Nabiullina says narrowing in bank margins could accelerate amid stiff competition, low rates, calling into question some business models
MOSCOW. Feb 18 (Interfax) - The narrowing in bank margins amid stiff competition and low rates could accelerate, thereby calling into question the business models of some players, Central Bank of Russia (CBR) Governor Elvira Nabiullina said during a meeting organized by the Association of Banks of Russia between credit institutions and the CBR's board of directors.
"Stiffening competition amid low rates is pressuring bank margins, thereby casting doubt on the existing business models for many banks prior to this situation. Given that bank margins last year did not narrow very much, by only 20 basis points according to our estimates, meaning that they have remained approximately the same as prior to the crisis, then narrowing could accelerate in the future owing to factors of increasing competition as well as new models used by banks to develop business amid sufficiently low interest rates," Nabiullina said.
"We have discussed at many meetings together the topic of business models that are sustainable in the long term. You must constantly develop services, technologies, and products in order to earn profits. Banks could also improve efficiency and competitive positions by consolidating, though, truthfully, such examples are still few in number," the CBR governor said.
Russian banks earned a net profit of 1.6 trillion rubles in 2020, thus showing a return on equity of 16%, which was 6% lower year-on-year. The net interest margins of the country's respective banks narrowed on average 20 bps in 2020 to the current level of 4%-4.5 % according to the CBR's estimate, which the regulator's Banking Supervision and Regulation Department director, Alexander Danilov, cited at the end of January this year. According to the CBR's forecast, bank margins should narrow within 20-30 bps in 2021.
S&P in January published an analytical report on the outlook for Russia's banking sector for the next two years. According to the rating agency, the net interest margins of the country's banks are expected to narrow markedly by 50-75 bps to an all-time low of 3.25%-3.5% in 2021, and possibly by another 25 bps in 2022. Declines in loan losses and growth in income from fees and commissions will not suffice in order to offset the expected losses in net interest income.