Credit Institutions


Analytical commentary

The impact of tightening monetary policy on Russian banks’ lending activity remains limited

  • Growth of the loan portfolio is continuing in all segments, although it is slowing down against the backdrop of an increase in the key rate. At the same time, the volume of new loan issuances has shown low sensitivity to the tightening of monetary policy, and the indicators for November and December 2023 exceeded the annual averages.

  • Banks continue to demonstrate considerable appetite for growing the loan portfolio. ACRA primarily views the availability of financial resources and the large volume of loans provided under state programs as factors that are maintaining the high volume of new loan issuances.

  • Demand for loans is supported by the general optimism of different categories of lenders. Indicators have shown sufficient stability in terms of the level of business confidence and consumer sentiment since the period of active tightening of monetary policy began.

  • ACRA notes that credit institutions are not in a hurry to increase interest rates on loans. The increase in the key rate has a limited impact on loans issued both for up to a year and for more than 12 months. In addition to the fact that a significant volume of loans is issued under preferential programs, this trend may indicate that the key rate is not the main factor in the pricing of loan products.

  • The key rate hike has not yet impacted the quality of the loan portfolio. The retail segment can be protected from the negative impact of rates, including by tightening requirements for loans with high total cost of credit, as well as for borrowers with high debt loads. In the corporate segment, where the share of loans issued at a floating rate is quite high, borrowers still retain the opportunity to pass on the increase in loan servicing costs to consumers of their products.

  • ACRA still expects the loan portfolio to grow by 12–15% in 2024. At the same time, the Agency notes that the results of the current year will be significantly affected by the duration of the period of high rates. If tightening of monetary policy leads to a significant slowdown in economic growth, then the increase in the volume of the loan portfolio will be lower than predicted.

loan portfolio — growth in spite of all

Monetary policy tightening had a limited impact on lending dynamics in H2 2023. Although most market segments experienced a slowdown in portfolio growth in Q4 2023, we can say that this was not a global process.

The corporate loan portfolio grew by 7.6% from August to December 2023 (10.7% from March to July), while average monthly growth was 1.5% (+1.9% from January to July). In the retail segment, the loan portfolio increased by 8.6% from August to December (+9.7% from March to July) amid average monthly growth of 2% (+1.5% from January to July).

The slowdown of growth of the retail portfolio was the most pronounced — it only grew by 0.1% in December. In ACRA’s opinion, the key factor in this was the toughening of regulation of unsecured lending.

The Agency notes that in all the main market segments, the volume of loans issued at the end of 2023 exceeded the monthly average for the whole of last year. In addition, the maximum volume of loans for the year were issued in December in the corporate, SME, and auto lending segments.

At the same time, growth of the loan portfolio in real terms from November to December practically came to a standstill. However, in this case it should be taken into account that the consumer price index recorded the highest growth (1.1%) since the start of 2023 in November, while in December it exceeded the average annual values (and amounted to 0.7% vs 0.6%), despite a slowdown in inflation.

Lending activity is supported mainly by steady growth of the economy and stable socioeconomic indicators, which stimulates demand for credit resources. At the same time, the capital reserve (provided by, among other things, the current regulatory easing measures), as well as an accelerated inflow of client funds in the second half of the year, allow credit institutions to meet this demand without reducing their own creditworthiness.

Figure 1. Volume of loans issued in 2023, RUB tln

Source: Bank of Russia

Among factors that reduce the impact of the Bank of Russia’s actions on the growth of lending, ACRA also refers to the fact that the results of tightening of monetary policy collide with the effect of government programs to stimulate the economy in the current operating conditions. In a number of areas, it is namely government support measures (mortgages, SME lending, projects for structural transformation and technological sovereignty) that stimulate the growth in banks’ lending activity. Consequently, a significant share of the lending process may have a sort of immunity to monetary tightening.

Demand for loans among major corporate borrowers is still in place. This is partly due to the need to finance investment programs on the backdrop of sanctions that impact borrowers’ operations (in this case, demand for credit resources is forced and may have low sensitivity to rate growth), and is partly related to the purchase of assets of foreign companies that have exited the Russian market (in this case, the benefit of deals may outweigh loan servicing expenses).

In addition, when assessing the stability of lending activity amid a toughening of monetary policy, ACRA notes the fact that the Bank of Russia’s measures to cool economic growth have had almost no impact on the sentiment of economic entities, the optimism of which is one of the key drivers of demand for credit resources.

According to the Bank of Russia, the business climate indicator calculated by the regulator in December 2023 grew for the fourth month in a row and considerably exceeded the average indicator for 2021 (after the end of the pandemic). Positive expectations were recorded for all of the key components of the indicator.

The RSBI1, which reflects the mood of small and medium-sized enterprises, also grew in December 2023. In addition, both investments and the level of loan approval grew at the end of last year.

The consumer confidence index calculated by Rosstat in Q4 2023 remained at highs relative to the values before the outbreak of the pandemic. Although the index of favorable conditions for savings has been steadily growing and reached its highest values since 2014, the index of favorable conditions for large purchases has not decreased and is also at its highest level for the last six years. According to ACRA, this suggests that the transition of the population to a savings model of behavior has not yet been fully formed.

Positive business sentiment coupled with stable consumer confidence allows us to count on the continuation of business activity, as well as an increase in consumer spending, which together will stimulate steady demand for loans.

1 The index is calculated by Promsvyazbank PJSC and OPORA RUSSIA.

loan rates are lagging behind the key rate

Another reason why demand for loans has limited sensitivity to the key rate hikes may be the relative stability of interest rates charged on new loans.

ACRA notes that the response of interest rates to tighter monetary policy has turned out to be quite moderate outside the bank lending segment as well. In particular, although the OFZ yield surged in August when the sharpest hike of the key rate occurred, subsequent hikes did not lead to comparable increase in the yield. As a result, as early as in August, the average key rate for the period began to exceed the OFZ yield in the middle sections of the yield curve, and in the following months, this situation became characteristic of the entire curve.

The picture is similar for loan rates: the key rate was higher than the rate on loans granted for more than one year in both the retail and corporate segments at the end of 2023. In the segment of short-term (up to a year) retail loans, where the highest rates are generally observed due to unsecured loans, the gap between the loan rates and the key rate shrank from 12 pps to 5.5 pps after the start of active tightening of the monetary policy in August 2023.

It is worth noting that mortgage rates turned out to be the least sensitive to the tighter monetary policy. The mortgage rate almost did not respond to the key rate hikes largely due to the various incentive programs. Moreover, the average rate on mortgage loans granted from August to December 2023 was 8.1% (vs. 8.24% in January–July).

The situation is quite paradoxical since, generally, mortgage rates — where the share of the credit risk premium is relatively small — demonstrate the highest sensitivity to changes to central banks’ key interest rates.

Figure 2. The key rate has outstripped the increase in the cost of credit products

Sources: Bank of Russia, MOEX

In ACRA’s opinion, the restrained response of lending rates to tighter monetary policy is explained by the following reasons.

First, in contrast to H1 2023, when credit institutions experienced a certain shortage of resources to finance the rapid growth of portfolios (which increased the role of funds from government organizations), the inflow of client funds to banks gradually became stronger along with the increase of the key rate. This trend peaked in December 2023, when the volume of client funds increased by more than RUB 5.5 tln, while the loan portfolio grew by less than RUB 1.4 tln. Given the portfolio growth slowdown (which, among other things, indicates lower willingness to refinance loans and release funds previously allocated for lending) and a large amount of cash accumulated by the population, banks have the potential to curb the growth of both funding costs and loan rates.

Second, lending in Russia is still largely supported by preferential programs mostly aimed at providing lower interest rates for borrowers. The main beneficiaries of the support are the mortgage lending and SME lending segments, but benefits, subsidized interest rates, reduced risk weights, etc. impact other market segments as well.

Third, rates changes are also affected by lending periods. The share of loans granted for more than a year consistently exceeds 90% in the consumer lending segment. In the corporate segment, this share is slightly less than 50%, however, for example, it was about 70% in H1 2022. Since the market does not expect tight monetary policy to remain for a long time, a rapid increase in rates for most of the new loans may result in the need for large-scale refinancing and a loss of clients when the regulator’s monetary policy becomes looser.

At the same time, ACRA notes that the impact of the tight monetary policy on loan rates may still be not exhausted. In December, against the backdrop of accelerated growth of loan disbursements in the corporate segment, the cost of credit also increased significantly (the average rate exceeded 14%). At the same time, according to various sources, there is a trend of rising rates on unsecured loans, while the impact of cuts of the preferential programs on the cost of mortgage lending has yet to be evaluated.

In February 2024, the rates on long-term OFZs (10+ years) were raised, which may also precede an increase in the cost of long-term loans.

Having analyzed the changes in credit activity at the end of last year and the dynamics of interest rates, the Agency maintains its forecast on the loan portfolio growth at 12–15% by the end of 2024 (see ACRA’s research Double impact. Russian banking sector: forecast for 2024 dated December 27, 2023). At the same time, ACRA notes that going beyond the specified range is possible rather in a conservative direction.

Factors that may curb growth include stronger regulatory pressure on certain retail lending segments (for example, macroprudential limits being introduced for mortgages) and portfolio quality risks that may materialize if the key rate remains at the current level for a long time.

stable asset quality may support banks’ risk appetite

Another factor that may encourage banks to continue to grow their loan portfolios aggressively against the backdrop of high interest rates is that this growth has little impact on both the quality of new loans and the servicing of the current portfolio.

In the abovementioned research, ACRA noted that it considered tighter monetary policy to be a significant risk, since a large share of loans (mainly in the corporate segment) have been issued at a floating rate. Nonetheless, the share of overdue loans in the corporate portfolio was less than 4% in December, and a similar situation was present in the retail segment.

At the same time, we note that it is too early to conclude that rising rates have zero impact on the portfolio quality. In the corporate segment, interest rates were raised following growth of the debt burden associated with the increased volume of borrowings in a number of industries. This pushed debt up and increased the sensitivity of solvency to the level of interest rates and the stability of operating income.

ACRA assumes that, despite the low level of delinquencies, borrowers are beginning to experience some debt servicing difficulties. An indirect sign of this may be the slowdown in the growth rate of the corporate loan portfolio in H2 2023, despite consistently high rates on new loan issuances. This combination of factors may indicate that some borrowers refrain from renewing expired loans in the conditions of increased interest rates (possibly due to their unwillingness to service new loans at current rates).

The stability of the volume of new loan issuances may indicate borrowers’ confidence in their ability to shift the increase in the cost of credit to the end consumers of their products; this confidence is apparently associated with the previously mentioned high business optimism indicators.

According to the Agency’s estimates, the retail segment is better protected from the negative impact of tighter monetary policy. This is due to increased risk weights, which help reduce potential non-performing loans, as the full cost of credit increases depending on the cost of the loan.

In ACRA’s opinion, in the next 12–18 months, the probability of loan portfolio quality deteriorating will be heightened due to increased loan servicing costs. Restrained growth of interest rates on new loans to non-financial companies may indicate that the growth of repayments for the current portfolio is insignificant. However, the sufficiency of operating income to service loans may raise some doubts if the period of high interest rates is prolonged and has a serious impact on the economic situation.

In case of adverse developments, the Agency expects loan rates to grow due to an increase in the credit risk premium. This factor, along with a more stringent risk management policy of credit institutions, may lead to a more pronounced decrease in loan issuances this year. Nevertheless, ACRA believes that high supply and demand in the credit market will contribute to a fairly rapid recovery in the volume of loan issuances as the Bank of Russia softens its approaches to the implementation of the monetary policy.

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Valeriy Piven
Managing Director, Head of Financial Institutions Ratings Group
+7 (495) 139 04 93
Svetlana Panicheva
Head of External Communications
+7 (495) 139 04 80, ext. 169
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