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22.12.11

Russia’s Raiffeisenbank: the Central Bank’s Policy Will Result in Bonds Profitability Rise

The Central Bank has recently changed refinancing policies having set considerable limits on short-term REPO transactions, which resulted in sharp rise of both REPO rates and MBC market rates. The set of limits which has started from December 7, 2011 at first affected overnight transactions only. But yesterday the bank regulator considerably cut back the limits on weekly transactions as well, which proves the CB’s determination to reorient banks from short-term to longer-term and, more important, much more expensive funding.

Over the last two weeks, the rates on overnight REPO transactions rose to 6.1–6.49% from the average of 5.3%, and the rates on weekly transactions rose to 5.56% from 5.28% which was caused entirely by the shrinkage of corresponding limits. The grounds for such policies of the Central Bank at the peak of liquidity demand are not fully apparent. It should be noted that the main volume of liquidity payments (such as repayment of deposits to the Ministry of Finance, big taxes like VAT and MET) were conducted this week. Besides, the Central Bank intervention intensifies in view of dual currency basket growth.

The set of REPO transaction limits is not likely to be connected with the wish to constrain inflationary pressure from the budget funds flow at the end of month. First, net cash and liquidity inflow expected by the analysts of Raiffeisenbank in December will be at least half as big as that of the last year and partially absorbed by the CB’s interventions intensified on the back of the weakening ruble. Second, budget receipts would be now spent on the reduction of debts to the CB and the Ministry of Finance, which is twice as big as the bank’s liquid assets, but not create liquidity overhang.

The analysts of Raiffeisenbank are also not inclined to believe that such tightening of the CB’s policy is aimed at countering the fall of ruble alone. On the one hand, we have witnessed yet more considerable weakening of the Russian currency in August through September 2011; on the other hand, by our estimate the impact of rate growth and ruble liquidity fall on ruble rate movement is considerably extended in time, and the impact itself is not material, which makes the instrument inefficient for achieving such purposes.

In the judgment of Raiffeisenbank’s analysts, the more probable reason of the present situation is the CB’s intention to minimize the risks of imbalances in the banking system when long-term assets are funded for a term that is too short.

Loan growth higher than anticipated, on the back of the shrinkage of the banks’ funding base has already resulted in imbalances in the banking system. The drop in short-term REPO transactions will make banks attract funds on a more long-term basis, for example, not overnight or for a week but for three months and at a higher rate. Thus, the CB can limit the accelerating credit growth, financing which was shifting from CB to short-term REPO in proportion to the decrease in deposit growth.

It has to be noted that the shrinkage of short-term REPO transactions limits with the following growth of money market rates is actually the tightening of monetary policy, which raises hackles in the context of the decline of economic growth rates and persistent liquidity shortage in banking system.

It should be also noted that the shift to longer term REPO transactions is also negative because it means a temporary «block» of capital issues, which are securities for these transactions, from secondary market sales. The loss of both secondary market liquidity and bank trading portfolios liquidity coupled with the instability of external markets will increase the market risk of bond trading. Fearing the losses from negative revaluation of balances (on REPO frozen convertibles), the banks may prefer bond trading instead of long-term REPO transactions.

Thus, the change of CB’s policies will lead to significant growth of bond yield on the account of widening spreads over REPO rates where 91-day volatility of change in market rates/yield will be implied instead of the present overnight volatility. In this respect, the growth in popularity of bonds with coupon rate of interest pegged to the fixed REPO rate of the CB may occur in the primary market.

November Macro Statistics: the Growth Recedes

This Tuesday Rosstat published the data on the socioeconomic indexes of Russia for November 2011. In spite of the increase in external risks, overall trends of the real macroeconomic indicators of the state remain strong and exceed the expectations Raiffeisenbank’s analysts: the certain dull trend in investing activity is compensated by the still outrunning growth in consumer demand.

The good results of November are related primarily to the accelerating salary growth both in nominal and real terms for the account of inflation decline, and also to the improvement in labor market where unemployment fell from 6.4 to 6.3%.

Along with maintaining high loan growth rates, positive salary trends allow to avoid considerable deceleration of retail sales that may follow credits appreciation and in proportion to the exhaustion of the effect of post-crisis retail activity lift. The presently observed rates of retail turnover growth (8.6% yr./yr. against 7.9% in the 3rd quarter of 2011) do not yet reflect the deterioration in home demand.

Perhaps the only unpleasant surprise in November was the disappointing data on industry and rather weak results in fixed capital expenditure which normally only increase at the end of the year for the account of public expenses surge. The performance degradation in industry has shown first of all in metallurgy, mining, chemical and transport vehicles production which may be partly due to the concern about the fall in the demand of export-oriented products as well as the slump of its demand following the cutting of world market prices on metals, for example.

Besides, the decline in access to funds and their appreciation due to the deterioration of external economic situation already begin to result in the retardation of investment and product output growth. The main impact on the retardation of investment growth in November (7.7% yr./yr. against 8.6% yr./yr. in October) was the considerable derogation of construction performance (5.9% yr./yr. against 8.2% yr./yr. in October).

The summary on the new data is the following: investments and production have already experienced the consequences of the European crisis increase, such as capital outflows and debt funds cost increase, whereas the retardation of the activity of consumer sector which is sustained at the cost of savings and crediting is not traced yet and may show up somewhat later.

December may both display high investing performance (primarily, for the account of statistical effect of the reflection of major projects closure) and reflect the pre-New Year lift of consumer activity. However, in the following months we should expect the non-negligible retardation of economic advance due to the degradation of domestic demand growth under the influence of borrowed reserves limitation and appreciation on the one hand, and the decrease in salary growth, the growth of civilian credit costs and the weakening of ruble on the other.


ZAO Raiffeisenbank
is a subsidiary of Raiffeisen Bank International AG. Raiffeisenbank ranks 10th among the Russian banks in terms of assets, based on Q3 2011 results (Interfax-CEA). According to the same Interfax-CEA data, ZAO Raiffeisenbank ranked 5th in terms of private deposits and 6th with regard to consumer lending.

Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporate and investment bank, and Central and Eastern Europe (CEE) as its home market. In CEE, RBI operates an extensive network of subsidiary banks, leasing companies and a range of other specialised financial service providers in 17 markets. RBI is the only Austrian bank with a presence in both the world’s financial centres and in Asia, the group’s further geographical area of focus. Around 60,000 employees service about 13.7 million customers through around 2,900 business outlets, the great majority of which are located in CEE. Raiffeisen Bank International is a fully-consolidated subsidiary of Raiffeisen Zentralbank Oesterreich AG (RZB). RZB indirectly owns around 78.5 per cent of the common stock, the remainder is in free float. RBI’s shares are listed on the Vienna Stock Exchange. RZB is the central institution of the Austrian Raiffeisen Banking Group, the country’s largest banking group, and serves as the group head office of the entire RZB Group, including RBI.

 

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