The highest proportions of foreign-currency loans at domestically-owned lenders at end-9M14 were at Gazprombank (38%), Alfa-Bank (35%) and Promsvyazbank (PSB, 30%), among the 100 banks covered in Fitch’s Russian Banks Datawatch. This implies a potential 70bp-100bp reduction in total capital ratios and 40bp-60bp fall in core Tier 1 ratios, if the increase in risk-weighted assets is not offset by internal capital generation.

Gazprombank had total and core Tier 1 capital ratios of 11.2% and 6.8%, respectively at end-9M14, while PSB had ratios of 11% and 5.8%, so these were already close to the 10% and 5% minimum regulatory requirements. We downgraded PSB by one notch to ’B+’ on 7 November in part due to the tightening of its capitalisation.

Overall, the Russian banking sector’s direct exposure to rouble depreciation is limited because FX lending is moderate and FX positions are largely matched. 17% of total sector loans (almost all to the corporate sector) were denominated in foreign currency at end-9M14.

This suggests that the system’s risk-weighted assets may have increased by 3% since 1 October, during which time the rouble fell 17% against the US dollar.

We expect this modest negative drag on capital ratios to be largely offset by capital gains from long FX positions and retained earnings. The sector was moderately long in foreign currency (12% of equity) at end-August, suggesting the potential for gains equal to about 2% of capital. But a few banks have short balance-sheet positions and high annual hedging costs, which could weigh on profitability. Uralsib and PSB had sizeable short positions equal to 80%-90% of their equity at end-9M14, among the large rated banks.

The direct negative impact on Russian banks’ asset quality from rouble depreciation should be limited. We estimate at least half of FX loans are to exporters or other companies with effective currency hedges, and so higher risk exposures to weakly hedged borrowers are less than 10% of system loans. But the economic slowdown will weigh on borrower performance, and the lower rouble could indirectly hit importers and retail traders due to weaker demand for foreign goods.

Switching of rouble deposits into foreign currencies was limited in 2Q14 and 3Q14, after increasing in 1Q14, and FX deposits comprised 24% of the sector total at end-9M14. Deposit dollarisation and rouble withdrawals (for conversion purposes) may have picked up in recent weeks, and banks may be forced to buy FX or incur greater hedging costs if household demand for dollars stays strong.

Sector FX liquidity has tightened over recent months as both banks and corporates have paid down external debt and probably hoarded larger amounts of foreign currency. However, limited take-up to date of central bank FX swap and FX repo facilities suggests there is no acute shortage of foreign-currency liquidity at most banks at present. Rouble liquidity is likely to tighten as the central bank seeks to limit speculative pressure on the currency, but should remain manageable.

Funding costs will rise following the latest 150bp increase in the central bank’s policy rate. But banks should be able to pass these on to borrowers in what is currently a lenders’ market.