Rise in rates marks rise of corporate lending and the depression of retail - VTB

MOSCOW. Nov 24 (Interfax) - A sharp increase in the key rate of Russia's Central Bank and, following that, bank loan rates, marks the beginning of the heyday of corporate lending: companies, even with high borrowing costs, still need funding; moreover, they may have additional needs for debt financing. But retail will face a depressive period due to the volatile funding base of the banks themselves and the lack of opportunities to shift the risk to the client, First Deputy Chairman of VTB Dmitry Pyanov said. To characterize trends in the Russian lending market, he used literary parallels, citing "The Lord of the Rings."

OF ELVES AND MEN

"To paraphrase Tolkien, remember, he said that the time of the elves has passed, and the time of men is coming. The time of retail, at least for 2024, has passed, and the time of corporate lending is coming," Pyanov said.

Corporates continue to have resource needs, and new ones can even arise - for example, due to the introduction of exchange rate-based export duties as of October 1, the banker noted, this time resorting to quoting Russian classical literature: "It's a simplification to explain the October peak with crab auctions." In November there is also active demand. There, each corporation is unhappy in its own way, and therefore comes for a loan for its own reasons. For some of them, this used to be financed from the National Wealth Fund, but now it has suddenly unexpectedly stopped and they need to apply for a loan regardless of high rates in the bank. For others, overloaded with mineral extraction taxes, other taxes, and duties tied to the exchange rate, there may be some delays in the receipt of foreign exchange earnings in yuan due to Chinese banks, and they need a line of credit."

The Central Bank said that, in October the demand for loans from companies remained high (+2.3% after +2% in September). About a third of the monthly increase came from companies engaged in crab production (in October, auctions were held as part of the second stage of the sale of investment quotas for their production).

There are dozens of industries "with their own destinies" that, despite the high key rate, still turn to banks for loans, Pyanov said. In addition, a large corporate client of a high-quality category is now more profitable for the bank, since it bears a smaller burden on capital and the ability to borrow money on the "key rate +" principle, that is, without leaving the interest rate risk with the bank.

"Therefore, if earlier, retail and retail lending could be considered drivers of profit due to being constrained by macroprudential allowances, which lead to a large utilization of capital and quantitative limits, unfortunately, the time of the elves is over and the time of men is at hand," Pyanov said.

In his opinion, the corporate and investment businesses of banks will be able to shift interest rate risk to clients and will feel good in 2024.

"Those types of businesses that are funded with low sensitivity to interest rates, for example, the current accounts of clients, are global lines; medium and small businesses will also feel good. And the global line that does not have the ability to shift interest rate risks to clients, it is prohibited by law and regulation - is retail, and accordingly, it has easily overvalued sensitive components in the funding base, for example, deposits and savings accounts, which, if competitive rates are not offered, will flow away (...), and they will suffer the most," Pyanov said.

"We see that, at least in our discussions of the 2024 business plan, retail may have a "black zero" [a slight profit, barely exceeding zero values] in terms of contributions to profit in 2024, which explains the drop in profit that we are looking at for 2024. So when I say if elves are the best people in this whole concept, the best in terms of profit, then the retail business will lose its importance temporarily in 2024 because of interest rate risk," he added.