Russia's banking sector is set for significant transformation as the number of operating banks continues to dwindle, with projections estimating less than 300 players by the end of 2025. This decline is primarily due to increasing mergers and acquisitions (M&A) and stricter regulatory frameworks, as highlighted by the recent review from the rating agency Expert RA.
At the outset of 2024, the Russian banking scene had 312 active banks, but recent trends have shown the departure of 12 credit organizations, marking half of these exits attributed to mergers with larger institutions. Notable examples include the mergers of Rosbank with T-Bank and FC Otkritie with VTB. This wave of consolidation is expected to accelerate, particularly as the Central Bank of Russia (CBR) continues to revoke licenses from underperforming institutions.
Various factors are driving these changes. Experts contend the intensified regulatory requirements and heightened competition from larger banks are forcing smaller entities to rethink their business models. “Under the conditions of stricter regulatory requirements and competition from the largest players, banks without expressed business models and stable customer bases will find it challenging to maintain profitability,” cautioned analysts from Expert RA.
Looking forward, the prognosis for bank profitability appears sobering. Expert RA anticipates net earnings for the sector will not hit new highs, estimating figures between 3.4 and 3.6 trillion rubles for 2025, largely due to reduced lending activity and increased reserves. This dip follows 2024, where the sector recorded substantial profits of 3.8 trillion rubles.
The projected numbers stem from anticipated shifts within both corporate and retail credit activities, with rising costs of borrowing and regulatory limitations contributing to these challenges. The analysis suggests loan activity is set to slow, impacting businesses and individual consumers alike, owing to the prevailing high-interest rates and limited governmental support for borrowers.
While the CBR maintains the key interest rate at 21%, there is potential for this to decrease to 19% by the end of the year, offering some reprieve for banks. This stabilization could help maintain current net interest margins above 4%. Nevertheless, concerns about rising credit risk persist, as the deteriorated financial conditions expected among borrowers might lead to a hike in the cost of risk across the collective credit portfolio.
Expert RA forecasts the cost of risk (COR) is likely to increase from 0.9% to 1.5% by the conclusion of 2025. For corporate loans alone, this figure may rise significantly from 0.3% to 1%. Many companies grappling with substantial floating-rate debt may struggle under the increased financial burden and may not be able to completely pass along the costs to consumers.
This precarious situation suggests potential upticks in loan defaults and the need for debt restructuring, prompting banks to bolster their reserves significantly. The CBR’s proactive measures to limit credit extension to high-risk market segments are expected to curtail these losses to some extent, with estimates indicating the retail cost of risk might ascend to 2.6% this year.
The baseline scenario projected by Expert RA hinges on sustained sanctions against both industrial and financial sector firms, alongside expectations of keeping the annual average exchange rate around 98 rubles to the dollar, with intervals of volatility throughout the year.
For much of 2025, the key interest rate is predicted to hold steady at 21%, allowing for gradual changes. The strict monetary policy may serve to lower annual inflation to around 7.5%, down from 9.5% forecasted for 2024, reflecting the cooling of consumer prices.
Despite these predictions, some analysts, such as Dmitry Gritskevich from Promsvyazbank, foresee even more conservative profitability forecasts, estimating around 2.8 trillion rubles. The combined factors of reducing margins and increasing credit risks will weigh heavily on banks’ financial results.
Looking beyond the immediate hurdles, the banking sector aims for continued expansion, seeking new income streams from both interest and commission revenues. Nevertheless, this outlook is framed within the larger narrative of necessitated adaptation to the economic environment and regulatory setting shaped by the central bank's directives and market dynamics.