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Thursday, October 27, 2016

What will happen to the profitability of Bank deposits

In April–may the Russian banks in a mass order have begun to reduce rates on deposits. Loans were also cheaper, but, apparently, they may get not all. So the situation in the market of banking services develops obviously not in favour of individuals. the Good news is that even in the leading banks still have deposits, which yield significantly higher than the expected rate of inflation.

photo: Mikhail Kovalev

Normal flight — fall

Its recent peak interest rates on deposits in Russian banks reached at the end of 2014 — early 2015. Then on the background of a sharp devaluation of the ruble and panic among depositors, banks are frantically trying to retain customers. The average rate on deposits at the time, according to the Bank of Russia amounted to slightly less than 13% per annum for deposits for a period of up to one year and slightly more than 13% per annum for deposits for a period of 1 to 3 years.

Now, when the economic situation more or less stabilized, these prices, the Russian investors can only dream about. Not everyone, of course, — those, for example, who opened a long-term replenishable Deposit at that time, still unable to reap the fruits of their calm during the financial storm. As for those who open new ones, the situation is getting worse every day. So, if in December 2015 the average yield of “short” (up to one year) deposits were up 8.83% per annum, in March — already only of 7.71%. This is a serious decline: there is the long term investment of 1 year income March” investors will be less income “December” by 16.9%.

Official data on the average return of deposits by the end of April is not yet published, but judging by the speed reducing interest rates this year, she is unlikely to be much above the current level of inflation, which in April of this year amounted to 7.3% in annual terms (that is, consumer prices in April 2016 was, according to official figures, 7.3% above the prices of April 2015).

Prices for credits also fell. So, if in the beginning of 2015, banks issued short-term and medium-term consumer loans at rates above the average of 29% per annum at the beginning of 2016 under 25.5 per cent on loans up to one year, and by 21,3% — on credits for a term from 1 to 3 years. In March, Central Bank statistics showed an even bigger drop in interest rates — up to 23.9% and 20% respectively. In April and may the largest state-owned banks announced another major decline in interest rates, which made up for separate credit products 4 percentage points.

Another thing is that banks are now very careful approach to the selection of borrowers and their total credit portfolio is not growing substantially. Which is not surprising: it is difficult to expect growth in the number of creditworthy borrowers in the face of economic crisis and a sharp reduction in real incomes. Thus, lower rates on loans, rather an element of competition for the most creditworthy customers, rather than a chance for the rest to get the necessary loan funds.

Extra people

The lower interest rates on deposits in Russian banks is understandable. The domestic banking system as a whole does not feel the need for money. The Federal budget deficit has led to the fact that the Ministry of Finance to Finance it printed “money-box” — your reserve Fund. Money in the Fund shall be deposited in the currency, the Treasury sells it to the Central Bank for rubles — and put into the economy. That is actually engaged in the printing of money.

The money to the final recipients go through banks. Client Bank balances are growing, and this means that credit institutions cease to experience liquidity problems, that is raising funds. And deposits of the population — a rather expensive resource, because of the large operating expenses it is obvious that a single large Deposit from a large company easier to maintain than several thousand smaller deposits of private customers. Therefore, banks first cut rates on deposits of natural persons (for comparison: in March, the banks short, term up to 1 year deposits of legal entities paid an average of 9.76% per annum, i.e. more than 2 percentage points more than in the respective deposits; in January, this difference was 1.2 percentage points). Of course, budget makeup makes it not all; these funds are mainly through large state-owned banks, but they just dominate the market of private deposits and determine the level of average interest rates on it.

Another reason why banks shock rate cut rates on deposits, is the already mentioned stagnation in the market of lending to private entities. Deposits of individuals, and costly to maintain, but it is a highly sustainable resource that can not disappear overnight. Therefore, it is indispensable for the funding of operations of crediting the same individuals is homogeneous, the assets and liabilities, their combination allows banks to reduce risks. But if the retail loan portfolio is not growing, and interest to attract deposits of private persons are falling too.

It is interesting that lower interest rates on loans and deposits in Russian banks is, despite the very tight monetary policy of the Central Bank. The Central Bank has already for quite some time (almost a year) keeps key rate at 11% per annum. It is this rate that determines the cost of lending of banks to the Central Bank, theoretically, and determines the value of money in the economy and interest rates on loans and deposits, and also serves as a tool to control inflation. But in the current situation, as already mentioned, the availability of money to the banking system is largely determined by the actions of the Ministry of Finance. In addition, if in the middle of 2015 the Central Bank rate at the level of 11-12% per annum looked organically (the official inflation by the end of 2015 amounted to 12,9%), now, when annual inflation fell to 7.3%, the rate of the Central Bank looks overpriced. Although the Bank of Russia explains the need to maintain high rates of preservation of high inflationary expectations and the risk of rising prices due to the same budgetary allocations of the Ministry of Finance, market participants are confident that in the near future the Central Bank will reduce rates.

In other words, the bankers are already embedded in the current Deposit interest rates, future inflation rates and the Central Bank. Typical example: average rate on “long” (3 years) ruble deposits was only 5.76% per annum, well below pre-crisis levels of January 2014 (of 7.43%).

photo: Gennady Cherkasov

Place your bets

But expectations — expectations and concrete action is quite another. Very likely, from the point of view of market participants, the reduction of the key rate of the Central Bank may happen at the next consideration of rates, which will take place at the meeting of the Board of Directors of the Bank of Russia on 10 June. Then, according to experts, will begin a new round of reduction in Deposit rates.

Overall, bankers believe that in the absence of new shocks on the market before the end of this year, rates in the largest banks must fall to the end of this year by 1-2 percentage points, and in the following year by approximately 2 percentage points. So by the end of 2017 they will have to be at the level projected by the Central Bank target values of inflation (4% per annum) or even lower. It’s normal historically, interest rates on deposits in the last decade were mostly below the rate of inflation.

Hence an important conclusion: those who believe that the bottom of the crisis has passed and believes the promises of the Russian authorities to achieve a drastic reduction in inflation, you should think about opening a Deposit now. Ideal long-term replenishable Deposit — this will give you the opportunity to add money to the Deposit when the situation described in the favourable scenario, and in the case that the market will begin again the crisis type, the devaluation of the ruble and the rise in interest rates is to open a new Deposit on more favorable terms or to buy the currency.

In addition, there is another important point. Lower rates on deposits — not an instantaneous process, banks reduced Deposit rates on various deposits in stages. That’s why there are proposals much better “average in the hospital”.

We emphasize: we are not talking about the abnormally high rates in small banks, which sometimes, because of financial problems, trying at all costs to attract more private investors. Impact the rate at which the Central Bank withdraws the license now shows that such deposits is risky, even though the Deposit insurance system: the process of obtaining compensation can take time and nerves, and the interest on deposits insurance does not cover.

However, the very best deals there are even the big banks. This is confirmed by statistics of the Central Bank, which regularly discloses information about the dynamics of the maximum interest rate on deposits in Russian rubles ten credit institutions that attract the largest volume of deposits of individuals. So, despite the General fall in Deposit rates, the maximum rates on deposits in leading banks continue to remain consistently high. At the beginning of 2016, this figure was 10% per annum for the third decade of may — 9.76% APR.

This means that you can still find the best interest rates even in the largest banks. And don’t put it in a drawer — it is obvious that, if the process is a General decline in interest rates on deposits will continue, such offers will end soon.


Bogdan ZVARICH, an analyst CC “FINAM”:

“In my opinion, in the near future, lower rates on loans and deposits will continue. While the basis for this can serve not only the reduction of interest rates by the Central Bank. Indeed, if the regulator in the near future will reduce the key rate, it will decrease interest rates on loans and deposits, but banks can do it yourself.

The fact that the lower interest rates on loans is a struggle for the client, and it is for the good of the client. Given the increase in delinquencies on the loans — both to individuals and the corporate sector, banks need to attract reliable borrowers, which will be timely to service debt and to make payments. To attract such customers you must create the appropriate credit terms, among which the most important is the interest rate on the loan. As a result, banks will try to lower interest rates, thereby creating a competitive advantage, but it can tighten models to assess borrowers.

As for deposits, this rate will be determined by the adequacy of liquidity in each individual Bank. So, at a high level of liquidity to banks is unprofitable to attract deposits, and they are reducing the rate, try to make them less attractive. If the liquidity situation in the banking sector in the near future will deteriorate, it is possible to reverse the process and increase interest rates on deposits. However, in my opinion, this is an unlikely scenario.”

Mikhail VASILIEV, President, Guild of financial analysts (GIFA):

“The positive trends in the foreign exchange market and, most importantly, oil market is likely to continue. On this basis, we can expect further reduction in rates on loans and deposits of banks.

Thus if Deposit rates will be cut almost all the banks, the lower interest rates on loans can afford mainly the big players. Big banks are more internal reserves for saving and reducing interest margins, and growing market share allows lower rates on the results and to attract money almost simultaneously. We must not forget that the main share account balances of legal entities also goes to the big banks. However, deposits are the main component of resources of the Russian banking system.

The last time we see efforts by the Bank of Russia on decrease in the level of rates in banks, but these measures will not be complete without the reduction of the basic monetary indicators in the key rate. Without reducing the key rate cannot lower interest rates on deposits and loans. Before, the Central Bank faces a difficult task — to find a balance between lowering interest rates in the real sector of economy and population, and on the other hand, not to allow excessive liquidity on financial markets and to avoid the formation of bubbles. However, most experts in the market believe that the regulator will try to reduce the rate for this year.”

Alexander POTAVIN, the chief analyst Management Savings”:

“The amount of free money in the Russian banking system over the past year increased significantly. In April, the largest state-owned Bank announced a significant reduction of interest rates on deposits, followed by other Russian banks lowered rates. And not only large. And judging by the fact that small banks with a large also reduces the level of deposits from the public, they don’t need cash. Because small banks use deposits from individuals as the source of their funding. Reducing rates to attract banks thereby indicate that a lack of funds now no. Interest rates on loans to business and population also began to decline at the beginning of this year.

However, we must not forget that we live in Russia, and there are periods of relative well-being can quickly be replaced by new instability. Another shake-up our stock and financial markets can get this fall if after elections to the state Duma escalated political situation.

If we pass this period safely, the closer to the end of this year continue the trend of reducing interest rates on deposits. The more that the price of oil in recent months has significantly rebounded and the ruble exchange rate shows rare stability, which were not the spring and summer of 2014. If you fall in the political arena of the country will be hot, then Bank rate will remain in place or even go up.

Financial crisis. Chronicle of events

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