Banks now have a new opportunity to generate earnings following the interest rate reduction
In a move aimed at stimulating lending and boosting economic growth, the Central Bank of Russia has lowered its key rate from 20% to 18%. This decision has set off a chain reaction in the banking sector, with Russian banks capitalizing on the opportunity to increase their profits.
Despite Russians increasingly preferring a savings model, Maria Yermilova, a lecturer at the Plekhanov Russian University of Economics, believes that the volume of money in deposits will not decrease significantly. This is due to the banks' strategy of reducing deposit interest rates more quickly than their loan rates, thereby widening the interest margin.
Banks are actively attracting funds from the public at reduced rates. For instance, some banks have already cut deposit rates, with others planning to do so soon. Deposit rates have dropped significantly, with some offering as low as 15%, down from 17%. This makes deposits less attractive and slows their growth, but keeps the banks’ lending margins positive and supports profitability.
Meanwhile, loan rates remain relatively higher, especially for riskier customers or segments. This differential keeps the banks’ lending margins positive and supports profitability despite the overall economic slowdown. Loans are not becoming cheaper as quickly as deposit rates, but economist Pavel Penenkin estimates this period could last for three to four months.
The slow decrease in loan rates allows banks to maintain profitability, with the net interest income on existing and new loans increasing. Economist Pavel Penenkin referred to the current situation as the 'haymaking' phase, implying a period of increased profitability for financial institutions.
Expert Alexandra Pozharskaya from the "People's Front. Analytics" sector predicts that this strategy will slow down deposit growth. However, economist Pavel Penenkin reported that the regulator's policy change has opened a window for financial institutions to generate income.
For depositors, this means lower returns on deposits. For borrowers, loans are expected to start becoming cheaper after three to four months, although not as quickly as deposit rates.
Join our telegram channel or subscribe to our site for the latest news updates. Our subscribers will be among the first to learn about the biggest news in Russia and the world. Keeping funds in banks remains beneficial, according to Maria Yermilova, despite the lower returns on deposits.
In summary, Russian banks are capitalizing on the Central Bank's key rate cut by reducing the interest paid on deposits promptly while easing loan rates more cautiously, thereby expanding the interest rate spread and increasing profits despite the overall lower rate environment. This dynamic affects depositors by lowering returns on deposits and affects borrowers by eventually offering somewhat cheaper loans but at a slower pace.
Banks are reducing deposit rates to capitalize on the Central Bank's key rate cut, which is lowering returns on deposits for depositors but maintaining lending margins positive and supporting profitability. Despite the lower deposit rates, loans are not becoming cheaper as quickly and will start to become cheaper after three to four months, especially for riskier customers or segments. This strategy of widening the interest margin slows down deposit growth, as suggested by Alexandra Pozharskaya from the "People's Front. Analytics" sector, but keeps the banks' business and finance operations profitable under the overall economic conditions.
