The forecast has been drawn up in line with General Principles of Socioeconomic Indicators Forecasting.
The mortgage market proved the most dynamic lending segment (even not accounting for currency revaluation) over the last four years. Nevertheless, it still retains considerable potential for further growth in the next four years (2017–2020). Demand should be fueled by low per capita housing in Russia, saving behavior of households (with real estate used for saving purposes), ongoing reduction of interest rates on loans on the backdrop of liquidity surplus and quantitative monetary easing, as well as the proactive housing policy pursued by the government (housing renovation plans in Moscow). Banks are keener on mortgage loans as well, as the latter require less coverage, with an adequate level of margins persisting in the segment thanks to a low default level and very modest loss rates.
Mortgage penetration remains weak: Russia has one of the lowest mortgage portfolio to GDP ratios (only 5%) among the European nations (see Fig. 1), as less than 10% of households used mortgage loans in 15 recent years.
A detailed banking sector forecast is available in the ACRA February 27, 2017 research titled “Weak demand for loans stimulates risk appetite among Russian banks”.
Mortgage looks set to remain one of the most dynamic lending segments. In 2017, the amount of provided mortgage loans should climb 15–17% per year (against 26% the year before, with the high base effect of 2016 taking its toll), while the loan portfolio should swell by some 12–13%. In 2018–2020, we expect slower growth rates in this segment – 12–13% (disbursement) and 10% (portfolio). Among other retail lending segments, only car loans will show relatively high portfolio dynamics (8–10% on average in 2017–2018). Unsecured lending growth will remain weak (less than 7%), as households are likely to further stick to high propensity to save.
As a result, by end 2020, the share of mortgage in GDP will reach 6.5%; but thanks to consistent reduction of rental rates, this growth will not negatively affect borrowers’ debt burden (given the total volume of the retail portfolio), which will remain at the average level for developed markets (around 9%).
The debt burden or the debt service ratio (DSR) is the share of disposable income needed to repay interest and short-term portion of the principal.
For details, please refer to the ACRA July 5, 2016 research titled “Lowering interest rates to provide modest impetus to consumer lending”.
In 2015–2016, banks grew increasingly interested in the mortgage market, partly due to the government program of subsidizing mortgage interest rates and consistently high quality of ruble loans. On the backdrop of stiffening competition for borrowers, an increasing number of banks started pursuing aggressive pricing policies, in particular by refinancing loans given out by competitors with lower rates or by offering promotional products at rates below the market level. In 2017, a new wave of price competition was initiated by Sberbank (ААА(RU)) that has lowered its mortgage interest rate three times and offered a proprietary refinancing program. As a result, the reduction of mortgage interest rates has been outpacing the dynamics of the key rate and average retail deposit interest rates this year.
By our forecasts, the said trends will bring about an annual reduction of average bank margins on new disbursements by 0.2 pps, which, in the horizon of 3 years, will cause the shrinkage of margins by 0.5–0.7 p.p. on average. During the forecasted period we expect the average interest rate on mortgage loans to drop by 3 p.p. to the level of 8.5–9.0% by end-2020.
Historically, the mortgage portfolio in Russia has been characterized by the lowest level of overdue debt among all segments of both retail and corporate lending. We expect high quality of the portfolio to persist over the next 3–4 years, with the mortgage segment demonstrating a lower level of bad debt compared to other consumer lending segments (including car loans).
Cost of risk is net provisioning (allowance for possible losses on loans less the provision recovery) for a certain period / average loan portfolio for the period.
The capital adequacy ratio is overall capital / assets weighted by risk profile.
In the meantime, cost of risk (the ratio of created provisions to average portfolio) for the period under review will rise. In 2016, thanks to considerable mortgage provision recovery by Sberbank and VTB24 (which accounted for 60% of all mortgage loans provided last year), cost of risk on the mortgage market was close to zero last year. In 2017, the influence of this factor will be way lower, which will cause an increase in cost of risk. The latter will also be negatively affected by an expected loosening of borrower requirements by a number of banks in response to stiffer price competition and dumping. Much softer mortgage loan accounting requirements used for calculating the capital adequacy ratio enable banks to increase the share of riskier loans without a material increase of burden on their capital. Nevertheless, growth of mortgage risk appetites will be controllable, thanks to the Bank of Russia’s ability to adjust risk ratios in calculating the capital adequacy ratio.
We expect the share of riskier loans in the total mortgage portfolio to grow insignificantly, so the quality of this portfolio is unlikely to deteriorate. We forecast that mortgage cost of risk during the forecast period will be at a comfortable level of 0.6–0.8% of the loan portfolio.
The Analytical Credit Rating Agency (ACRA) conducts in-depth analysis of credit quality of mortgage loans provided by Russian banks. The results of this analysis will be published in one of our forthcoming research reports.
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