As long as Urals price remains around $80 per barrel, liquidity in oil-producing countries' banking sectors unlikely to suffer
Azerbaijan, Baku, July 30 / Trend, I.Khalilova /
As long as the Urals price remains around $80 per barrel, liquidity in oil-producing countries' banking sectors is unlikely to suffer, Standard & Poor's Ratings Services believes.
On Monday Standard & Poor's announced a report, which considers reliance of Russian and other CIS countries' banking systems from foreign investment inflows. The CIS countries the report covers are Azerbaijan, Belarus, Kazakhstan, Ukraine and Uzbekistan. Georgia is not member of the CIS since 2008, however, for comparison this country is also covered by the report.
"Any prolonged difficulties in the eurozone would likely contribute to a global economic slowdown, which, in turn, might have a negative impact on oil prices or local stock markets. The recent drop in the price of Urals crude oil to $90 per barrel at the end of June 2012 from $120 per barrel three months before is evidence of this," S&P experts believe.
They believe that a global economic slowdown could also indirectly heighten the volatility of the stock markets and weaken certain domestic currencies, most importantly the ruble.
"We also note that some large banks in Russia and Kazakhstan are using debt capital markets as a source of funding. That means any growing economic pressure on these two countries could impair these largest banking groups' access to international capital markets," the report says.
According to S&P, since the beginning of the global financial crisis in 2008, Russian banks have increased their investments in CIS banking sectors. These flows, which are not new but have become more important, are compensating for the stagnation, or even decline, of FDI from Western European banks.
"We believe external factors, like the price of oil and commodities, could have a big influence on the sustainability of these Russian FDI flows. As long as Urals crude oil prices remain at or above $80 per barrel, a level we consider to be high, some of the cash the large Russian corporates have accumulated will continue to be replaced in the banking sector, which therefore benefits from ample funding sources, which can be used to some extent for expansion into neighboring countries," S&P experts believe.
Kazakhstan provides is a good example of how Russian banks are taking advantage of both the low presence of Western European banks and the high level of deleveraging at large local banks to significantly increase their local market shares. Russia's biggest lenders, Sberbank (not rated), VTB Bank, and OJSC Alfa-Bank (BB/Positive/B) used to have very small local franchises in Kazakhstan, mainly serving corporate customers. The assets of Sberbank's local affiliate in Kazakhstan increased from Kazakh tenge (KZT)98 billion ($650 million) in 2008 to KZT491 billion in 2011, and it is now the seventh-largest bank in the country.
Russian banks are using their stronger funding liquidity profiles compared with Kazakh banks to rapidly gain market share in Kakazhstan. Their strategy involves offering attractive rates on deposits and loans to Kazakh customers to grow volumes rapidly, and then adjusting pricing to competitors' levels once the franchise is strong enough.
The Ukrainian subsidiaries of Sberbank, Alfa Bank, and VTB have also expanded rapidly in a market where Western European banks are no longer actively looking to grow because their subsidiaries have had huge losses there since 2009. In Belarus, on the other hand, Russian banks have historically been practically the only foreign investors in the banking system.
Russian banks' outward FDI totaled $7 billion in 2011, four times higher than in 2006, and the CIS was a significant contributor to the increase.
"Although we expect this trend to persist in 2012 and 2013, the volatility of oil prices, and therefore the cash positions of large Russian banks, will continue to drive FDI flows to neighboring banking sectors," the report says.
S&P continues to believe that global macroeconomic imbalances are a bigger threat to Russian and CIS banking sectors that the difficulties of some eurozone members and their banking systems. An abrupt economic slowdown, which would imply falling oil and commodities prices and volatility of certain currencies, may affect the creditworthiness of Russia and the CIS' banking systems, if they prove to be significant and long lasting.
We expect Russian and CIS economies to continue to grow in 2012 and 2013 after the abrupt declines in GDP in 2009 and slight recovery in 2010.
"Nevertheless, we expect the pace of economic expansion to be slower than during the booming pre-2008 years. For example, we expect future real growth rates in Russia to be lower than the 5.5% annual average over the past decade. This is because of Russia's heavy reliance on commodities in its export mix, its internationally uncompetitive manufacturing sector, and the slow pace of economic reform. Until the region's non-export industries become more efficient and competitive with those in the rest of the world, the performance of the Russian economy is likely to remain highly correlated, and therefore vulnerable, to hydrocarbons prices. However, our base-case scenario anticipates real GDP growth at 4.1% for Russia in 2012, compared with about 6% for Kazakhstan and 3% for Azerbaijan," the report says.
However, S&P base-case scenario anticipates real GDP growth at 4.1% for Russia in 2012, compared with about 6% for Kazakhstan and 3% for Azerbaijan.
"Our base-case scenario assumes an inevitable economic slowdown for Russia and the CIS. But we do not expect it to be a severe enough shock to plunge these economies and the whole banking system into deep trouble," S&P experts believe.