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IMF: Russian banks likely to face capital shortfall on hidden NPLs

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IMF: Russian banks likely to face capital shortfall on hidden NPLs

Theproportion of nonperforming loans in the Russian banking system could beundervalued, and local lenders will likely need additional capital, the IMFsaid in its recent annual report on Russia.

Takinginto account the lower quality of restructured loans, misclassifications andtransfer of distressed assets to affiliated off-balance-sheet entities, theactual proportion of NPLs in Russian lenders could be higher by around 3.5percentage points than the 9.2% figure reported for the first quarter for 2016,resulting in a capital shortfall in the banking system equivalent to between0.5% and 1% of GDP.

Stresstests carried out by the IMF showed the capital shortage in the banking sectorcould rise further to up to 4.5% of GDP by 2020 under two adverse scenariosenvisaging low oil prices. In one of the stress-test scenarios, oil pricesrebound from a low of $19 per barrel, while in the other they stay lower for alonger period after falling to $25 per barrel.

Evenin the baseline scenario, certain banks will need new capital owing to lowprofitability and increasing credit losses. The required resources increase inthe stress scenarios, but remain manageable, the IMF said in its report.

TheRussian banking system is weak but stable, the IMF noted, pointing to suchproblems as the continued worsening of credit quality and declining overallcapital adequacy ratio due to low profitability and slow lending growth.

 The IMF welcomed the recent initiative ofRussian authorities to cover all banks with capital risk assessment, noting,however, that more comprehensive measures are need to improve the efficiency ofthe mostly state-controlled Russian banking system to support recovery.

Italso recommended that Russia should proceed with privatization of state banks,remove weak lenders from the market and refrain from using state-ownedfinancial institutions to bail out troubled commercial banks.