Market overview

Global and Russian financial markets

In 2013, the situation on the international financial markets was influenced by the ongoing economic downturn in the Euro area, the recovery of the U.S. economy and the prospect of a wrapping-up the programme of “quantitative easing” by the Federal reserve system (FRS). Market environment during the year was influenced by monetary policies of foreign countries.

The aforementioned external factors as well as the dynamics of energy prices globally had an impact on the Russian financial market. In the beginning of 2013, the rouble appreciated against the U.S. dollar and prices of rouble-denominated securities increased with a background of oil price growth. In February 2013, as a result of falling oil prices and the banking crisis in Cyprus, the Russian financial markets began to deteriorate. The strengthening of the rouble seized, while the growing banking sector demand for liquidity led to the increased interest rates on the money markets. The growth of debt securities prices also seized, while share prices declined steadily. In the summer of 2013, despite rising oil prices, the situation on the Russian financial market remained tense due to the outflow of global investors’ funds from risky assets. In the autumn of 2013, on the back of expectations of further “quantitative easing” by U.S. Federal Reserve and renewed investor appetite for risky assets, the situation stabilised, and the Russian financial market maintained its stability.

Trends

According to expert opinions, reduced demand for borrowing, the growth of distressed assets and shortages of liquidity will have a decisive influence on the dynamics of the banking sector in 2014. The decrease in loan demand will affect not only lending to large business and the population, but also the SMEs. Amid the deteriorating macroeconomic environment, the quality of banking assets will decline.

According to the forecasts of “Expert RA”, in 2014, the banks‘ assets will add not more than 11%, the aggregate loan portfolio - not more than 13%. Retail lending will maintain the highest growth rates, but its dynamics will not exceed 22%, while the segment of unsecured retail will grow only by 26-28%. However, by the end of the year, a boost of the banking sector can be expected in the segment of mortgage lending, while lending to small and medium business will slow down from 18% to 13-14%.

Macroeconomics

In 2013, the Russian economy has entered a period of stagnation. The economic slowdown was mainly due to reduced capital investments (their volume in 2013 dropped by 0.3%) and decrease of consumption. This had a negative effect on the stability of public finances - according to the Ministry of Finance, in 2013, the budget deficit exceeded 300 billion roubles. Tensions on the financial market provoked a gradual currency devaluation, heated by the reluctance of the Bank of Russia to engage in large-scale interventions on the currency market. Outflow of capital from the country continued, its volumes for 2013 exceeded $60 billion.

Banking sector

According to “Expert RA” agency, in 2013 banking sector assets grew by 16% versus 19% a year earlier. The stagnation of the Russian economy had a negative impact on the dynamics of lending to large business (a growth rate of 10% versus 12% in 2012). Simultaneously, the saturation of demand, the deterioration of payment discipline and changes in banking regulation adversely impacted the retail market (an increase of 29% versus 39%), which had been the key driver of growth in the banking sector for the past three years. Rapid growth of overdue retail loans and uncertainty in the corporate segment led to increased charges to provisions for possible losses. The only segment, which at the end of last year managed to maintain the growth rate (about 18%), was lending to SMEs. For the first time over the last five years, the total annual income of the banking sector decreased and amounted to 993.6 billion roubles for 2013 (versus 1,011.9 billion roubles for the previous year).

Regulations

Despite aggravated problems, the banking system of Russia has shown relatively high growth rates in 2013. However, such factors as a significant discrepancy between the volume of retail and corporate lending growth rates (with the former leading far ahead of the latter), substantial rise in overdue debts on corporate loans, a reduction of capital adequacy and a more than doubling (122%) growth in the Bank of Russia financing due to problems with liquidity, caused concerns among market participants and regulators.

This forced banks and regulators to take a number of economic and legislative measures, which had an inhibiting effect on the development of credit organisations. In 2013, the Bank of Russia was preparing to move to the capital adequacy calculation based on the recommendations of the Basel Committee on Banking Supervision (Basel II and Basel III), which gives increasing significance to the operational risk and a more strict approach to the calculation of risk-weighted assets, as well as to the inclusion of subordinated instruments in the additional capital. To reduce the expansion in retail lending, the Bank of Russia raised the provision requirements for a number of consumer lending products, increasing pressure from high-risk unsecured retail loans on banks’ capital. Greater importance was given to the matter of tightening legislation in the sphere of counteracting the legalisation of criminal proceeds and the financing of terrorism. These measures led to slowing growth in the banking system.

In addition, in 2013, the Central Bank of the Russian Federation started to implement strategies for optimising the number of credit organisations in Russia, which resulted in the contiuous withdrawal of banking licenses at the end of 2013. The series of license revocations provoked a “domino effect”, and even the record volumes of the Bank of Russia lending only partially covered the liquidity deficit in the system. Local outbreaks of depositors’ panic resulted in quite a tangible redistribution of the client base.

Market positioning of Bank Vozrozhdenie

Bank Vozrozhdenie is a private commercial bank with a stable economic position.

Throughout history, our ranking, according to specialised agencies, has never dropped below the 35th position in terms of assets, yet in our key segments, the Bank has maintained higher ratings.

One of the most developed business segments of our Bank is lending to small and medium sized enterprises (SMEs). The Bank is ranked 3rd in the relevant ranking of Expert RA. In addition, we are actively expanding our mortgage lending business. Successful operations in this segment have allowed the Bank to rank among the top-10 largest Russian mortgage lenders.

Customer funds remain the primary source of funding for the Bank. Based on the volume of retail deposits, the Bank is ranked 21st in the Russian banking system. Due to an extensive client base, our high reputation and compehensive approach to customer service, the Bank managed to maintain relatively low interest rates throughout 2013, which resulted in the Bank being included in the top-10 banks with the lowest interest rate on deposits.

Historically, the Moscow region has been the core area for the Bank, being the place where the Bank was founded and where it has consistently maintained leading market positions for over 20 years. In many towns and districts of the Moscow region, the Bank is among the Top 3 financial institutions.

Factors that could impact the operations of the Bank

The Bank has a strong position in the Russian banking system and adheres to a conservative risk management strategy. Despite this, alongside the other participants of the banking system, the Bank remains vulnerable to the influence of negative tendencies prevailing in the market. The slowdown in economic growth and the deterioration of the financial standing of borrowers may affect the growth rate of the loan portfolio and the willingness of the Bank to take risks. Tighter regulation and the trend of clients preferring state-owned banks as the more reliable ones, can increase the costs of raising new funds, while closed capital markets and new regulation requirements on capital replenishing instruments in accordance with the requirements of Basel III will limit the potential expansion of the capital base.