Russians’ confidence in banks has almost halved in the past two years, according to a study by the national agency for financial research, NAFI. Only 38% of banking customers said in February they would recommend their own bank to their friends. On the other hand, Russian banks are more and more often refusing loans to their clients. Vasily Solodkov, Director of the Banking Institute at the Higher School of Economics, gave Invest Foresight some insights into the Russian banking system, shared tips how to invest without risk, and explained why Russian banks are engaged in real wars with other banks.
– Analysts give a positive outlook for the banking sector development in 2019: its pre-tax profit is expected to increase to RUR1.8-1.9 trln ($28-30 bln), while profitability will return to the 2013 level. Are such forecasts realistic?
– There is no point in discussing the entire banking sector’s development. Most state banks will indeed meet the profit forecast; the rest of the banks will show either near zero or negative profitability, large private banks being the only possible exception. As for the profit projections you mentioned, banks co-owned by the state will probably account for most of it. The remaining banks will be in a vacuum.
– How are Western sanctions affecting the banking system?
– We have lost the Western long money that the largest players on the market have been using; now they have switched to using state funds instead of cheap foreign loans. So, for large state banks, nothing really changed. Vnesheconombank has had some problems, but they were remedied by the pension reform and the freezing of future retirees’ deposits – at the expense of the people. The general situation is sad: where there were no problems, Russia created them artificially.
– At the moment, are there any tangible consequences of the sanctions for the banking system?
– No sanctions have been imposed on the country itself yet. They were imposed on specific individuals and companies. For example, Oleg Deripaska was the first person on the black list. His business went downhill and he did everything for the sanctions to be lifted. The current problems of the Russian economy were not caused by the sanctions but are due to the general model of Russia’s economic development. The economy is becoming increasingly monopolized; state participation is growing while the population’s actual income is decreasing.
– In one of the interviews, you said that the sanctions are making Russia an outcast. Is it possible that in the future Russia will be subjected to the harshest scenario and disconnected from SWIFT?
– It depends on what Russia will do. Nobody wants to disconnect Russia from SWIFT. However, in the past years, Russia has been giving more and more reasons for sanctions. Despite that, there have been no serious sanctions against our country.
– Are you saying that there is a certain line and if politicians cross it the sanctions will be toughened?
– This line is flexible and depends on many factors. Recently, Russia was accused of using chemical weapons of mass destruction in Great Britain but, for example, the United States has not yet imposed any related sanctions on us. A similar thing happened when Russia violated the agreement on free navigation in the Kerch Strait. No actual consequences have followed so far.
– What do you think about the Central Bank’s policy to cancel licenses of certain banks? It is expected that 50 more banks will lose their licenses in 2019.
– The Central Bank started canceling licenses without creating an insurance system for legal entities. And naturally, the legal entities are being taken over by state-run banks and large private banks that will not lose their licenses. All the other banks are left without a resource base.
Private banks have no choice but to attract clients through higher deposit interest rates, which leads to a profit decrease. Thus, small banks are getting risk-sensitive. When a bank runs out of money, its license gets revoked. This has an entire chain of consequences and it is all the Central Bank’s fault. The economy needs small banks and they can be better than large ones for a variety of reasons. But they are nevertheless being pushed out of the banking sector and replaced with state banks or microfinance organizations.
– Is it possible to find out what banks are risky for consumers? How can such banks be recognized?
– It is impossible, even experts cannot do that. When our large banks were collapsing, the Central Bank still was not able to predict which banks would have problems. Naturally, you cannot demand forecasts from individuals as well. As a rule, banks with a higher deposit interest rate are more prone to having problems.
The more reliable and large the bank, the lower interest rates it has; this is not a 100% percent true though. So we need to take advantage of the insurance system. If the deposit does not exceed RUR 1.4 mio ($22K), it is better to receive compensation later than lose money due to a low rate.
– Who benefits from the reducing number of banks? Does the harsh regulatory policy of the Central Bank benefit large players?
– Yes, of course it does. They receive additional profits. When foreign financing came to an end, state banks began to use the resources of the corporate sector. The revocation of a bank’s license equals a closed business, therefore most clients of such banks have left them for state banks. The latter are the main beneficiaries: they receive profit at the expense of private banks.
– Is the baking sector becoming more state-driven?
– The process is already underway, and the government stake is increasing. The main competition is developing between two groups of banks – Central Bank, which controls Sberbank and a certain number of banks that have been placed under resolution, and the Finance Ministry’s group which owns VTB Bank.
– According to the national agency for financial research, NAFI, Russians’ trust in banks has plummeted twofold over the past two years, with only 38% of banking customers saying in February they would recommend their bank to people they knew.
– I do not quite understand what ‘loyal clients’ means. People always choose banks that they find more advantageous. When the competition gets worse, banks are no longer interested in attracting clients. This results in clients switching banks more often.
– The emergence of online banking was one of the major stages in the financial system’s development. What do you think the next stage of banking development will be?
– I have been monitoring the development of online banking for 20 years already. Recently, mobile banking has advanced. I do not know what next stage we can expect as technology is ever-changing.