Liquidity Seesaw Pits the Haves of Russian Banks Versus Rest

(Bloomberg) -- The budget cash flowing through Russia’s financial system isn’t reaching the parched fringes where smaller banks ply their trade.

The government’s second year of deficit spending is weaning lenders off central bank funding, setting the stage for the industry’s first liquidity surplus since 2011. Yet smaller lenders are continuing to drive demand for the central bank’s refinancing even as it winds down the operations and begins accepting funds on deposit for the first time since February 2015 to mop up the excess rubles.

“What’s causing the situation is the highly uneven distribution of liquidity across the system,” said Denis Poryvay, a fixed-income analyst at Raiffeisenbank JSC in Moscow. “Budget funds are reaching large state banks, but because of the lack of available limits, the money isn’t being redistributed through the interbank market to small and medium-sized lenders.”

The funding squeeze underscores the divide among lenders after the unprecedented cleanup under Bank of Russia Governor Elvira Nabiullina in the past three years, which has thinned the top-heavy industry by shutting down more than a quarter of all firms, two of them near the top 30 by assets. That’s only deepening the gulf between the haves and the have-nots, with a handful of state banks now controlling at least 60 percent of corporate and retail loans and deposits.

The strains are playing out in the interbank funding market, with the Ruonia overnight rate rising 37 basis points since July’s low. Demand at a repurchase auction on Tuesday reached 517 billion rubles ($8 billion), 62 percent more than the amount offered. Banks borrowed a total of 320 billion rubles.

The higher funding costs are a further drain on banks whose margins and asset quality are under pressure from Russia’s longest recession in two decades. The country’s biggest lender, state-controlled Sberbank PJSC, alone accounted for almost 60 percent of the combined seven-month profit for Russia’s 669 banks. Two state-run banks -- VTB Group and Gazprombank JSC-- got more than half of the government’s 826.1 billion-ruble recapitalization program.

The central bank, whose cull of the industry has targeted lenders it considered mismanaged or undercapitalized, is offering looser requirements to smaller banks if they agree to remain in the regions where they’re based and forgo cross-border transactions.

“Many smaller banks operate in monoindustrial cities and are often important in their respective regions, complicating efforts to further consolidate the banking sector,” the International Monetary Fund said in a July report. “The 1990’s saw a decrease in state ownership, but the failure of systemically important private commercial banks in 1998 triggered a partial reversal.”

Juggling Act

The liquidity bottlenecks are leaving the central bank to juggle its instruments in the run-up to a cash surplus it expects from early 2017. To contain the buildup of rubles that could stoke inflation, policy makers have already sold local-currency government debt and increased reserve requirements for commercial lenders, with plans to offer their own short-term bonds, securities that haven’t been used in five years.

At the same time the central bank is continuing to make rubles available through its repo facilities, extending at least 200 billion rubles in overnight loans every day from Aug. 3 to Aug. 16.

“Going forward they will probably alternate repos and deposits, fine-tuning the situation with liquidity,” said Dmitry Polevoy, chief economist for Russia at ING Groep NV.

Funding Jam

Smaller lenders that are failing to wring enough cash from the interbank market have little recourse but to continue to flock to repo auctions, where some of them are willing to pay a premium of over 100 basis points to the Bank of Russia’s 10.5 percent policy rate. Ruonia, the average rate banks charge to lend rubles to one another, has been below the central bank’s benchmark since June. It reached 9.93 percent on July 4, the lowest since December 2014.

The central bank has acknowledged the discrepancies. Its research and forecasting department said in June that the “segmentation” of the industry will continue as budget spending leaves bigger banks increasingly awash with cash. The impact on the money-market rates may be “sizable,” according to a report.

“In determining the parameters of auction-based operations conducted by the Bank of Russia, the liquidity needs of the entire banking sector -- not individual banks -- are being taken into account,” the central bank said in a report on Wednesday. It estimates that the structural liquidity deficit was at 1 trillion rubles at the end of July.

Lending limits on the interbank market are set on the basis of banks’ capital base, which has been stagnant and explains the lack of available funding, according to Raiffeisenbank’s Poryvay.

“A bank can’t get more than it’s already been allotted,” he said. “Besides, as a result of the systematic withdrawal of licenses, there are worries about risk among counteragents.”

--With assistance from Jake Rudnitsky Anna Baraulina and Olga Tanas To contact the reporter on this story: Vladimir Kuznetsov in Moscow at vkuznetsov2@bloomberg.net. To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Alex Nicholson at anicholson6@bloomberg.net, Paul Abelsky, Simone Meier