‘We’re starting inspections more actively’: Central Bank to evaluate banks’ sustainability

Banks’ sustainability will be examined in Russia from 1 July

The Central Bank will resume inspections of the banking sector when the Russian economy leaves the self-isolation regime. The Central Bank’s auditors will return to the places where the inspections were interrupted from late June, while a widespread evaluation of the economic situation of banks will begin on 1 July, claimed Vice Chairwoman of the Bank of Russia Olga Polyakova at an online meeting of the Association of Russian Banks. Moreover, she admitted that there might be stress testing because of an expected reduction in the profitability of the banking sector in 2020.

Post-quarantine sustainability examination

The banking sector will face a big post-quarantine inspection of the regulator for sustainability to macroeconomic shocks banks experienced during the pandemic.

“We are resuming our inspection activity,” claimed Vice Chairwoman of the Bank of Russia Olga Polyakova giving a speech at a meeting of the Association of Russian Banks. “We are starting more active inspections and will do this on a regular basis like before. Of course, there will be stress testing, evaluations of the probability of losses, a default of your clients for whom loans were decided to be restructured. All this will become key (Editor’s Note: topics) during meetings for discussion,” she outlined the general perimeter of the future work. So Polyakova gave the audience to understand that the instrument of stress-testing will be used quite widely to measure the state of the banking system after the first wave of the pandemic.

The vice chairwoman of the CB reminded the audience that stress testing had already been applied to big banks. “We have done this work on big and significant banks in terms of assets so far, now we are starting the discussion of results of stress testing with every bank,” she said.

It should be reminded that in May the Russian CB performed stress tests for the biggest banks of Russia, and their results turned out satisfactory. The testing was individual for 20 largest banks that account for over 80% of all assets of the banking sector. The total potential of the Russian banking system to absorb losses without violating any compulsory rule exceeded 5 trillion rubles.

Olga Polyakova continued to talk about stress testing and noted that “probably many banks are about reconsidering their investment plans, doing stress tests to accurately determine what result they will have by the end of the year”.

What results for first six months will show

Banks’ financial performance during the first six months will be a signal in this evaluation for the CB. “Profit of the banking sector this year will reduce, and it is absolutely obvious, everybody perfectly understands it,” Polyakova shared fears. “Consequently, there will be a fall in profitability, there will be potential losses because of clients’ defaults,” she forecasts.

“We will carefully analyse the dynamics and structure of the financial result. And our attention will be paid to meeting our recommendations on no dividend payout in 2019,” the CB vice chairwoman warned.

The Bank of Russia recommended postponing decisions on dividend payouts and offered to put them off to late August or September 2020: “A decision to distribute profit and pay dividends out for 2019 should be made only if there is enough capital stock, considering the necessity of full-fledged continuation of their business”.

Polyakova reminded them once again how important it was to understand the level of burden on every bank’s capital.

“Will it be necessary to augment the capital including at the expense of profit? We suppose that given the current economic conditions and forecasts it is feasible to use the profit to increase banks’ capitals and support middle-term lending of the economy,” she explained the essence of the CB recommendations.

Restructuring for 2,5 trillion rubles

Banks have already restructured loans for 2,5 trillion rubles in total within economic supporting measures — such a sum was provided at the meeting. In this respect, the banking sector wonders when the regime of exemptions will end.

In answer to this, Polyakova reminded them how the CB, in turn, helped commercial banks: first of all, it was made a decision to reduce contributions to the Compulsory Insurance Fund (the saving is 70 billion rubles), secondly, macroincrements for mortgage loans were cancelled for banks. The regulator supposes the banking system doesn’t have a deficit of liquidity.

“We follow the action of effects we introduced, the action of supervisory exemptions. And I would like to stress that we will consider the prolongation of these exemptions holistically. But I want to remind everybody about 2014-2015 when decisions on different exemptions were made too. In 2016-2017, the banking sector gradually left this type of exemptions. Undoubtedly, when we will evaluate the necessity of gradual exit, the necessity of prolongation of this term, we will consider the economic and epidemiological situations,” the speaker said.

The CB will resume economic evaluation of banks from 1 July, in this respect, Polyakova recommends financial institutions to prepare a forecast for those indicators that will influence the evaluation of the economic state on their own right now.

“Crisis is a soundness test. The lifeline must always be to hand, and your future depends on its endurance. And it will be tough for banks that have insignificant capital stock,” the Russian CB representative concluded.

By Luiza Ignatyeva

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