Fitch: Recovery in Belarus Bank Lending is Still Some Way Off 

A return to growth in Belarusian bank lending is still some way off, Fitch Ratings said at its annual conference on Belarus in Minsk today.

We expect new lending (excluding exchange-rate effects) to be at best flat in 2017. Volumes will be constrained by the still-contracting economy and banks' deteriorating asset quality, although the decline that began in 2015 could end this year. The banking sector's new lending fell 4.6% in 2015 and 7.9% in 2016.

Government-directed and subsidised lending to prioritised economic sectors is being scaled back as it represents a significant contingent liability for the public-sector balance sheet. It fuelled overall lending growth in the past decade and accounted for more than 40% of the banking sector's stock of loans at end-2016, with about 18% (equal to about 7% of GDP) secured by central and local government guarantees.

Corporate lending will remain limited by borrowers' generally high leverage, while the government will focus on the clean-up of state-owned banks' balance sheets to support their capital and performance. We expect this process to be gradual given the government's limited financial capacity for significant support.

In contrast, we expect retail lending to keep growing this year, at low single digits, driven by housing lending transacted via state-owned Belarusbank under government programmes. Retail accounts for about 20% of the sector's total loan stock.

Pressure on earnings is likely to persist in 2017, due to lack of lending growth and weakened asset quality following the two-year recession and the sharp fall in the currency. Lending in Belarus is highly dollarised (56% of the total).

Regulatory non-performing loans (NPLs) doubled to 13.7% of gross credit exposure at end-1Q17 from 6.8% at end-2015. The government is addressing this with its initiative to transfer problem assets to a non-bank vehicle and replacement of state-guaranteed problem loans with long-term bonds issued by local governments. State-owned banks accounted for about 70% of sector NPLs, reflecting their high share of overall lending.

The banking sector reported positive operating results in 2016 but this is helped by delayed provisioning for impaired loans. We estimate that pre-impairment profits could be sufficient to increase reserve coverage of NPLs to a more solid 80% from a weak 45% at end-2016, over a 12-month period. But further provisioning could become necessary given the difficult operating environment.

Increased regulatory solvency requirements introduced in 2016 are positive for financial stability. But we view banks' capital buffers as modest relative to high credit risk and unreserved NPLs, equal to 32% of regulatory capital at end-1Q17, a figure we believe may be understated due to loan restructuring.

We rate six banks in Belarus, all at 'B-'/Stable. These ratings are underpinned by potential support either from the Belarus state or Russian shareholders, and are at the same level as the 'B-'/Stable sovereign rating. Low external liquidity is a risk for Belarus but we assume that ad hoc financial support from Russia will continue.

Deterioration of the sovereign credit profile would be negative for bank ratings as it would indicate a reduced ability to support banks and their public-sector borrowers. Capital erosion from a marked deterioration in asset quality or significant tightening of FX liquidity positions would also be credit negative for banks.