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The possible reduction of Russian banks' minimum regulatory capital ratios could be moderately negative for their credit profiles, says Fitch Ratings. Proposed reductions are in line with Basel guidelines and, for domestic systemically important banks (D-SIBs), could be at least partially offset by capital buffer rules coming into force in 2016. However, we believe that in more cyclical emerging markets, such as Russia, asset quality may be more vulnerable in downturns, and hence higher capital levels could be required to safeguard bank solvency.
On 1 October, the Russian Central Bank (CBR) indicated that it is considering lowering minimum core tier 1 and total regulatory capital ratios respectively to 4.5% and 8% from the 5% and 10% currently in force in Russia. At the same time, the CBR announced likely changes to certain risk weightings, also in line with Basel recommendations. The extent to which lower capital requirements, risk weight changes or D-SIB capital buffers are negative or positive for individual banks' credit profiles will largely depend on the extent to which they result in changes to actual capital ratios.
Some of the likely risk weight changes will result in increased capital requirements., including on foreign-currency sovereign debt. But other weightings will be reduced, for example those on qualifying retail mortgage loans (to 35% from 50%-150% currently on local currency exposures) and certain small business loans (to 75% from 100%). The reduced weighting on small business lending in a relatively difficult operating environment like Russia may not fully reflect associated risks, in our view.
Banks may also be able to make capital savings from 2016 once the advanced internal ratings-based approach to credit risk assessment is permitted by CBR. In addition, they already benefit from significant regulatory forbearance in capital ratio calculations, introduced to offset the impact of the current economic recession, including in respect to restructured loans, securities valuations and foreign currency assets.
However, planned capital buffers should add 3.5ppts to core tier 1 capital ratios of D-SIBs by 2019, a far larger amount than the reduction in the minimum requirement being proposed.
The robustness of asset valuations and risk classifications is likely to have at least as much of an impact as reported ratios on Fitch's assessment of individual Russian banks' capitalisation. Russia's ten D-SIBs all reported core tier 1 ratios of over 7% at end-1H15, although, in our view, these ratios may in some cases benefit significantly from favourable asset valuations.
