Pleasure offered in retail

• Unsecured lending is starting to record stable growth. This March and April, growth exceeded 1% — such growth for two months in a row hasn’t been seen since the end of 2021. Issuance of loans is also returning to pre-crisis levels. The growth of the segment is supported by stable social development indicators, in particular, low unemployment (3.5% in March).

• The unsecured loan portfolio will grow by more than 15% in 2023. Growth may even reach 20% if operating environment conditions remain stable. Banks specializing in unsecured lending have a sufficiently high level of capitalization, which allows them to actively increase loan issuance without damaging financial stability.

• Portfolio quality remains stable. According to the Bank of Russia, the share of non-performing loans as of the end of Q1 2023 was around 5%, which is only 0.4 percentage points higher than at the start of the economic downturn of 2022. The share of loans overdue by more than 90 days as of the end of the first three months of this year was 8.7% (+1 percentage point vs. the start of 2022). ACRA believes that the retail lending segment has suffered less than other areas thanks to support measures. In particular, the volume of restructurings was much lower than during the pandemic.

• Restricted influence of the macroprudential limit. A feature of the development of the unsecured lending market in 2023 is its operation alongside a limit imposed by the Bank of Russia on issuing loans in segments with potentially high credit risk. In ACRA’s opinion, this limit has a restricted deterrent effect on the lending policies of banks, which adapt their loan provision conditions in order to meet the regulator’s requirements. In Q3 2023, the Bank of Russia will tighten the limiting rules, which may restrict the growth potential of unsecured lending. Nevertheless, in ACRA’s opinion, the total impact of the limit on the population’s debt load remains moderate and has almost no impact on the level of loan application rejections.

• In the Agency’s opinion, a further increase in the population’s debt load carries high risks of reducing its solvency. Comparisons with other countries confirm the relatively low level of the debt load of Russia’s residents, in particular, the ratio of debt to income. At the same time, the population of Russia has a higher share of expenses on essential goods compared to a number of developed countries, as well as lower ownership of financial and other assets. These factors may determine increased dependence of the creditworthiness of the population of Russia on the level of hidden unemployment and the stability of social payments and serve as the reason for increased risks of non-payments in the event of a protracted economic downturn.

THE UNSECURED LENDING MARKET IS INTERESTING TO BANKS AGAIN

For further details, see ACRA’s analytical commentary Consumers at a Crossroads from May 26, 2023.

Data published by the Bank of Russia on the development of the banking sector for January–April 2023 evidences the stabilization of the growth trend in consumer lending. In April, monthly growth of the portfolio exceeded 1% for the second month in a row, which had not been seen since November 2021. ACRA also views the fact that monthly provision of new loans has returned to the 2021 level and in some periods even exceeded it as a sign that activity is recovering in this segment.

In 2023, the unsecured loan portfolio is growing slower than other retail areas — since the start of the year, 3.7% growth has been recorded, while growth of mortgages in January–April hit 6.4% and car loans reached 6% growth. However, here it should be taken into account that the analyzed segment does not enjoy the same level of state support as mortgages, and also did not experience the decline that car loans went through against the backdrop of a decrease in the supply of passenger cars, which ensured the effect of pent-up demand. Furthermore, since the Bank of Russia introduced a limit on lending in segments with heightened risk, banks have had to overcome rather serious regulatory obstacles in their efforts to grow consumer lending.

This year, growth of unsecured lending has been stimulated by an overall recovery of consumer activity in H1 2023. Here a key factor is growth in the consumer sentiment index to its maximum level since 2018 amid a trend toward recovery of the share of income used to purchase goods and services to pre-crisis levels.

Figure 1. Retail lending growth rates have returned to pre-crisis levels (portfolio growth month-on-month)

Sources: Bank of Russia, ACRA

Growth in demand for consumer loans, which is associated with a favorable operating environment, is being met by the growing risk appetite of credit institutions. Data published by individual banks demonstrates that there is a good trend toward growing the portfolio in this market segment. In particular, growth of Sberbank’s retail lending (excluding mortgages) in Q1 2023 was 4%. According to the consolidated financial statements of TCS Group Holding PLC (the parent company of Tinkoff Bank), portfolio growth exceeded 11% in Q1 2023.

It should be noted that there is no single trend in portfolio volume change among the monoline banks. Even among the major players in this market, there are organizations that reduced the amount of receivables from individuals. In ACRA’s opinion, the difference in behavior of banks is mostly explained by the specifics of their client base (relatively high share of loans, the issuance of which is limited by the Bank of Russia, in the portfolio coupled with weak competitive positions in other segments). In general, according to ACRA’s estimates, Sberbank and TCS Group Holding PLC could provide for up to 90% growth in unsecured lending in Q1 2023.

ACRA believes that the conditions for further growth of unsecured lending will remain in place for all of 2023. According to the Agency’s assessment, growth of unsecured consumer lending will exceed 15% in 2023. Tightening of macroprudential limits on the issue of loans in certain high-risk segments of the market may hinder banks in their efforts to achieve growth considerably higher than 15%.

ACRA’s optimistic forecast is supported by the fact that far from all the indicators of consumer activity have recovered to the level as of the end of 2021. In particular, this is reflected in the assessments of real retail turnover, the size of incoming cash flow in sectors focused on consumer demand, and so on. If consumer sentiment and business confidence indices remain stable at the same time as an increase in real incomes, then further growth of consumer activity can be expected, which will stimulate growth in demand for unsecured loans.

Figure 2. Capital adequacy (N1.0) of banks specializing in unsecured lending that hold ACRA ratings

Sources: Bank of Russia, banks’ financial reports

The Agency expects that credit institutions themselves will bolster their efforts to increase the loan portfolio. The unsecured retail segment continues to be highly profitable. In Q1 2023, banks that specialize in developing this area on average recorded higher profitability of assets compared to the industry as a whole. In addition, these banks usually have a higher capital stock, which allows them to support growth without a considerable decline in financial stability.

PORTFOLIO QUALITY IS ABOVE EXPECTATIONS

As of the end of Q1 2023, the Bank of Russia noted the stability of the share of non-performing loans (which the regulator regards as loans in the IV–V quality categories), which made up 5.1% of all loans, as well as a small decline in debt overdue for more than 90 days in unsecured consumer lending to 8.7% (as of the start of the year these indicators stood at 5.1% and 8.8%, respectively).

These results generally confirm the sufficiently high quality of the retail portfolio and absence of signs of the materialization of deferred risks — situations where portfolio quality continues to deteriorate after the end of the delayed phase of a crisis. Another sign of this may be the limited volume of restructurings carried out since February 2022. During the pandemic, over the year of existence of restructuring programs, their volume approached RUB 1 tln; yet over the past 12 months this figure did not exceed RUB 600 bln (which partly confirms the fact that the impact of turbulence on the creditworthiness of the population turned out to be limited).

Figure 3. Portfolio quality is stable

Sources: Bank of Russia, ACRA

In addition to this, ACRA notes a moderate increase in debt transferred by banks to collectors, which is comparable to the overall growth in lending to individuals.

The stability of portfolio quality is largely determined by the sustainability of social development indicators. Amid unemployment remaining at a level (3.5%) close to historical lows, as well as steady income growth, borrowers have sufficient resources to service their debt.

Despite an absence of signs of a deterioration in the quality of debt, banks that focus on consumer lending are on the whole not yet changing their conservative approach to risk management. Almost all the monoline banks with ACRA credit ratings created reserves in Q1 2023 that are comparable to the average quarterly volume of reserves in 2022. This is different to the situation observed in 2021, when credit institutions significantly cut funds used to create reserves as the situation stabilized in the consumer market.

Figure 4. In 2022, banks were quite active when creating reserves for retail loans (RUB bln)

Sources: Bank of Russia, ACRA

On the whole, the banking system has maintained a rather high level of reserve coverage of non-performing retail loans. V category quality debt is almost 100% covered by reserves. The ratio of all reserves created for loans provided to individuals, according to the Bank of Russia, for Q1 exceeded the volume of non-performing loans by 1.3 times. In consumer lending, the total amount of reserves reaches 90% of all delinquencies, which is slightly higher than at the beginning of 2022.

According to ACRA’s estimates, the quality of the unsecured portfolio will largely remain unchanged in 2023. There are currently no conditions for a deterioration in social indicators (the unemployment rate fell to 3.3% in April), which will allow borrowers to fulfill their obligations. For previously restructured loans, there is still an increased likelihood of repeat defaults, however, ACRA believes that such loans have largely passed the stage of maturation and were classified as problem loans by banks. In addition, the Agency assumes that no more than half of restructured loans will end up in default, and therefore the volume of this type of non-performing loans will increase the total volume of problem debt by no more than 100 bps (to 6% of the portfolio).

Due to the stability of asset quality, banks specializing in unsecured lending can reduce the size of transfers to reserves and use this freed-up income to increase lending, which will be an additional factor contributing to portfolio growth this year.

BANKS VS. THE LIMIT

A specific feature of the consumer lending market in H1 2023 was the establishment by the Bank of Russia of a limit on the issuance of loans in increased-risk segments. Earlier, ACRA assumed that banks would seek to compensate for the impact of the imposed restrictions through a higher volume of loans in the lending segments that are not categorized as high-risk by the regulator, thereby expanding growth opportunities for loans with debt load ratios (DLRs) of more than 80% and terms of more than five years.

However, the main response of credit institutions to changes in the regulatory environment was to adjust lending terms. According to the materials of the Bank of Russia, this adjustment was primarily expressed in a reduction in the average size and the maturity of loans issued. In particular, the regulator noted an increase in the share of loans with DLRs of 70–80% from 10% to 15% of the total volume of loans issued in Q1 2023, as well as an increase in the share of loans with terms of four to five years from 47% to 62%.

This data generally corresponds to the estimates received by ACRA from banks focused on unsecured lending, but contradicts the information published by other sources. In particular, in May 2023, the National Bureau of Credit Histories (NBCH) reported an increase in the average term of consumer credit from 4.4 years in March 2022 to 4.9 years in March 2023. In addition, the NBCH reported a steady trend of increasing the average size of consumer loans, which has been observed throughout the current year.

Figure 5. The average size of consumer loans has grown twofold over the past year (RUB thousand)

Source: NBCH

Discrepancies in estimates of changes to the terms of loans may be determined, in particular, by the fact that at the same time as the reduction in the share of loans with the longest terms, there is an increase in the repayment period for relatively short loans that fall into the category of high-risk due to high DLRs. These changes make it possible to manage the debt load ratio and at the same time maintain the total amount of income that banks receive on loans.

The “small checks” policy in general allows banks to achieve greater turnover of the loan portfolio, which makes it possible both to maintain the flow of fee income generated by new loan issues and increase the effective return on the loan portfolio.

At the same time, it cannot also be ruled out that the increase in the term of loans and the average check recorded by the NBCH is determined by continued demand for unsecured loans as a tool for forming the initial mortgage payment.

In general, in ACRA’s opinion, the limitation of consumer lending in high-risk segments achieves the stated goal only in part — as indicated above, this can be confirmed by the heterogeneous dynamics of changes to the volume of loan portfolios of monoliners. Banks with more aggressive policies may need to maintain a relatively high loan application rejection rate.

With this in mind, the effectiveness of the tightening of the macroprudential limitation of unsecured lending expected to be introduced by the Bank of Russia in Q3 2023 raises certain doubts. ACRA believes that the ability of credit institutions to adapt loan terms to changing restrictions will allow them to maintain the planned growth rates of the portfolio, while the household debt load will be determined by the growth of incomes (in nominal and real terms) rather than by the influence of regulatory restrictions on the level of refusal to issue new loans.

household debt load — is there a risk?

The recovery of the growth of unsecured consumer lending (while maintaining growth in other retail segments) will inevitably lead to another round of discussions about the acceptable level of household debt load in Russia.

ACRA notes that, in assessing the reasons and prospects for the growth of unsecured lending, banks that actively develop their unsecured lending business, continue to believe that an increase in the portfolio does not carry any specific systemic risks. This conclusion is based on an assessment of the household debt load in comparison with a number of developed countries, which, according to banks, has remained low.

In the Agency’s opinion, this assessment of the debt load is close to reality. The assessment of the ratio of household income to the total amount of debt shows that Russia is quite far behind the indicators typical, in particular, for the EU, US, and the UK. In addition, the level of debt load in Russia as a whole is increasing at a rate comparable to income growth.

At the same time, ACRA believes that this sort of comparison, without taking into account other factors characterizing the financial situation of Russians, as well as the structure of income and expenses, leads to an inadequate assessment of creditworthiness and may cause instability in certain consumer lending segments.

Figure 6. Ratio of debt to income of Russians is still low compared to a range of developed countries (%)

Source: OECD

In particular, Russians’ income level is such that a significant part of it is spent on basic necessities. According to RIA Novosti, as of December 2022, the share of food expenses exceeded 32% of total expenses: in this indicator, Russia is ninth out of the 39 European countries included in the sample.

At the same time, the results of the Russian National Household Survey on Consumer Finance conducted by the Bank of Russia in 2022 show that only the households with the highest income level (incomes included in the highest decile group) has a share of food expenses below 35%. For the households with the lowest income, the indicator is close to 50%.

ACRA also notes that a higher debt load is usually characteristic of countries with populations that have a relatively high volume of financial and other assets. According to available data, in the world ranking that reflects the positions of countries in terms of net assets (assets excluding liabilities) per capita, Russia is outside the top 50. In the Agency’s opinion, the growth of the debt load would not be associated with increased risks only if the population had other assets at the same time. On the other hand, in conditions when a significant (over 70% for certain categories of the population) portion of income is spent on basic necessities, as well as on servicing existing loans, an increase in such assets is unlikely (it can occur mainly due to real estate purchases, which, again, involve an increase in the debt load through mortgages).

Figure 7. Debt load is higher in households that have a stock of financial and other assets

Source: OECD

All of the above suggests that the potential risks of deterioration in the loan portfolio quality associated with the household debt load may not be fully reflected in the indicators of non-performing assets and the cost of risk. As a result, the portfolio quality may be subject to the crucial impact of such factors such as:

1.       Sustainable and timely social support (which is especially important for low-income borrowers, where transfers can reach 40% of total proceeds);

2.       Temporary support measures for borrowers who are in difficult situations (credit holidays);

3.       Interest rate stability.

Summing up, an increase in unsecured lending based on a general assessment of the household debt load can result in a large volume of potential non-performing loans long before the indicator reaches the levels characteristic of developed countries.

At the same time, ACRA believes that the unforced regulatory restriction of unsecured lending in a situation where the normal life of many households depends on access to borrowed funds may lead not only to a decrease in debt load, but also to a drop in borrowers’ standard of living. Under these conditions, the Agency expects further development of state regulation of banks’ relations with borrowers who have fallen into a difficult situations. The final point in this may be the establishment of a mechanism for repurchasing the population’s bad debts if economic growth turns out to be unstable, and the deterioration of economic indicators leads to the fact that ongoing restructuring is unable to produce the expected effect of fast recovery of borrowers’ solvency.