Russians are gradually regaining confidence in the country’s banking system, and deposit growth in banks is outpacing GDP growth. But analysts say that depositing money in Russian banks still can be unreliable.

Russian banks can no longer make the kind of profits they used to from managing the accounts of and lending to large corporations. Big companies are increasingly borrowing money from abroad, where the interest rates are lower, and, in any case, Russian banks do not have the resource base needed to make large, long-term loans.

As a result, banks are now increasingly willing to work with household deposits. In turn, ordinary Russian citizens are beginning to forget the 1998 financial crisis and are increasingly willing to once again entrust their savings to banks.

"People are no longer afraid to keep their money in a bank," said Anatoly Milyukov, vice president of the Russian Banks’ Association. "This year, people have deposited 30 billion rubles in Russian banks. Last year, they deposited only 12 billion rubles. This means that deposits have more than doubled over this time."

Economic Development and Trade Ministry analysts say that the rise in bank deposits is due to the increase in people’s real incomes, the drop in consumer expenses, the development of wage-payment schemes through bank accounts and an increased tendency to try to save money. Analysts say that the drop in wage-arrears growth in February-March also had a positive impact.

According to State Statistics Committee data, total deposits in banks rose by 17.6 percent over the first five months of this year and reached 1.231 trillion rubles. This is an increase of 46.6 percent since June 2002. Deposits are growing at a faster rate than are incomes, which increased by only 30 percent over the same period, up from 3.042 trillion rubles to 3.961 trillion rubles.

Central Bank analysts say that the trend for increasing household deposits seen in 2001-2002 has changed in that people now prefer to open ruble accounts. One of the main reasons for this is the fall in the dollar’s exchange rate with the ruble. Now that the ruble exchange rate has stabilized, interest rates on ruble deposits are closer to those for foreign-currency deposits. As for the euro, despite its strengthening against both the dollar and ruble, the currency is not yet as widely used here, and Russians are not as used to it as they are to the dollar. Some banks, organizations and individuals are moving over to euro accounts, however.

<b>The country’s main monopolist</b>

The most popular bank among ordinary people is still Sberbank, but its share of total deposits is beginning to fall. As of June 1, 2002, 69.8 percent of Russians were using Sberbank’s services, while that figure had fallen to 65.4 percent by mid-2003. Sberbank holds 40 percent of all bank deposits and also accounts for the bulk (30 percent) of all corporate loans.

Now that the retail sector is growing, many banks are actively opening branches in the regions and entering the competitive fray. But the banking system still remains quite heavily skewed in favor of state banks over private ones. As analysts point out, if Sberbank’s restructuring were to begin today, not a single other bank would be able to take on its functions.

Yekaterina Trofimova, a credit analyst at Standard & Poor's, said that the size of Sberbank’s capital base and its resource-base advantages and ability to directly influence price formation on the market have a considerable impact on competition in the banking sector.

"Sberbank’s dominant position means it can follow a more flexible price policy than other banks, especially when it comes to attracting private deposits," Trofimova said. Sberbank then uses these household deposits to make loans to corporate clients.

Sberbank is the only bank that can offer state guarantees for deposits, and this is what enables it to attract two-thirds of household savings. Deposits in other banks are not guaranteed. (It was this lack of guarantees that caused many people to simply lose their savings in the 1998 financial crisis and undermined trust in banks.)

Andrei Borodin, president of the Bank of Moscow, says that any Russian bank working in retail banking has a hard time competing with Sberbank.

"I don’t think, as some of my colleagues do, that Sberbank should be broken up or banned from carrying out certain operations. I don’t think this would be the right approach," he said, however.

"But I do think we should do something to encourage and help other banks to grow stronger, so that we don’t have just one bank the size of Sberbank, but five or six such banks," he added.

That, he says, would make the market more competitive and bring more quality products to the people. "The consumer would only benefit. Today, however, we’re dealing with a monopolist that is also transforming and becoming an active and quite aggressive player. It’s extremely difficult to compete with Sberbank, if only on price parameters for any operation, because what we face is interest-rate dumping," he added.

Many analysts say that increased public confidence in the banking system could change the situation on the market and that Sberbank’s share of deposits will inevitably begin to fall: As the economy stabilizes, people will choose the banks that offer interest rates a percentage point or two higher, in their view.

Low reliability

But many analysts also say that Russian banks are still not very reliable. The main reliability indicator is the ratio of the bank’s owned capital to its general assets. For Russia’s banks, this is still at a dangerously low level.

The banking-sector director at the Interfax ratings agency, Mikhail Matovnikov, says that the owned capital/assets ratio of many Russian banks is falling and that some now have capital levels scraping the minimum acceptable capital-sufficiency level of 8-12 percent. These kinds of low levels could undermine the entire banking system.

According to Central Bank Chairman Sergei Ignatyev, Russian banks should have an average capital-sufficiency ratio of 20.9 percent and that the downward trend is very worrying. According to the Banker last year, Russian banks had an average capital sufficiency level of 18.47 percent. In reality, this figure may be a great deal lower, because of the widespread practice among Russian banks of inflating their capital.

A recent Central Bank inspection showed that a quarter of banks’ capital exists only on paper. Of the 60 banks inspected, 38 had in some way or another inflated their capital. In other words, 63 percent of Russian banks are misleading their clients and the Central Bank. If recent Central Bank statements are anything to go by, it intends to seriously combat this problem.

Having inflated capital of this kind makes banks more vulnerable to credit risks. What’s more, this kind of practice could tarnish banks’ reputations and lose them clients if discovered.

Deputy Central Bank Chairman Andrei Kozlov says that a new Central Bank instruction with detailed descriptions of the schemes for artificially inflating capital to be banned should end this practice and make it clear what the real level of commercial banks’ capital is.

Various estimates put household deposits at $40 billion-$50 billion. The only thing that is stopping banks from making use of this money is that people do not have enough trust in them. State officials think that, if people can be persuaded to trust banks through a deposit-insurance scheme, than $10 billion-$15 billion could flow into the banking sector.

But winning that trust will not be easy.