OREANDA-NEWS. Only five of Russia's 100 largest banks might struggle to meet capital adequacy ratios if exchange-rate forbearance was withdrawn today, says Fitch Ratings. The bulk of forbearance measures introduced by the Central Bank of Russia (CBR) at end-2014 will expire in July. The measures can be extended but stress testing undertaken by Fitch concludes that, unless a renewed exchange rate shock occurs, the banking sector can easily cope with the withdrawal of the benefits of forbearance.

The CBR introduced forbearance to ease pressure on banks' prudential ratios. In particular, it allowed banks to convert foreign-currency (FC, mostly US dollars) assets (about 25% of the total sector assets) into roubles from end-2014 using more favourable end-September exchange rates. This prevented a significant swelling of risk-weighted assets (RWA) in rouble terms, triggered by depreciation of the currency against the US dollar in the fourth quarter of 2014 and early 2105.

Russia's largest 100 banks have limited FC capital components and positive exchange rate revaluation of capital would have been insufficient to offset the far larger negative impact from the RWAs.

About one-quarter of the 55 Russian banks rated by Fitch made use of exchange-rate forbearance. Fitch stressed their balance sheets at end-1Q15, converting FC assets into roubles at the prevailing end-March exchange rate, which was still 30% more favourable to the banks than the CBR's permitted September forbearance rate. We concluded that all rated banks that publish their capital adequacy ratios and made use of exchange rate forbearance would have met minimum regulatory capital adequacy ratios at end-March 2015 if they had converted FC assets at the prevailing market rate. However, by applying the more favourable rate, their reported capital ratios were, on average, 1% higher.

One rated bank, JSC Russian Standard Bank, does not publish its regulatory capital ratios. The bank's already weak capital position at end-2014 will have been further eroded by net losses posted in 1Q15 and Fitch believes it may be dependent on exchange-rate forbearance to comply with prudential capital ratios.

Assuming they made use of forbearance, we concluded that four non-rated banks could be in breach of capital ratios (excluding banks which are already non-compliant) if forbearance were to be cancelled today. The banks are Probusinessbank, Jugra, UBRIR and Bank of Moscow.

On the whole, Russia's 100 largest banks, which represent around 90% of sector assets, are not reliant on exchange-rate forbearance to comply with regulatory capital ratios which, on average reached 14.8% at end-March, above the 10% minimum. Were CBR to cancel exchange-rate forbearance today, we estimate that total capital ratios for the 100 banks sampled (which include non-rated banks where we have assumed take up of FC forbearance) would fall by a modest 0.8%, while Tier 1 and core capital ratios would fall by an even lower 0.5%.

Other forbearance measures announced in December included the reclassification of bonds as 'held to maturity', thereby avoiding mark-to-market losses, which would reduce capital, and a lifting of reserve requirements for restructured exposures. Fitch believes that cancellation of these measures would not, on their own, cause any stress because banks would not be required to make retrospective adjustments. These measures were described in a previous Fitch comment, 'Rouble, Rates Moves Heighten Russian Economy Risk', available at www.fitchratings.com.