Economic recession in Russia will continue to negatively affect the operating environment for Russian banks in 2016, as the impact of low oil prices and large depreciation of the ruble continues, says Moody's Investors Service in a report published today. This is likely to have a knock-on negative effect on Russian banks' asset quality and capital adequacy. 

"We expect problem loans of rated banks to rise to an average of 14%-16% of their total loans over 2016 from our estimate of around 11% as of year-end 2015," says Olga Ulyanova, a Vice President at Moody's. "We also expect a higher delinquency rate for foreign-currency denominated loans disbursed to corporates domiciled in Russia -- which comprise around 20% of the sector total loan book -- given the significant ruble depreciation." The ruble has depreciated over 25% against the US dollar between year-end 2014 and March 1, 2016 putting pressure on banks' loan performance and capital. 

Although government injections supported capital ratios of Russia's largest banks, capital remains under pressure, according to Moody's. "In 2016, we do not expect any large-scale recapitalization measures will be taken either by the government or by private shareholders," explains Ms. Ulyanova. "Instead, we anticipate low internal capital creation rates and projected growth in risk-weighted assets will lead to a declining trend in capital adequacy." 

While Moody's expects the banking system to post an aggregate loss under IFRS for the whole of 2015, it expects the sector to return to break-even in 2016 due to a gradual recovery of net interest margins, but partially also due to under-provisioning practices, which are likely to persist. The above being said, the rating agency expects the coverage of problem loans by loan loss reserves to slightly improve over 2016 compared to the relatively low 60% coverage ratio reported at mid-2015 under IFRS.