Speech by Philipp Gabunia at press conference on Financial Stability Review for 2024 Q2–Q3

Good afternoon. Today, we are presenting the Financial Stability Review for 2024 Q2—Q3.

In this review, as in the previous issue, we have identified five key vulnerabilities in the Russian financial sector.

Let me begin with the risks that have largely materialised.

The first is infrastructural currency risk. Over the summer, sanctions were imposed on the Moscow Exchange, and just last week, the United States announced sanctions against 52 banks, including Gazprombank.

These developments have increased volatility in the foreign exchange market. In response, we have decided not to purchase foreign currency under the fiscal rule until the end of the year, although we will continue to sell foreign currency.

The sanctions inevitably create infrastructural challenges and complicate export and import operations. However, in the medium to long term, the dynamics of the exchange rate are driven by fundamental factors. For example, the depreciation of the ruble in September and October resulted from a reduction in the current account surplus. Commodity prices remain at comfortable levels, although the risk of a decline persists if global economic growth slows down.

Since the suspension of exchange trading, all transactions in US dollars and euros have shifted to the over-the-counter (OTC) market, and we began to calculate the official exchange rates for these currencies based on OTC transactions using data from bank reports.

Another consequence of the sanctions was increased cost for yuan liquidity in the currency swap market. A number of market participants reduced their operations, while certain banks, on the contrary, increased their demand for yuan. We expanded the provision of liquidity under these conditions. Subsequently, we gradually raised the interest rate on the yuan leg of the swap to align with the key rate, minimising the impact of our operations on market pricing. The Bank of Russia’s swap facility is not intended to fund currency assets. Therefore, the banks must continue to de-dollarise their balance sheets and manage their currency positions using market instruments. The banks have significantly reduced their use of our swap facility in recent weeks.

The second risk that materialised this year is interest rate risk. Mounting inflationary pressures necessitated an increase in the key rate. It is now crucial for banks to maintain resilience to interest rate risks. Overall, the banking sector has a substantial safety buffer: at the end of the third quarter, the net interest margin remained sufficiently high at 4.4%, roughly the same level as in the first quarter.

However, conditions vary from bank to bank, and interest margins could come under pressure in the future. The need to comply with the liquidity coverage ratio has intensified competition among banks for stable funding. As a result, deposit rates, particularly for corporate clients, have risen above the key rate. At the same time, more than 40% of loans have been issued with spreads of no more than 2 percentage points over the key rate. In this context, we have temporarily expanded the ability of systemically important banks to use irrevocable credit lines to meet liquidity requirements. In turn, banks must take measures to mitigate their vulnerability to rate volatility.

Turning to interest rate risk associated with securities, the rise in OFZ yields has led to a negative revaluation of bond portfolios. Over the past two quarters, this revaluation reached ₽519 billion, which is equivalent to approximately one-third of the banking sector’s profits for the same period. In addition to trading portfolios, we are also monitoring the revaluation of securities held to maturity, which does not affect banks’ balance sheets. As of 1 October, this revaluation amounted to ₽783 billion. The scale of this remains limited, at less than half a percentage point of the banking sector’s capital adequacy ratio. A significant part of the held-to-maturity portfolio consists of securities eligible for refinancing with the Bank of Russia. As such, there is currently no risk of their sale or of the realisation of revaluation losses.

Non-bank financial institutions also experienced a decline in profitability in the second and third quarters. Nevertheless, they remained resilient. Insurers increased their holdings of short-term deposits, while non-governmental pension funds reduced their trading portfolios subject to revaluation and increased reverse repo operations.

Now, let me turn to vulnerabilities that have stabilised over the past six months. This primarily concerns retail lending, household indebtedness, and housing market imbalances. Following our measures, banks have accumulated a macroprudential buffer of ₽1.1 trillion against retail loan risks.

The performance of consumer loans weakened towards the end of last year, driven by increased lending to new borrowers amidst rising interest rates. In response, we raised the macroprudential requirements for such loans twice this year. Banks have tightened their scoring models; consequently, loan quality has stabilised and growth in consumer lending has slowed in recent months. Given this, the macroprudential limits for 2025 Q1 remain unchanged.

However, we note that the total cost of credit also increases as interest rates rise. Macroprudential add-ons tied to the total cost of credit may impose an excessive capital burden on banks, as borrower risk levels remain largely unchanged. To mitigate this, we have reduced the macroprudential add-ons for consumer loans today. These changes will be effective from 2 December. We will ensure that all banks accurately incorporate all loan-related costs into their total cost of credit calculations.

Regarding the imbalances in the housing market, the termination of the large-scale subsidised mortgage programme has resulted in a more balanced mortgage growth — currently just under 1% per month.

Banks are now more cautious in assessing the creditworthiness of borrowers. Mortgages with low down payments (less than 20%) accounted for 13% of issuance in the third quarter, which is one-fourth the value of a year ago. Issuance to borrowers with high debt levels fell from 74% to 42%.

However, we observe a deterioration in the performance of mortgages issued in 2022 and 2023, prior to regulatory tightening. For now, the amount of overdue payments is small, but we are closely monitoring this indicator.

We plan to introduce macroprudential limits for mortgage and auto lending for the first time on 1 July 2025. This measure is expected to more effectively curb the accumulation of household debt burden and mitigate banking sector risks.

There remains a price gap between the primary and secondary housing markets, which arose during the period of large-scale subsidised mortgages. This was driven by strong demand for new housing in the second quarter and high interest rates on market mortgages. Consequently, borrowers or banks selling a mortgaged property in a new development face losses due to this price disparity. As inflation slows and the key rate declines, market mortgage programmes will become more affordable for households, leading to a recovery in housing demand and a narrowing of the price gap.

Now let me discuss the vulnerabilities that continue to build up.

Corporate lending is growing rapidly despite the tighter monetary conditions, indicating an overheating of credit. This requires banks to ensure adequate risk coverage. For this reason, we have we have revised the timeline for the introduction of the countercyclical capital buffer: it will now come into effect on 1 February next year, not 1 July as originally planned.

The majority of loans are being issued to large companies, which are less sensitive to rising interest rates. Currently, the 23 largest borrowers account for 26% of the growth in the debt of corporate sector. Starting in 2025 Q2, we plan to introduce macroprudential add-ons for loans issued to the largest companies with higher debt burdens. Our core approach is as follows: if a company’s debt exceeds 2% of the banking sector’s capital and its ratio of operating profit to interest payments falls below 3, further increases in debt could pose systemic risks. Banks must therefore create additional capital buffers against such exposures. We will also revise the minimum risk weights for loans to the largest companies under the internal ratings-based approach.

The number of profitable companies is declining across most sectors. Many firms are facing rising costs for components, raw materials and labour, as well as higher tariffs and more complex and expensive logistics, all of which contributing to higher production costs. By raising the key rate and containing inflation, we limit the growth of companies’ expenses, thus mitigating the negative impact on their finances. The exception is highly leveraged companies, for which higher rates increase the financial burden. However, the adverse effects on the financial position of companies would be much greater in the case of persistently high inflation and disproportionately rapid growth in production costs.

Overall, the largest non-financial companies retain financial resilience and moderate debt levels.

Given the current high interest rates, we are closely monitoring the quality of corporate loan portfolios, which currently remains sound, with non-performing loans at 4%. Large and medium-sized enterprises are paying their loans on time, while small and micro-sized enterprises have begun to delay their payments more often. We are also observing an increase in overdue leasing payments among small and medium-sized enterprises. Small firms are most vulnerable to higher rates, but their debt, currently under 1% of the corporate loan portfolio, does not yet pose risks to financial stability.

Our ongoing analysis of the sensitivity of companies to tight monetary policy indicates that most borrowers have sufficient operating profits to service debt next year.

In conclusion, I would like to emphasise that the financial sector remains broadly stable, although certain vulnerabilities continue to accumulate. For this reason, we are tightening the macroprudential regulations and will continue to monitor financial stability closely in order to respond promptly to any emerging challenges.