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What sets the Belarusian banking system apart is a high concentration of assets and liabilities in state banks.
What sets the Belarusian banking system apart is the high concentration of assets and liabilities held by state banks. As of 1st April 2007, Belarusbank accounted for 43% of total assets and the following four banks made up a further 44%: Belagroprombank; Priorbank; Belpromstroybank; and Belinvestbank. Priorbank, part of the Raiffeisen group, is the only bank in this group in which the state does not hold a controlling stake.
The assets of each of the five major Belarusian banks exceeded US$1 billion as of 1st April 2007. According to The Banker magazine, Belarusbank ranked 17th in Eastern and Southern Europe in 2007 and 600th among the largest banks in the world.
These five banks are followed by six banking institutions which have assets ranging from US$130 million to US$380 million, accounting for 9.2% of total assets.
Two banks in this group - Belrosbank and the Minsk-Moscow Bank - are 100% owned by Russian capital. Russian investors hold controlling stakes in a further 3 banks: Slavneftebank; Belvnesheconombank; and Belgazprombank. It should be noted that strategic investors bought into the first two banks in early 2007. Combined, these Russian-owned banks rank 4th or 5th in terms of assets in Belarus.
Western investors hold a controlling stake in Mezhtorgbank, but the National Bank retains a sizeable stake as well.
Additionally, there are 12 small banks whose assets range from US$17 to 80 million; they account for 3.8% of total assets. Of these, only Paritetbank is state-controlled; the National Bank had to acquire this private bank to stave off its bankruptcy. The rest are privately owned, primarily by foreign investors. Foreign investors involved in the Belarusian banking sector do not represent large foreign banks; the only exception is Astanaeksinbank, a member of the TuranAlen group and a banking major from Kazakhstan.
There are a further four banks, which were established in free economic zones and which hold certain privileges. However, in 2007, they are expected to migrate to a normal regime. Having increased their charter capital to exceed the 5 million Euro threshold, they froze their activities in the first quarter of 2007 and deposited their assets with other banks. On 1st July 2007, Atom-Bank and the International Reserve Bank had their licenses suspended for failing to comply with the National Bank requirement of meeting this stipulated threshold.
The National Bank of Belarus holds a special place in the banking system. With assets of 7.28 trillion Roubles, it ranks second after Belarusbank. The National Bank is primarily involved in regulating the banking sector’s liquidity and in depositing national reserves.
Changes in Assets
The Belarusian banking system is divided into state and non-state sectors, which do not enjoy equal privileges; the state supports state banks by obliging state companies to open accounts with them. The development of the state sector of the national economy has primarily benefited state banks alone.
Most foreign capital banks are ‘captive’ - owned by an international group.
This situation changed drastically in 2004, when average private incomes rose and interest rates on Rouble loans fell. Banks were able to extend more borrowing to individuals and small businesses (see Graph 1). In early 2003, loans held by individuals almost equaled those held by state agencies and banks. By late 2004, loans to individuals were exceeding other investments by 85% (Graph 2).
Even greater changes were in evidence in 2006, when companies and state banks faced a liquidity crunch. This set the stage for an expansion of credit not only to individuals and small businesses, but to large firms.
In 2006, banks switched to the same taxation regime applied to other economic entities - resulting in an upsurge in their profits. By late 2006, Belarusian banks’ profits stood at BYR411.2 billion, up 91.3% on the previous year. In 2006, there was a 9.55%, return on equity - well above the rate of inflation. The return on assets stood at just 1.70%. These trends made investment in the banking sector more attractive.
In 2006, total Belarusian banking assets grew by 40.5%, to BYR30.1 trillion; equity rose by 28.1% to BYR5.2 trillion.
These trends continued unabated in 2007. According to the National Bank, from January-May 2007, Belarusian banking profits shot up by 32% compared to the same period of the previous year, reaching BYR184.8 billion.
Medium-sized and large foreign-controlled banks benefited most from the opportunities available. From 1st April 2006 – 1st April 2007, the assets of Priorbank, Belgazprombank, the Moscow-Minsk Bank and Belrosbank grew by more than 70%.
Of the small banks, only the Minsk Transit Bank and Astanaeksimbank were capable of shifting gear to suit the new conditions. The latter led the way in terms of asset growth: in the first quarter of 2007, Astanaeksimbank’s assets ballooned by 120% on the previous year.
Sources of Profits
Belarus’ financial market remains primitive, with banks offering a limited selection of services. They mainly handle current account transactions, deposits and loans. Investment activities in Belarus are very thin. Interest profits rank first, followed by commissions and charges on hard currency transactions (Graph 3).
Net interest income accounts for about half of banks’ net profits. In the first quarter of 2007, net profits reached BYR 264.5 billion, up 40% on the previous year.
Net interest income grew by 17%, to BYR198.1 billion, while net profits on hard currency transactions shot up by 23%, to BYR56.8 billion.
Securities transactions only generated losses for Belarusian banks in the first quarter of 2007.
Net income from loans exceeds that from commissions for all medium-sized banks controlled by Russian capital and most large banking institutions. The reverse is true for small banks, where commissions account for most of their profits; the only exceptions are the Minsk Transit Bank and Astanaeksimbank, which have branched out into lending to SMEs. Small banks also draw a sizeable portion of their profits from hard currency transactions.
The Bank of International Trade and Investment stood apart from other major institutions in the first quarter of 2007 in having lower net income from loans than from commissions or hard currency transactions.
The Extension of Loans is a Key Activity
The 2004-2007 Belarusian banking boom was fueled by higher volumes of loans. Specifically, the assets of the Belarusian banking system grew by 53% from 1st April 2006 to 1 April 2007 while the volume of loans granted grew by 60%.
Loans to clients account for the bulk of banking assets in Belarus. As of 1st January 2007, corporate loans stood at BYR15.3 trillion, loans to individuals BYR5.5 trillion and loans to state agencies BYR3.1 trillion. Investment stood at BYR2.6 trillion.
Until 2005, interest rates on Belarusian Rouble-denominated loans were higher than those on foreign currency loans. The situation changed in 2005, when the gap between the two narrowed. In December 2006, the average interest rate on Belarusian Rouble-denominated loans for legal entities stood at 11.5% per annum - compared to 10.4% for foreign currency-denominated loans. Loans to individuals were issued at 11.4% and 12.7%, respectively. In early 2007, rates rose with liquidity but later fell once more.
These figures are not an accurate portrayal of the cost of loans, as Belarusian banks do offer concessionary credits – particularly to finance housing construction.
Interest rates on loans are not an accurate measure of banking profits, since borrowers are sometimes obliged to pay extra for certain bank services. In early 2007, the average interest rate for individuals taking out Belarusian Rouble or foreign currency loans ranged from 16-20% per annum, although some institutions charged two or three times this amount. Legal entities face the same situation. In addition, many banks demand that borrowers move their accounts to them, allowing them to gain commission charges for transactions as well as interest on loans.
The National Bank has introduced a cap on interest rates chargeable on new Belarusian Rouble loans to legal entities, stating that they should not exceed the refinancing rate by more than 3%. Belarusian banks are abiding by this recommendation.
Sources of Funding
Prior to 2005, funds deposited by economic entities were the primary resource of the banking sector. These were later replaced by individuals’ deposits, which reached BYR7.8 trillion as of 1st January 2007. Deposits by legal entities then equaled BYR6.7 trillion. (Graph 4).
Banking capital was placed third, with BYR5.2 trillion, while non-residents and the Government deposited BYR3 trillion and BYR2.9 trillion respectively. These two were tapped to avert a liquidity crunch in early 2007 – at a time when the population and economic entities rushed to withdraw funds from the banking system.
In terms of capital, the Belarusian banking system looks sustainable. According to the National Bank, the statutory capital of the banking system stood at 20.2% as of 1st June 2007 - far exceeding the 8% level recommended by the Basil Committee.
Belarusian banks can still boost their assets without increasing their capital – although the equity-to-capital ratio varies across the sector.
As of 1st April 2007, medium-sized and large banks (with the exception of Belagroprombank) had a ratio far lower than 20%. Smaller institutions’ ratios stood at 20% or higher. Clearly, larger banks were able to make more effective use of their capital than smaller ones, thereby seeing higher returns on their equity.
Medium-sized and large banks should face no difficulty in boosting their capital. The Belarusian Government has sufficient funds to contribute to the charter capital of state-owned banks, while Priorbank and medium-sized institutions can tap foreign investors.
Prospects: Boom continues against the background of mounting risks
As the volume of loans increases, the delinquency risk mounts. Over the past 4 years, the situation has been benign; non-performing loans have fallen from a 9% share on 1st January 2003 to 2.83% on 1st January 2007. This trend may reverse soon, however; some telltale signs have already emerged. Specifically, the Ministry of Statistics and Analysis tells us that national economy profits for the first quarter of 2007 stood at BYR3 trillion - a 7.4% rise on the same period of 2006. Meanwhile, consumer prices rose 7.7%. This indicated that, in real terms, profit growth in the Belarusian economy had ground to a halt. This can be attributed to mounting energy costs and increasing interest payments. These negative factors look set to endure, with further energy price hikes due in early 2008; these will affect corporate profits and compromise companies’ ability to repay loans.
Vladimir Tarasov |
Finances 