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27.05.2008 - MDM Comment: CBR tightens again

On Friday last week, the first deputy chief of Russia's central bank, Gennady Melikyan, said that the regulator is concerned with the high rates of asset/credit expansion in the Russian banking sector, with 14% growth achieved in 1Q08. The latter, rapid expansion, is not quite obvious to us, particularly when we come down from macro statistics provided by the Central Bank and examine the sector from the micro level. For instance, the leader in consumer finance, Russian Standard Bank, has shown a decline in its assets and loan portfolio last year (a brief comment on RSB’s 2007 IFRS will follow this one).  
Nevertheless, Mr. Melikyan made his comments, and yesterday they were followed by an increase in prudential requirements for banks. Specifically, the obligatory reserve rate against liabilities due to foreign banks was increased from 5.5% to 7.0%; the rate against liabilities due to individuals went up from 4.5% to 5.0% and the rate against all other liabilities was set at 5.5% (5.0% previously).
Our views on this matter are as follows. First, we believe that the tightening move is not significant, and its effect on the banks' liquidity and funding costs will not be material. Second, by the uneven level of reserve rates, the regulator is signaling that it prefers Russian banks to strengthen deposit base rather than raise foreign currency funding in the capital markets. Finally, given the high inflation readings (7.2% YTD), we believe that the Central Bank will continue to tighten its monetary policy by raising both prudential requirements and key rates (the latter were already raised twice this year). We are less and less inclined to expect nominal appreciation of ruble vs. the bi-currency basket. A major appreciation (by 5-10%) would be politically unacceptable, while a minor one won't help much, since the ruble is already rapidly appreciating in real terms. Nominal ruble appreciation would also undermine confidence in what Central Bank officials are saying in their public statements ("ruble appreciation is an inefficient anti-inflationary tool") and encourage investors to bet on further ruble gains, adding to monetary pressures.

27.05.2008 10:18
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