Bangkok--14 May--Moody's
London, 14 May 2012 -- Since 2010-11, banks' origination of credit to small and medium-sized enterprises (SMEs) has grown in Russia, and the banks' strategies for expansion within the SME sector exceed that of lending to large corporates, says Moody's Investors Service in a new Special Comment published today. The overall growth trend is credit positive; however, if the economy contracts SME loans are likely to incur higher credit losses compared to other asset classes.
The new report, entitled "SME Lending in Russia: Growth Supports Profitability, but Cyclical Credit Risks Remain", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
"Overall, we believe that the banks' expansion of their SME portfolios and their plans to further this expansion are credit positive. The SME sector supports the banks' net interest margins, provides cross-selling opportunities and contributes to further diversification of banks' risks," explains Olga Ulyanova, a Moody's Vice President and author of the report. "However, if the economic cycle enters another phase of downturn, SME loans are likely to be the segment most vulnerable to weakened conditions, and credit losses might reach levels seen during 2008-09," adds Ms. Ulyanova.
Moody's says that relative to other asset classes, SME lending poses greater risks to banks credit profiles, due to (i) the weak corporate governance and financial reporting practices of many SMEs; (ii) their concentration and dependence on only a handful of large customers and/or suppliers; (iii) fewer refinancing options available to SMEs as opposed to large corporates; (iv) SMEs' elevated exposure to domestic currency fluctuations; and (v) a poor track record of SME loan recoveries, partly because of the low realisable value of collateral.
Credit risks for Russian banks are further aggravated by the country's evolving legal systems and practices, making it difficult for banks to settle bad debts via court and to secure recovery through repossession and sale of collateral.
Moody's report identifies several key trends in Russian SME lending over the next 12-18 months. The total volume of bank loans to SMEs will surpass 10% of the country's GDP (compared with 9.3% at year-end 2011). By 2015, SME lending will likely stabilise at around 15% of GDP, a level comparable with that of peer countries.
By expanding their SME lending operations, Russian banks seek to improve their revenue generation through wider net interest margins and additional cross-selling opportunities; however, the credit risks of SME lending continue to be higher compared with the risks posed by larger corporate or secured retail loans.
Moody's says that credit losses generated by SME loans originated after 2008-09 are currently lower than those for pre-crisis vintages, reflecting post-crisis economic stabilisation in Russia and the somewhat tightened credit underwriting procedures that the banks implemented. Moody's believes that banks are unlikely to relax their credit underwriting standards in the next 12-18 months and expects credit losses on newly generated SME loans to remain contained in the current economic environment.