Russian banks are facing a net interest margin slump amid "unprecedented low interest rates" as the Russian economy battles the consequences of the COVID-19 pandemic, S&P Global Ratings said.
While growing fees and commissions, along with a gradual decrease in credit losses in 2021 and 2022, could alleviate some of the pressure on Russian banks' profitability, they are unlikely to fully compensate for the expected drop in net interest income. Cost of risk will not reach the pre-pandemic level of 1% until at least 2023 as banks will continue to create provisions for problem assets accumulated during the pandemic, mainly loans to corporate clients, the agency said.
The impact of lower net interest margins on Russian banks' business and credit profiles will vary across the sector. Lenders with greater exposure to low-margin corporate business, including some state-owned banks, along with those falling behind in the digital transformation processes, will be most vulnerable to the net interest margin drop.
Focus on digitalization, retail business and optimization
The race to digitalize will prompt Russian banks to increase spending, and their strategies will also center on operating efficiency and retail business as they adapt to low interest rates and the economic impact of the pandemic.
With greater focus on retail lending, competition in the consumer finance segment is expected to intensify, which might lead to more aggressive pricing and risk-taking, further increasing pressure on net interest margins, according to S&P Global Ratings.
Lower profitability is not expected to weaken Russian banks' creditworthiness. However, it will slow capital generation in the sector and reduce its resilience to potential stresses in the medium term, the agency noted.
As of Jan. 27, US$1 was equivalent to 75.63 Russian rubles.