Pressures Intensify On Russia's Banking Sector

Category: Personal Loans
Published: Friday, 26 December 2014
Written by Admin

On December 22nd the Russian Central Bank (RCB) announced that it would provide a bail-out of up to Rb30bn (US$500m) to prevent the bankruptcy of Trust Bank, a mid-sized Russian lender. Its Deposit Insurance Agency will take over interim administration of the bank.

The move underlines the growing pressures faced by the banking system as a result of the weakening rouble, international sanctions, the ailing economy and a sharp tightening of monetary policy. Bank profitability and asset quality are likely to deteriorate significantly in 2015.

With banks unable to access external financing or to roll over existing foreign debts, capital-adequacy levels are also set to fall. It is likely that the Central Bank and the Ministry of Finance will be forced to provide additional capital to support the banking sector. Further bank failures are likely, but the authorities retain substantial resources to support systemically important financial institutions.

Even before the latest crisis, Russias banking sector indicators had been weakening. In June 2014 total banking profits were down by 14% year on year, with more than 25% of Russias banks recording a loss in that month, compared with 18% a year earlier.

Capital adequacy stood at 13% in August, down from 13.5% at the start of the year; by the end of the third quarter this had slipped to 12.6%, according to RCB data. The share of non-performing loans was rising: overdue unsecured consumer debt rose by 2 percentage points between April and September 2014, to 11.3%.

Triple whammy

Since August, the risks to the banking sector have increased substantially as a result of three factors: the imposition of international sanctions, the worsening economic outlook and the rapid depreciation of the rouble.

In August and September the EU and US imposed sanctions on leading state-owned Russian banks in response to Russias role in the conflict in eastern Ukraine and the downing of a Malaysian passenger aircraft. The measures prevent the banks-including the countrys largest lenders, Sberbank and VTB-from accessing anything but debt with a maturity under 30 days. Although only state-owned banks are formally subject to the sanctions, borrowing costs will have risen for all financial institutions as foreign investors price political and economic risk significantly higher. Comparisons of Russias debt-payment schedule and debt stock between the second and third quarters of 2014 suggest that almost no new foreign debt was issued to Russian companies over this period. The sanctions have effectively cut off the banking system from wholesale financing on international markets, and are also forcing banks to redeem outstanding foreign debt as it comes due, rather than rolling it over, thus increasing their foreign-currency liabilities.

The affected banks brushed off the sanctions, suggesting they would have little impact on their operations. Nevertheless, indications quickly emerged that these measures had put their balance sheets under strain. On August 25th the government announced that it would acquire shares in VTB and Rosselkhozbank in exchange for outstanding debt of Rb239bn (US$6.6bn at the exchange rate at the time) owed to the National Welfare Fund (NWF), one of the countrys sovereign wealth funds. The move was intended to strengthen the two banks tier-one capital (a measure of their financial state).

Nevertheless, the significance of the sanctions for Russian banks financing position should not be overstated. The banking sectors total external debt at the end of the third quarter stood at US$192bn, which was equivalent to around 22% of total domestic claims, based on the exchange rate at the end of October. In addition, the Russian banking sector as a whole has a positive net foreign-asset position. Domestically, the measures did not appear to have a material impact on the sanctioned banks standing, and there was no evidence of depositor flight from the affected institutions.

Rouble risks

However, the pressure on the banking sector has increased significantly as the result of the devaluation of the rouble since June, which has been driven by high political risk, international sanctions (which have blocked capital inflows) and the falling oil price. Between June and November the rouble fell by 25% against the dollar. This has pushed up the cost of foreign debt service for the banking sector, and also increased the risk of default on foreign-currency-denominated debt issued by the banks. In October 2014 (the most recent data available), loans issued by banks in foreign currency accounted for around 23% of the total loan stock. This share will have risen significantly in November and December as a result of the further devaluation of the rouble, to around 30% of the total loan stock.

However, the risk of default is mitigated by the fact that a significant share of these corporate loans will have been to natural resource companies, whose revenue is earned in foreign currency, limiting their exposure to exchange-rate risk. In contrast to some east European countries such as Hungary, the share of personal loans issued in foreign currency is low, at less than 2% of the total.

Panic stations

Exchange-rate pressures on capital levels, external liabilities and asset quality escalated sharply in late November and early December, when the rouble began to fall precipitously against the dollar, raising the risk of a full-blown currency crisis. Following a fall of more than 10% in the rouble on December 15th (the currencys biggest one-day fall since the crisis of 1998), the RCB raised its key policy rate by 650 basis points, to 17%, in an effort to stabilise the currency.

Far from calming sentiment, the move appears to have panicked the market. After early gains, the currency fell by more than 35% to a low of Rb79:US$1, before recovering to around Rb68:US$1, down around 15% from the start of the day. For the first time there were indications that the fall in the rouble had spooked consumers, raising the risk of large-scale deposit flight.

The rouble has subsequently recovered against the dollar and was trading at around Rb54:US$1 on December 23rd. It is unclear, however, to what extent this is due to foreign-exchange intervention by the authorities and to administrative pressure. On December 17th the Ministry of Finance announced that it would sell up to US$7bn of foreign currency to support the rouble, which it described as extremely undervalued. On December 23rd Kommersant, a business daily, reported that major state-owned exporting firms had been instructed to sell foreign currency in order to support the rouble. These claims have been contested by the government. With confidence in the rouble and the RCB low, it may only take a small shift in sentiment-most likely from another fall in the oil price-to trigger another round of currency volatility.

The rouble rout has further exacerbated exchange-rate pressures on banks and has also severely damaged confidence in the financial sector. In the days following the RCB interest-rate increase, the interbank lending rate rose to almost 30%-significantly above the peak reached in the 2008-09 financial crisis. The rise in interest rates will squeeze liquidity and severely limit interbank lending, increasing banks dependence on the RCB. This will be compounded by high levels of economic uncertainty and concerns over rouble deposit flight. High interest rates will lead to a sharp drop in new lending, reducing bank profitability and increasing the risk of default for borrowers on variable rates or those who need to refinance existing loans. Vedomosti, another business daily, reported on December 22nd that Sberbank, the countrys biggest lender, had increased its mortgage rate by 2-3 percentage points to 15-16%-a rate which the Agency for Residential Mortgage Lending describes as a psychological tipping point for borrowers.

In addition to high financing costs and increased exchange-rate risks, banks will have to manage the impact of a serious recession in 2015. The Economist Intelligence Unit now forecasts that the economy will contract by 3.5% next year, with high inflation leading to a fall in earnings of more than 5% in real terms. This will lead to a rise in corporate defaults and non-performing loans, putting further pressure on banks asset quality and balance sheets.

Feeling the strain

Evidence is building that the banking system is experiencing severe stress and facing significant capital shortfalls. On December 19th the Duma (parliament) passed a bill, following three readings in one day, to provide Rb1trn (US$16.5bn) to recapitalise the banking system. Prior to this, on December 4th, Vladimir Putin, the president, had committed up to 10% of National Welfare Fund assets (which totalled around US$80bn at the start of December) for the same purpose. At present it remains unclear how the recapitalisation will be conducted, what form the capital will take or what collateral the banks will provide in return. Mr Putin has also hinted that the banks may be required to increase lending to priority sectors in exchange for government support.

With access to international markets closed, banks have had to rely heavily on the RCB for foreign-currency liquidity to meet external commitments. The RCB has steadily amended its repo auction programme, by extending the maturity of the loans and reducing the interest rate, to make it easier for banks to access foreign currency. On December 11th the RCB announced that it was expanding the range of assets that it would accept as collateral to provide foreign-currency liquidity, offering further evidence that the banks are undercapitalised and struggling to meet their foreign-currency obligations. The Central Bank has currently set a limit of US$50bn on the total loans and repurchase agreements it will provide to the banking sector. In a statement on December 24th, the RCB confirmed that this limit could be increased if necessary. The burden of financial risk is thus being shifted gradually from the banks and their debtors to the state.

The RCB has also sought to relieve the pressure on the banks by relaxing its prudential regulations and effectively suspending mark-to-market accounting to assess banks capital adequacy. On December 18th the Central Bank announced that it would introduce a temporary moratorium on the recognition of the negative revaluation of securities portfolios. It also granted credit institutions a temporary right to use the third-quarter exchange rate to assess its prudential requirements for operations in foreign currencies.

This move will provide temporary succour to banks, but also increases systemic risks. It is based on the assumption that the sharp fall in the exchange rate and asset values in mid-December was a temporary phenomenon, which was not driven by market fundamentals, and that the banks therefore face a problem of liquidity rather than solvency. It is unclear how the RCB will act if the exchange rate continues to fall or when it plans to lift these temporary measures. On December 19th Evgeny Gavrilenkov, chief economist of Sberbank CIB, the investment banking arm of Sberbank, warned that the RCBs willingness to provide refinancing for banks against non-marketable securities could cause a full-scale banking crisis.

Outlook for the sector

We continue to believe that the authorities have the resources to support all of the countrys systemic banks to prevent a financial crisis, particularly as almost all of these are already state-controlled. Although the authorities may be using some administrative means to support the currency, the rouble is now effectively floating free, which should enable the government to conserve foreign-currency reserves in order to support the banking sector in meeting its foreign-currency liabilities. Foreign-currency reserves (including assets in the sovereign wealth funds) total more than US$400bn, equivalent to over 60% of the M2 money supply. Under our current forecast, oil prices will average US$80/barrel in 2015, significantly above the current price level, which should help to stabilise the rouble despite ongoing capital outflows to redeem foreign debt.

Nevertheless, the combination of economic contraction, a liquidity crunch and the falling exchange rate is likely to lead to the failure of a number of banks. Russia has more than 800 banks, many them with low capitalisation, weak finances and weak corporate oversight. As of December, the RCB had withdrawn licences from more than 80 banks in 2014 alone. While the sector is in need of consolidation, however, the disorderly failure of a large number of banks could cause significant economic disruption, deepening the recession and further undermining public confidence in the financial sector. Trust Bank is unlikely to be the last institution to receive a Central Bank bail-out.

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6 ways to build credit without a credit card

Category: Personal Loans
Published: Thursday, 25 December 2014
Written by Admin

Whether youre new to using credit or have made a few dire credit mistakes in the past and need to rebuild, growing a robust and positive credit historycan dictate the interest rates youre offered when financing a big-ticket purchase, like a car or home, or whether you can obtain a loan at all.

Generally, shoppers turn to conventional credit cards to build and demonstrate creditworthiness, but if you dont have a strong credit history, some creditors are unwilling to risk granting you a line of credit. This catch-22 makes it difficult for someone with good intentions to improve his credit score.

Learning how to build credit isnt a talent reserved for a lucky few, you just have to take deliberate action to positively change your credit score. Here are six helpful tips from credit professionals and real people whove had success building good credit.

Related: Heres How to Get the Highest Credit Score Possible

1. Safeguard Your Credit With a Secured Card

Unsecured credit cards are a riskier option for banks and creditors to approve, since they offer no security should you default. A helpful option for those starting with poor or no credit is to apply for a secured credit card instead.

A secured credit card often requires you to provide a certain amount of cash to the card issuer as collateral. This amount then establishes the available credit on the card.

New York resident Tonya Rapley took advantage of this helpful credit-building tool, among other approaches, to help increase her credit score by more than 120 points.

I got a rebuilder card and paid it in full each month, then used that [credit] history to get two premium cards and paid those in full each month, Rapley said, which helped her steadily develop a positive history.

Keep reading: How Bank Secured Credit Cards Really Work

2. Make a Name for Yourself

When starting out with credit, its helpful to start off small. Utility services operate in a similar fashion to other lines of credit because they are giving you service in advance and relying on your promise to repay them each month when its billed.

Having this type of credit under your name is essential, however, so handing over your share of the utility bills to your roommate isnt going to cut it. This practice is really only beneficial if the account is under your name.

You might get a competitive interest rate with the help of a cosigner, but piggybacking off someone elses credit can create sticky situations and be unrewarding when building your credit.

3. Phone in a Favor

Naming yourself responsible for your households utility services is a good habit to maintain, but theres still another step to take in order to reap the benefits of putting this type of account under your name.

Some utility companies only report your payment history to credit report bureaus (Equifax, Experian and TransUnion) when an account has become so far delinquent that the balance due has been reported to a collections agency.

Usually, service providers will send this information to credit bureaus upon request, so contact your providers customer service hotline to see if it can accommodate this favor.

4. Ask Companies to Cut You Some Slack

If youre trying to learn how to build credit because you made a few bad decisions in the past, theres no harm asking creditors for a bit of flexibility by letting your transgressions slide this onetime (hopefully you stay true to your word by keeping your creditworthiness on the up and up).

State your case and, if theyre willing to give you a pass, ask them to send a goodwill letter to the three credit reporting bureaus to erase the misdeed.

5. Mix Up Your Credit

In addition to applying for a secured credit card and having your utility payment history reported, look into opportunities to mix up your lines of credit with a rebuilder loan. These loans are usually small personal loans offered by banks and credit unions to help boost borrowers Fair Issac credit scores in a healthy, manageable way.

Mixing the types of credit under your belt, like revolving credit (eg a secured credit card) and installment credit from rebuilder loans, can positively affect your credit score by as much as 10 percent.

Related: 4 Best Credit Cards to Build Credit Fast

6. Review Your Credit Report

The most important step when it comes to how to build credit is knowing your starting point. You cant know how much you need to raise your credit score without first referencing your credit report. This is the most basic, yet practical, step that even professionals ensure their customers perform.

One of the first things we do when preapproving a client is check his credit score with all three bureaus, said Sean O. McGeehan, an Illinois-based mortgage loan officer. Many credit reports have errors due to someone having a common name like lsquo;John Johnson, or a similar name as his father, like a Mike Henderson Sr. and Mike Henderson Jr.

We can have these things corrected in 48 hours with the credit bureaus with something called a rapid rescore. We just show them paper documentation supporting our claim.

Mistaken identity is all too common, which is why checking reports for errors is an effective way to build good credit.

Dan Nainan, comedian and self-taught credit expert, learned the value of correcting credit report errors first hand. While requesting an increase on his credit card limit, he was denied due to two negatives on his report. Upon further investigation, he found that two accounts one from a doctors office and another from DirecTV belonged to his father, who has a similar name, and were erroneously put under his credit report.

I sent a [certified] letter to Equifax disputing two items that were erroneous, Nainan said. Sure enough, I was pleasantly surprised to receive a letter that the items had been removed from my file and my credit score increased from 715 to 785.

The turnaround time to correct the errors on Nainans report was just six weeks. And its this level of sleuthing that can make the difference in ensuring your credit score is correct and improves.

Photo credit: Tax Credits

LendingClub's IPO Suggests Interest Rates Will Keep Falling

Category: Personal Loans
Published: Thursday, 25 December 2014
Written by Admin
Getty Images
LendingClub (LC) successfully raised $870 million in an initial public offering, which values the firm at about $5.4 billion. Since the company was launched in 2006, it has helped arrange more than $6 billion of personal loans. The business has a unique business model, which could transform the way banking and borrowing happens in this country.

Now that LendingClub has $870 million in its war chest, we can expect that its will become even more aggressive with marketing and growth. Whenever there is a successful IPO, we can expect copycats to appear. And the boring personal loan marketplace has become crowded with companies looking to be the next big thing. With these new entrants looking for customers, you can expect interest rates on personal loans to continue getting lower as they try to win your business. If you have credit card debt, it should only become easier to refinance that debt at a lower interest rate. But we should also expect growth in two other areas: small business lending and student loan re-financing. All of this is good for consumers.

Refinancing Credit Card Debt

There is more than $800 billion of credit card debt in the US And, the average interest rate is a shocking 17 percent. In a recent interview, the CEO of LendingClub revealed that the average rate for a credit card refinance loan is 12.5 percent. If you have $10,000 of credit card debt and want to pay it off in five years, than you would need to pay $248 a month. At 12.5 percent, you only need to pay $225 per month. Over five years, you would end up paying $1,412 less interest. However, the real temptation with a credit card is the you spend more and pay less, sometimes only the minimum due. A credit card is just an enormous temptation. With a personal loan, you cant spend more, and you are forced to pay enough to be out of debt in three or five years, rather than 30 years with a credit card minimum payment.

LendingClub and Prosper were the original lenders looking to eliminate banks. But there are now some other players out there looking for business. Whereas Prospers lowest rate is 6.73 percent and LendingClubs lowest rate is 6.78 percent, new entrants are going even lower. Vouch, a recent entrant to this space, starts at 5 percent. And CircleBack Lending, which starts at 6.63 percent, is just a bit lower than Prosper.

We are starting to see competitive pricing between the new entrants. Now 6.63 percent may seem like an odd price point, but it makes sense when you see that it wants to be lower than the market leaders. At MagnifyMoney, we have created a marketplace where the cheapest provider will always rise to the top. And the good news is that we see continued competition on pricing. If you have good credit and are looking to pay down credit card debt more quickly, you can dramatically reduce your interest rate and take years off your debt repayment.

Student Loans

Student loan debt is now bigger than credit card debt, and some new companies are looking to refinance student loan debt. These new players are also looking at things that traditional creditors ignore. Rather than looking at your credit score, some lenders are looking at where you graduated, what you studied, how long you have had a job and your total income level. If you are in financial difficulty, these loans are typically not for you. But, if you have a good job and are making good income, than you may be able to find a way to refinance your debt.

The company making the biggest splash is Sofi, who has decided to charge fixed interest rates as low as 3.63 percent. These are shockingly low interest rates. Competitors dont know how it does it. But, for a borrower, you dont need to worry about that. Just take advantage of the low rates. To get the best rates, you will need to appear very low-risk to Sofi, which means a great degree and a great job.

But if Sofi does not approve you, dont give up. There are a number of Sofi copycats, and even credit unions are dramatically expanding their student loan refinance business. We have put together a list of places where you can refinance student loans.

Small Business Loans

The same business model used by LendingClub has been brought to small business loans as well. There are a few new entrants that are trying to make it easier for small businesses to get the capital that they need to grow, while providing investors with better return on their investments. Two examples include FundingCircle and OnDeck.

Investors are looking for yield, and borrowers are paying too much for their loans. This problem has an almost obvious solution, and the fact that so many new entrants are looking to cut rates for borrowers is good news for consumers.

Nick Clements is the co-founder of MagnifyMoney, a price comparison website that helps you find the best deals in banking. He spent nearly 15 years in consumer banking, and most recently he ran the largest credit card business in the UK

Mortgage approvals down by a fifth

Category: Personal Loans
Published: Thursday, 25 December 2014
Written by Admin

Meanwhile, consumer borrowing using credit cards, overdrafts and personal loans continued to grow at the fastest rate in six years, reflecting an easier borrowing climate and improved household finances, the BBA said, adding that this bodes well for a fruitful Christmas for retailers.

Annual growth in this type of unsecured or non-mortgage borrowing is running at 3.1%, the highest rate since late 2008.

People have also piled more money into their Isa savings over 2014 than the previous year.

A total of £12 billion was pumped into Isas in the 12 months to November, a surge of nearly 38% on the same period a year earlier. Isas have seen a net inflow of £8.6 billion in the last five months.

At the start of July, the rules surrounding Isas were relaxed, enabling people to stash more cash away tax-free and giving them more flexibility over how they invest their money. People can now save all of their £15,000 annual Isa allowance in cash if they want, or all in stocks and shares, or keep it in any combination of the two. Previously, only up to half of the annual Isa allowance could be saved in cash.