In 2013, the bank sector situation was developing rapidly. On the one hand there was a steady increase of credit volumes and mortgage portfolios and on the other hand the constraining fac­tors were actively developed: the sub­stantial increase of problem debt in the retail segment, the tightening of the Bank of Russia regulatory require­ments. Credit institutions had to adjust their strategies to defend and improve their rating positions.

DIFFICULT VICTORY

In 2013 Russian credit financial institutions showed an increase of total assets, loans and deposits. In particular, bank assets grew by 16% compared to 19% of the previ­ous year. The retail loan volumes increased by 28.7%, the loan portfolio of legal enti­ties increased by 12.7%. In 2013 the nomi­nal deposits in Russian banks are only one percentage point less than in 2012 (19% vs. 20%). "The aggregate profit of credit insti­tutions amounted to 994 billion rubles over the past year", - Elvira Nabiullina, the head of the Central Bank said at the XXVth Con­gress of Association of Russian Banks. Ana­lysts note that these results were achieved at a more conservative bank estimate of their risks and at additional reserves development.

"The year 2013 was quite different from the current one for the bank market. There was a strong enough inflow of pop­ulation deposits and the relative stability of legal entity funds in liabilities until the IVth quarter. Let the deposits were gener­ally expensive the bank sector still operat­ed in more or less comfortable conditions in terms of liability base and market liquid­ity. Today the situation changed greatly. The excess of liquidity has to be kept at the expense of profitability. In 2013 the retail banking was rapidly developed, and it was profitable for the majority of segment par­ticipants, despite the deterioration of port­folio quality and the activation of reserves establishment process due to the regula­tory environment changes. Last year small business loans increased by more than 16% and this are a good result. Credit factories, established a few years ago by a number of banks for SME servicing, gave an impetus to the market. However, the delay increased and the loan urgency decreased. Perhaps, one can determine some more narrow seg­ments - commercial finance, factoring, etc. And there was quite a decent growth (over 30%), and for many participants these areas brought good financial results", -Pavel Samiev, Director General Deputy of "Expert RA" agency analyzes the situation.

Maxim Petronevich, the Head Dep­uty of Gazprombank Economic Forecast­ing Center says: "The outstripping growth was caused by a rapid increase of population unsecured (31%) and the provision of funds to non-financial sector (13%). The state also supported the positive process­es - Central Bank of the Russian Federa­tion and the Ministry of Finance provid­ed more than 800 billion rubles for credit institutions trying to maintain the business growth through refinancing. Net interest income continues to be a major source of bank profits: only in 2013 they increased by 405 billion rubles. It allowed to compensate the growth of reserves for possible losses. At the same time, credit institutions continue to increase actively commission income. Its share rose from 2.2% to 2.6 % in the bank total income".

According to Vasyliy Yakimkin, the Associate Professor of "Finance and Bank­ing" faculty RANHiGS under the support of RF President the main driver of the last year was the growth of the issued consumer and other loans, as well as operations in var­ious segments of financial sector. The credit companies actively offered structured prod­ucts to their clients, developed such a seg­ment as bank saving certificates, and effec­tively managed short term deposit line.

"The assets of the Russian banking sys­tem increased by 16% in 2013. The assets of the 30 largest players increased by almost 19%. The total profit of banks decreased by 1.8% compared with 2012, and by 2.7%

within TOP-30. In general the results, on the one hand, were slightly worse than in 2012. On the other hand, last year the banking sector was still one of the leaders. It is clear that the economic rate growth slowdown adversely affects the bank business. More stringent capital requirements also limited the bank expansion. On the background of the many license revocation (29 licenses in the second half of the year) the major lend­ing institutions began to show accelerated growth rates. This is applied particularly to state-owned banks: their assets increased by 21% against 17% for private banks. This may be explained by the client transition from small to large players, especially to the state ones", - Natalia Lityanskaya, the head of SME Bank analytical center stated.

SME Bank expert notes that retail busi­ness became the main driver of asset growth once again if we talk about lending and not about speculative component. "Howev­er, the rates of increase start to slow down because of "low base effect" exhaustion, the increase of reserve requirements and the general deterioration of the economy state. High growth rates were demonstrated by mortgage lending: the number of loans doubled and the amount of credit increased about by 30%. As for the lending of small and medium business, the high growth rates were not observed: the results of 2013 may be regarded as satisfactory (the volume of provision was increased by about 16%, the portfolio increased by about 15%). The total volume of the legal entity loan portfolio increased by 12.7%. Interbank lending was greatly increased (the growth made 21.3% against 6.9% of the previous year)", -Natalia Lityanskaya added.

Natalia Yalovskaya, the Director Depu­ty of the Standard & Poor's "Financial Insti­tutions" commented: "In 2013, the consum­er credit increase was a significant driver for bank assets growth. Against a modest growth of corporate lending, which did not exceed 13% in 2013, consumer loan portfo­lio increased by 28.7% and provided about 30% of the total loan portfolio growth in the bank sector. At the same time the profitabil­ity of the bank market deteriorated in 2013 so ROA indicator (Return on assets - asset profitability) made 1.9% versus 2.2% of the previous year. The main factor of profitabil­ity reduction was funding costs and reserve cost increase, and a significant part of the costs for reserves development was caused by a high-risk unsecured lending".

According to Igor Bulantsev, the Chairman of Nordea Bank Board, the main driver of bank assets and profits growth in 2013 was retail lending. "As far as corporate lending, it played a far less significant role", - the Head of Nordea Bank agrees with most experts.

ALL MEANS ARE GOOD WHEN THERE IS CUSTOMER CHASE

It is known, that in 2013 CBR introduced a number of innovations concerning regula­tion, which cooled rapidly the growing seg­ment of unsecured lending. These chang­es will have its impact on the development of this market segment in the coming year. Today, the bank sector is being developed in more difficult economic conditions than during the previous year: GDP and invest­ment growth slowed down, the real growth rates of population income closed to zero, the retail turnover slowed down. The eco­nomic realities were added by geopolitical factors which resulted into a nervous reac­tion as from investors so as from the bank customers. What adjustments are neces­sary to be performed by credit institutions in their strategies taking into account the economy growth rates slowdown?

"Most banks are making changes already. They relate primarily to safety level increase (liquidity reserve, liabilities stabil­ity control and the measures for passive base diversification, the more stringent require­ments regarding the selection of borrowers) and, of course, the optimization of costs. It is very difficult and painful, but it is a trend of the year", - Pavel Samiev (Expert RA) believed. The analyst draws one's attention to the fact that Russian banks average ratio of expenditure to total assets makes more than 3.5%. "It means a lot, and at interest margin decrease at the deteriorating economic con­ditions this level becomes even unaccept­able", - the expert said. "When the oppor­tunities for extensive growth are reduced the market participants shall be focused on inten­sive aspects, that is, to offer their customers integrated products and services, to fight for their loyalty, to develop stronger relation­ship. The second potential problem for banks is the loan portfolio quality reduction. When borrowers are optimistic about the economy outlook, they are willing to accept a higher credit load as they expect the income growth. These forecasts do not become true at growth rates decrease, and the risks of non-payment appear", - Natalia Lityanskaya (SME Bank) analyzes the situation.

In her opinion, the new year 2014 will depend a lot on whether banks show flex­ibility in resolving debt problems. Custom­er loyalty will be largely determined by the actions of a financial institution in an unfa­vorable situation. In some cases, the bank is not interested in the credit agreement termination and collateral withdrawal, as such property is very difficult to implement dur­ing crisis periods. In the near term credit institutions should also carefully treat risk assessment. The unfolded struggle for bor­rowers, including by loan refinancing pro­vided in other banks, should not be reck­less - otherwise there is a risk to overload the portfolio with "bad" debts. Of course, some players have problems with the avail­able funding. The opportunities to receive borrowed funds from foreign financial insti­tutions are reduced. The domestic market also does not expect any significant bursts of liquidity. Most likely it will be impossi­ble to keep bank rates at the current level. The credit cost increase will be observed. In these circumstances, an important com­petition role will play cut costs and getting rid of non-core functions.

"Today we need to tighten lend­ing conditions as for legal entities so as for individuals. However, you should try to reduce lending rates for consumers in all segments. The right step would be the effective rate increase for short peri­od deposits and the development of struc­tured products for consumers. Also, banks should pay more attention to such instru­ments as savings certificates and work more actively at the bill market", - Vasily Yakimkin (RANHiGS - Russian Presiden­tial Academy of National Economy and Public Administration) considered.

"First of all you need to monitor active­ly the quality of the loan portfolio and spe­cific borrowers. Secondly, you need to work carefully with your costs, reduce them, increasing thereby the efficiency of its oper­ations. Thirdly you need to draw attention to fee income", - Igor Bulantsev (Nordea Bank) shares his experience.

Natalia Yalovskaya (Standard & Poor's) comments: "It is clear that the growth rates of consumer credit will slow down in 2014. According to our estimates, banks closed to the point of demand satu­ration within the segment of unsecured consumer loans. Accordingly, the further aggressive growth is possible here either by the increase of the borrower's debt level (it is already quite high and closed to 25% of the average owned income), or due to the mass involvement of borrower categories in lending, which did not meet previously the underwriting criteria. Both are poten­tially very dangerous growth strategies that could pose serious problems concern­ing the loan portfolio quality". According to the expert, most banks will adopt a more cautious growth strategy. At the same time the difficulties which emerged at the begin­ning of the current year associated with the availability of refinancing at foreign markets for Russian borrowers may have a positive effect on the prospects of lending for nation­al credit institutions: the borrowers who are unable to obtain financing at the capital markets will be forced to apply for bank refi­nancing. It is important to note that we are basically talking about large companies.

"We need to reduce the cost of non-core business and focus on small and medi­um business lending. Banks also should be focused on serving a particular segment of individuals - the least risky upper middle class", - Sergey Shpeter, the senior vice president of the National Collection Ser­vice reckoned.

SEARCHING FOR HIDDEN RESERVES

The current situation, as observers empha­size, could not be better described than by a phrase from a popular adventure book: "fight and seek, find and do not give up". The search in this case, as experts explain, should be focused on nonstandard problem solutions, new business development strat­egies. The models developed within more or less stable years may easily be ineffective. Expensive sources of bank system fund­ing limit the potential of new resources cost reduction. In this regard, some reduction of funding cost may only provide a broader securitization of loans, which will be avail­able in the second half of 2014. As for the client attraction, it may be done through a more accurate assessment of the borrow­er risk profile, the borrower differentiation according to risk level and by an individu­al offer of a competitive rate. "The follow­ing common situation remains: an interest rate for higher quality borrowers has loan default costs by less reliable counterparties, i.e. de facto these are the costs of insuffi­cient risk management quality by a bank", -Maxim Petronevich (Gazprombank) stated.

Pavel Samiev (Expert RA) summa­rized: "There are few hidden reserves. First of all it is the already mentioned optimiza­tion, identical function removal, automa­tion. However, there are no secrets here. An extensive growth was possible dur­ing stable periods. There won't be such a growth during the next two years for sure. Banks, no matter how corny it sounds, have to reduce their costs. Everything else is non-market, macroeconomic, regula­tory and political factors. Let's hope, they will not deteriorate severely".

"First of all one should draw his atten­tion to the optimization of costs, for exam­ple by business processes improvement (elimination of functions duplication, pro­cedure acceleration) for operation auto­mation. This will allow to compete with other organizations by the service costs reduction. Then it is worth to strive for non-interest income increase. The qual­ity of customer complex service improve­ment may bring large effect. Banks need to pay attention to the possibilities of coop­eration with the development institutions (with the insurance funds and other funds for small and medium enterprises support by SME Bank). The provision of guaran­tees on loans, on preferential long-term resources, subsidizing of interest rates -all these measures may revive demand and make the products offered by banks more attractive. This synergy becomes relevant for small regional organizations that are faced with the transition of customers to the major players, to the state-owned banks", -Natalia Lityanskaya (SME Bank) analyzed the situation.

We can't say that most of these expert "recipes" are something new. But the banks, which will use them, have a chance not only to keep its position in various ratings, but also to strengthen them by the end of 2014. No wonder the slogan "Crisis is not only a test but also a pool of opportunities for the brave and skillful" became axiomatic as for Russian credit organizations, so as for all eco­nomic entities in the world.