Only the Strongest Will Survive

The banking business in Russia will not be able to survive in 2015 without additional capitalization. While the larger players are beginning to ask themselves what kind of assistance they can receive from the government, smaller financial institutions have not ruled out the possibility of throwing in the towel altogether.

Looking at the situation in 2008, it is important to note that banks and the Russian business community already had a certain degree of financial redundancy when the crisis hit. Since 1998, a year when many of them went bankrupt or sustained losses, a decade had passed, giving financial institutions time to get back on their feet. Obviously, not every year was a resounding success, but 2005 to 2007, for instance, were quite productive indeed. During this time, the banking system acquired a certain resilience in terms of its profit margins and other indicators. That is why, by and large, banks managed to come out of the 2008 crisis relatively unscathed with no major bankruptcies. However, they were not without government assistance; several major players received cash injections from the government.

We should also bear in mind that after every crisis, banks end up with a considerable percentage of so-called ‘bad loans’ on their hands. During calmer financial times, they are gradually sorted out: some get restructured, others get sold. This period can be called a ‘time of creation,’ which is eventually replaced by another period of destruction, which in turn brings new debts.

The six years since the 2008 crisis have not been very successful for any banks. Granted, the industry recovered to some extent, and even began to show some growth, but this has not been enough. Naturally, the bad debts generated in the past have not gone away. Moreover, new debts piled up on top of old ones, which continue to snowball today.

Without a doubt, 2015 will prove quite difficult for the banking system. Several major players will experience bankruptcy and overall market consolidation will be unavoidable. At this stage, it is not yet clear whether this consolidation is likely to come in the form of mergers or if players will have to vacate the market. However, one thing is clear: barring an absolute miracle, 2015 will spell recession, and Russian banks will have to undergo a transformation. Only the strongest will remain on the market.

Without a doubt, 2015 will prove quite difficult for the banking system. Several major players will experience bankruptcy and overall market consolidation will be unavoidable. At this stage, it is not yet clear whether this consolidation is likely to come in the form of mergers or if players will have to vacate the market. However, one thing is clear: barring an absolute miracle, 2015 will spell recession, and Russian banks will have to undergo a transformation. Only the strongest will remain on the market

This time around, even the largest and most resilient players will not be able to survive without the government’s assistance, as they will have to opt for additional capitalization. Judging by their statements, government officials are perfectly aware of this. The government will have to decide quickly how this process is going to be implemented and with what rules.

It is fundamentally wrong to assume that the need to top up banking capital is caused by the bankers themselves, who allegedly accumulated money in every way possible, spent it mindlessly, and then turned to the government for help. In the face of a crisis, banks have to contend with two major restrictions: liquidity, on the one hand, and the Central Bank’s regulations on the other. Capital adequacy becomes the overarching requirement. Today their capital is decreasing as many financial institutions formed their assets in foreign exchange, while their capital is denominated in rubles. It thus follows that the banks overestimated their assets and are now low on capital. As surprising as it may seem, this situation exists across the board for all banks, albeit to varying degrees. They need capital to extend loans to their clients and to stimulate the economy.

The banking sector is the cardiovascular system of the economy. If the body is suffering from anemia or the blood supply is running low, the organs feel it right away. In such cases, it is not just the banks who suffer but the entire body – in this case, the economy. Additional capitalization is not unlike a blood transfusion – it is a step that could bring the body back to normalcy. This process plays a huge role, and will be absolutely vital for Russia’s banking system in the near future.

This is the fifth crisis that our banking system has faced. The crises of the 1990s were a shock to everyone, but now Russia has grown accustomed to the cyclical nature of a capitalist economy. Having survived two global crises in 1998 and 2008, and two additional crises in 1995 and 2004 that were limited to the banking sector, we have become somewhat immune to such events and have acquired the experience to deal with these situations. Today’s bankers have learned from past mistakes; though they now find themselves engulfed in what could be the most serious crisis to date, all remain convinced that economic recovery will soon follow.

It should be noted that it is quite easy to live with such a feeling. However, it is much more difficult to remember these cycles during prosperous years and to put money aside for the future instead of spending it. The players who thought about a situation like this in advance, rather than those who forgot crises like this during times of abundance, will find it much easier to weather the storm.