggest bank, Sberbank PJSC.
“From the bank’s point of view, higher mandatory reserves will, of course, have a negative impact on financial results,” Ashot Simonyan, a vice president and department head at Russia’s second-largest retail lender, VTB24, said. The monetary authority is raising ratios on liabilities in rubles for the first time since Elvira Nabiullina took over as governor in 2013, adding to its policy mix to manage a buildup of cash while inflation remains almost double the central bank’s 4 percent
target.
Higher requirements are already draining funds from the financial industry, with loan-loss provisions jumping by 5.3 percent, or 287 billion rubles, since the start of the year, central bank data show.
The seven-stock Micex Financials Index slipped 0.2 percent in Moscow after plunging 2.7 percent on Monday. It’s headed for its fifth drop in the past six days.
Looming Surplus
The focus on cash held as reserves reflects the balancing act by the central bank after it cut interest rates this month for the first time in almost a year. As the government’s deficit spending floods the financial industry with rubles from its Reserve Fund, policy makers are trying to head off the first liquidity surplus since 2011 and ward off risks to inflation.
While reserves in rubles have been unchanged for more than three years, policy makers already raised foreign-exchange requirements this month to motivate banks to increase operations in the Russian currency. “The measure will make it possible to absorb the part of the liquidity inflow resulting from Reserve Fund spending to finance the budget deficit and discourage growth of foreign currency-denominated liabilities,” the central bank said.

Deficit Spending
With Russia headed for its longest recession in two decades, the government is channeling extra cash into the economy, allowing lenders — net borrowers from the central bank for five years — to wean themselves off its funding.
To postpone a liquidity surplus expected in 2017, the central bank has already sold more than half of the 207 billion rubles in government securities it held at the start of the year.
It will also offer “tens of billions of rubles” of its own bonds over the next two to three months, Nabiullina said.

June 10, the same day the central bank cut its key rate to 10.5 percent from 11 percent.
The buildup of excess rubles has pushed money-market rates below the central bank’s benchmark. The Ruonia overnight rate fell to 9.95 percent as of Friday, the lowest in a year. Annual inflation has stalled at 7.3 percent for three months, a level Nabiullina has previously deemed “unacceptable.”
The Bank of Russia has given little ground as critics in government and business appealed for looser policy. Corporate credit has declined during every one of the past four months as non-performing loans grow, central bank data show.
Higher requirements will only add to the industry’s travails, according to Sberbank.
“This decision will push the rates of credit higher, lower the banking sector’s profitability and capital adequacy,” it said in a statement.