Speaking before Moscow went into indefinite lockdown on Monday, Vladimir Verkhoshinskiy said the Russian banking sector is much better prepared for a downturn today than it was before both the 2014 to 2015 Ukraine crisis and the global financial crisis.
He also dismissed suggestions that a surge in retail lending over the past three years could exacerbate the impact of Covid-19 on the industry.
Vladimir Verkhoshinskiy, Alfa-Bank
“In 2014 leverage was higher in all segments – retail, SMEs and corporates,” said Verkhoshinskiy. “Since then Russian banks have become much more professional in their lending behaviour. We are also still well below western and central Europe in terms of retail lending to GDP.”
Similarly, the fall in the value of the rouble following Russia’s decision to abandon its agreement with Opec on oil production in early March will have less impact on banks than after the oil price collapse in 2014, according to Verkhoshinskiy.
“Russian banks have got used to rouble depreciations,” he said. “There is no lending in hard currency to retail customers and corporates hedge their FX risk better than before previous crises.
“I think our retail customers are also more educated than they were in the past. We are prepared for a spike in demand for cash, but we haven’t seen it yet. Ten years ago there would have been a huge line of people waiting to withdraw cash by this point.”
What Alfa-Bank has seen in recent weeks is a continuation of rapid growth in lending demand from both retail customers and small and medium-sized enterprises, despite a sharp fall in approvals rates.
“It’s forward-looking behaviour,” said Verkhoshinskiy. “People are making sure they have what they need, in the same way that they are stocking up with food. Interestingly, loans issued during such times usually turn out to be of a very high quality.”
Nevertheless, Alfa-Bank is expecting an increase in credit impairments as the effects of the global Covid-19 quarantine and Russia’s own domestic measures start to hit home. By Tuesday, three more regions had followed Moscow in implementing a lockdown, while a nationwide week-long holiday began on March 28.
“All the same sectors as in Europe will suffer for sure here – tourism, offline non-food trade, entertainment etc.,” said Verkhoshinskiy. “They are starting to suffer already and I think within weeks we will see a deterioration in the overall loan portfolio – in those industries faster, in other industries slower.”
As in other countries, the Russian authorities are pushing banks to offer payment holidays to borrowers affected by the crisis. In a speech on March 25, president Vladimir Putin urged lenders to freeze retail loans and mortgages, as well as deferring debt servicing for SMEs for up to six months.
What is most important right now is how fast banks can react
– Vladimir Verkhoshinskiy, Alfa-Bank
Alfa-Bank has heeded the call, offering two-month payment holidays for retail customers. The application process will initially be semi-automated but is expected to be fully digital by the end of April.
“Managing applications for loan holidays is obviously a challenge,” said Verkhoskinskiy. “We had credit holidays as a product, but it was a paid-for facility for one month. We are changing this to make it more flexible and free.”
SMEs will likely also get payment holidays, as well as loans to enable them to continue paying employees. On March 27, the Russian central bank announced plans to provide up to R150 billion ($1.92 billion) of one-year loans to banks at an interest rate of 4% for on-lending to SMEs to pay workers.
Russia’s two largest state-controlled banks, Sberbank and VTB, have already announced plans to launch a pilot of interest-free salary loans for businesses.
Verkhoshinskiy rejected suggestions, however, that Russia’s state banks would fare better during the Covid-19 crisis than those in private ownership. Alfa-Bank is the largest privately-owned lender in Russia.
“What is most important right now is how fast banks can react,” said Verkhoshinskiy, who headed VTB’s retail operation before moving to Alfa-Bank in August 2018. “This is a big opportunity for private-owned banks because we can make and implement decisions fast.
“For example, on Monday I called our heads of retail and SME banking and told them we needed to look at offering payment holidays. By the evening we had made the decision and it was announced the following day.
“In state or big public organizations, even if you have a very decisive chief executive, it takes weeks to navigate the bureaucratic processes.”
What the Covid-19 crisis will do, according to Verkhoshinskiy, is accelerate consolidation in the Russian banking sector. Even after the drastic clean-up of the industry initiated by central bank governor Elvira Nabiullina after her appointment in 2013, Russia still has just under 400 banks.
“The banks that suffer most will be those who focus on POS [point of sale] lending and unsecured small-scale consumer lending,” he said. “Those who focus on mortgages, affluent lending and salary account lending will suffer less.
“For sure, a lot of smaller, regional and monoline banks will disappear from the market in the next 12 to 18 months. Clients will migrate to more reliable, bigger banks. It’s been happening for the last two to three years already.”
Digitalization is part of this process, Verkhoshinskiy added. “The leading digital banks in Russia, including Alfa-Bank, are among the most advanced in the world,” he said. “But we also have a couple of hundred smaller banks that don’t have the resources to invest in digitalization and IT platforms.”
Around 80% of Alfa-Bank’s customers regularly use digital banking channels. Verkhoshinskiy said this gives the lender a big advantage as Russia heads into quarantine.
“Operationally we can for sure cope with lockdown for a few weeks,” he said. “What would happen if it was three months, I don’t know. But for Alfa-Bank it would be less of a problem than for other banks because we are one of the leading banks globally in terms of digitally active clients.
“The average Russian customers will be able to live with complete lockdown much better than those in European and other countries, and with Alfa-Bank I think we are probably in one of the best situations globally.”