Standard & Poor's predicts credit costs for banks to stabilize in CIS in 2011

Standard & Poor's predicts credit costs for banks to stabilize in CIS in 2011

Azerbaijan, Baku, April 6 /Trend/

Standard & Poor's Ratings Services expects credit costs for banks to stabilize or continue declining this year in Russia, Kazakhstan, Ukraine, Belarus, Azerbaijan, Georgia, and Uzbekistan, but at a slower pace than in 2010 , Standard & Poor's said in a report published on April 4, "Credit Costs Are Stabilizing For Banks In Russia, Kazakhstan, Ukraine, Belarus, Azerbaijan, Georgia, And Uzbekistan."

Stabilizing or lower credit costs, reviving business activity, and stabilizing net interest margins should generally help the banks' bottom lines and creditworthiness, Standard & Poor's said in a report published today, "the report reads.

Using data from central banks in these countries for the past few years, we are able to track trends in credit costs for these seven banking systems for the first time. Trends in credit costs provide insight not only into asset quality but also profitability. A decline is common for banks coming out of the bottom of a credit cycle, but how they climb out differs widely.

Credit costs have fallen on the back of a drop in problem loans, but to a greater or lesser extent in each banking system. That's because the economic crisis differed in severity depending on the bank and by country, and as a result of national differences in accounting, regulatory and disclosure quality, and recognition of problems assets.

"Subject to the sustainability of the economic recovery, we expect the general trend of stabilizing or lower credit costs to continue in 2011, but at a slower pace than in 2010," saidStandard & Poor's credit analyst Ekaterina Trofimova.

That's because asset quality is only improving very slowly while lending growth is picking up, which usually requires banks to add new provisions.

Credit costs--also referred to as credit losses or loan losses--are commonly measured by the ratio of net new provisions (net of recoveries) to average loans over a period. Changes in this ratio indicate to us that most credit costs in the seven systems are resulting from net new provisions that banks are adding in response to the rapid loan growth and deteriorating asset quality. Because of the growing amounts of net new provisions and legal difficulties to write off problem loans, write-offs of problem loans against existing provisions are unlikely to boost credit costs.

Despite the decline in credit costs, they still significantly exceed net write-offs (that is, net of recoveries), which represent ultimate credit losses. In other words, the seven banking systems have accumulated reserves that have created a more or less deeper cushion against potential future problems.

"However, we still think that lending reserves at most banks in these countries might be insufficient if economic or political trends turn negative," said Ms. Trofimova.

"We believe that earnings will rebound faster at banks and banking systems that have set aside sufficient or more than sufficient reserves, work out problem loans more aggressively, and whose business has picked up more quickly," Ms. Trofimova added.

Large stocks of problem debts and a host of remaining uncertainties are a drag on lending growth, particularly in Kazakhstan, Ukraine, and Russia--and in that order.

"Even though we believe credit costs are stabilizing or declining in these seven banking systems this year, we view this more as a cyclical effect as the economies recover, rather than a fundamental change," Ms. Trofimova said. "We believe that these banking systems will remain high risk for now, and their credit quality subject to volatility in response to changing political and economic conditions."

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