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Bloomberg 25.05.2015 Fedor Bizikov's comment "Back-to-Basics Investors Sour on Russia Banks as Bad Loans Jump"

Back-to-Basics Investors Sour on Russia Banks as Bad Loans Jump
2015-05-25 11:38:20.570 GMT

By Vladimir Kuznetsov and Anna Baraulina
(Bloomberg) -- The rally in Russian banking bonds is
stalling as investors return to the basics: bad debt and
sanctions.
VTB Group’s perpetual notes had their worst weekly drop
since March as data last week showed the banking industry’s non-
performing loans reached a four-year high. VTB’s bonds and 2023
debt from OAO Sberbank handed investors at least 46 percent
returns since Jan. 29, the day before policy makers surprised
markets with the first of three interest-rate cuts. That’s more
than twice the average gain for Russian companies in a Bloomberg
bond index.
Sanctions imposed last summer blocking companies including
VTB and Sberbank from global debt markets may stand in the way
of further advances, according to GHP Group in Moscow, which is
selling part of its bank debt holdings. While borrowing costs
have fallen, they’re still two-thirds higher than a year ago and
bad loans aren’t set to improve anytime soon amid a recession.
“The rally is mainly over now,” Nadezhda Bozhenko, a debt
analyst at UralSib Capital, said by phone on Thursday. “These
bonds were oversold last year after sanctions were imposed and
the ruble depreciated. Economic weakness won’t allow them to
rise further.”
Yields on VTB’s $2.25 billion of perpetual rose one basis
point to 10.92 percent by 2:31 p.m. in Moscow after climbing
seven basis points last week, and compared with a 2015 high of
16.12 percent. The notes handed investors returns of 51 percent
since Jan. 29, in part as banks borrowed cheap foreign currency
via the central bank’s repurchase operations and reinvested them
in higher-yielding Russian assets.

Sanctions Premium

Policy makers have since curtailed the supply of repos and
increased their cost to make the so-called carry trade less
appealing. Even after the rally, debt of Russia’s second-biggest
lender is trading at a 944 basis-point premium to Treasuries,
compared with 700 basis points a year ago. The so-called Z-
spread for Sberbank’s $1 billion of 2023 notes is 528 basis
points, up 146 basis points in the period.
The extra cost partly reflects deteriorating credit quality
as sanctions following Russia’s annexation of Crimea worsened an
economic slump. VTB’s non-performing loan ratio climbed to 6.4
percent in the first quarter from 5.8 percent at the end of
2014. The banking industry’s retail bad-debt ratio increased to
7.1 percent by the end of April, according to central bank data.

Rate Cuts

“There’s only room for future growth in bank Eurobonds if
we expect the sanctions to be lifted sooner or later,” Ivan
Guminov, a money manager at Ronin Trust in Moscow, said by e-
mail on Friday. “The biggest contribution of the spreads of now
is the sanctions premium.”
Banks will probably get some relief as slowing inflation
opens the door for the Bank of Russia to cut borrowing costs
further and support economic growth. Consumer price increases
are set to slow “very quickly,” Bank of Russia Deputy Governor
Ksenia Yudaeva said in Astana, Kazakhstan, on Thursday.
Policy makers will lower the main interest rate to 10
percent by year-end from 12.5 percent now, according to median
forecast compiled by Bloomberg, helping banks lower their cost
of funding and boost margins.
Rate cuts “should be positive for Russian banks, including
VTB,” Tolu Alamutu, an analyst at Bank of America Corp. in
London, said in a May 19 note, projecting 350 basis points of
further easing this year.
Non-performing loans are set to peak toward the end of the
year or the start of 2016, central bank Deputy Governor Vasily
Pozdyshev said at regional banks conference in Moscow on Friday.
For Fedor Bizikov, who manages $1 billion for GHP Group,
it’s time to take profits with no relief from sanctions on the
horizon. The European Union will assess its penalties at the end
of July.
“Current spreads aren’t taking into account the sanctions
that still exist,” Bizikov said by phone on May 21. “The rally
has gone too far for the whole Russian bond universe.”