OREANDA-NEWS. March 21, 2012. Repo operations with shares to recommence. In 2H12 the Central Bank of Russia may resume REPO operations with shares as collateral, CBR First Deputy Chairman Alexei Ulyukayev told the Russian Economic and Financial Forum in Switzerland on 19 Mar. Additionally the CBR is ready to ease requirements for corporate bonds’ inclusion in the Lombard list (primarily with respect to rating requirements) and is considering prolonging the maximum te rm of collateralised financing to one year. The regulator implemented the same steps in 2009 when the Russian banking system faced great difficulties, including an acute liquidity shortage.

Providing a sizeable liquidity injection. According to Ulyukayev’s estimate, the abovementioned steps could provide banks with RUB100bn in additional liquidity (approximately 6.7% of the current RUB1.5bn maximum limit on Lombard financing and REPO transactions). The amount could be adjusted depending on the actual changes in collateral requirements for bonds and stocks. At present credit organisations use slightly less than two-thirds of the available refinancing instruments (total debt constitutes RUB966bn).

Banking system liquidity appears stable. Although at first glance the banking system’s liquidity position remains stable (the balance on correspondent accounts and CBR deposits prior to 4Q VAT payments totalled slightly less than RUB870bn and net liquidity, despite being negative did not dip below RUB100bn). Ulyukayev indicated that the CBR has been asked by the heads of several state banks to expand refinancing facilities and the provision of liquidity. As such, we believe the focus is not specifically systemic liquidity but rather certain banks’ desire to obtain longer-term and cheaper funding from the central bank and the Ministry of Finance. In our view VTB will be the key beneficiary of the regulator’s actions, as the bank is in dire need of liquidity (the gap between its assets and short-term [1 year to maturity or less] liabilities is RUB700bn), and is characterised by reduced profitability and low capitalisation.

Short-term positive for the banking system and credit quality. We believe that expanding the list of securities accepted in REPO operations and the prolonging of terms for liquidity provision would be positive for the banking system and credit quality in the short term. Liquidity should return to comfortable levels, a lower cost of funding is likely to improve profitability and sector capitalisation, and the lengthening of terms ought to contribute to smoothing out banks’ asset-liability imbalances. However, longer term, we believe the CBR’s actions may do more harm to the sector than good. We provide our reasons for this on the next page.