OREANDA-NEWS. September 07, 2015.  The increased range of support tools available to Russia's banks allows them to cope better under stress, says Fitch Ratings. The provision of central bank refinancing facilities, capital support for systemically important banks and regulatory forbearance measures all strengthen the support framework. This is particularly important at present because Russian banks face a challenging operating environment.

Russian banks have been able to pledge collateral and obtain rouble liquidity from the central bank since 2007. This has been particularly important in recent years because customer funding inflows have been limited, reflecting the economic slowdown. Central bank rouble funding peaked at 12% of total sector liabilities at end-2014, falling to 8% at end-July 2015, reflecting a hike in repo rates.

State-owned banks accounted for over 80% of the total outstanding central bank rouble funding at end-July. They are highly reliant on this type of funding, as tapped amounts are above their share of system assets. Unutilised capacity in the system, as measured by the stock of eligible, unencumbered securities held by banks, is considerable. We estimate this could reach in excess of RUB2.5trn, equivalent to 3.6% of total system assets, although available collateral is not spread evenly across the banks. In an adverse scenario, we believe the central bank might also provide rouble liquidity on an unsecured basis, as in 2008.

Since October 2014, Russian banks have been able to pledge collateral with the central bank to obtain foreign-currency (FC) funding, subject to a total limit of USD50bn. This was equal to 12% of total sector FC assets at end-July. This measure was introduced to alleviate FC liquidity pressure faced by Russian banks following the imposition of sanctions by the US and EU and the closure of international capital markets. The uptake of FC repo liquidity reached USD33bn at end-July, with half this amount, we estimate, used to refinance corporate client loans and the balance apparently used to fund carry trades in Russian sovereign debt. We believe utilisation of the FC repo facility is likely to peak in 4Q15 when a number of corporate FC borrowings mature.

Since 2H14, RUB2.6trn, equivalent to 5.7% of end-July total sector loans, has been committed by the authorities to recapitalise Russia's systemically important banks. This capital support has improved/maintained the otherwise moderate loss absorption capacity at a number of banks. Fitch believes this level of capital support should be sufficient to allow the banks to weather a period of two or three years of stress, as happened in 2008. If there is a more protracted recession, additional capital support may be required. The capital support measures announced to date are equivalent to 3.4% of 2015 forecast GDP, of which an amount equivalent to 1.9% of GDP has been utilised, and so represents a moderate fiscal burden for the sovereign.

The central bank has introduced an array of forbearance measures to offset the negative impact of financial market stress on bank balance sheets. Measures include the use of favourable exchange rates to compute FC risk-weighted assets and favourable bond prices when reclassifying securities as held-to maturity, thus minimising the need to recognise losses. Banks were also allowed to restructure loans without making provisions, and Ukraine-related exposures required no additional reserves.

Forbearance measures were initially intended to be temporary, in place until July 2015. But extensions have been granted until October for some measures, and the central bank has indicated that further extensions on exchange-rate and provisioning measures are likely, considering the high exchange-rate volatility and the operating environment. We estimate that exchange-rate forbearance alone has boosted banks' regulatory capital ratios by around 80bp-120bp - which is significant for some banks given their moderate reported capital buffers.

Details on support measures are available in a 'Russian Banking System Support Compendium', published today. The document contains links to official sources for easy reference. Fitch will update the compendium quarterly, allowing users to monitor key changes in banking sector support.