Russian banks are now stronger than those in most of the other major emerging markets in terms of their market funds ratio, says a new report by Moody's Investors Service.

“Improved funding and liquidity metrics for Russian banks are likely to persist in 2016 as government spending increases money supply and stimulates deposit inflows,” reads the paper.

Moody's report, entitled "Banks -- Russia: Funding profiles boosted by increasing money supply," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

"Russian banks are now stronger than those in most of the other major emerging markets in terms of their market funds ratio, which has improved significantly for rated Russian banks to -8% as of year-end 2015 from 8% as of year-end 2014," says Svetlana Pavlova, an Assistant Vice President at Moody's. "This means that Russian banks have generally become more resilient to refinancing risk, with enough liquid assets to potentially repay all their market funding."

Other key funding metrics for Russia's banking sector have also improved: gross loans/customer deposits ratio was down to 110% as of April 1, 2016, from peak levels of 120% in mid-2014; and the share of Central Bank of Russia (CBR) funding has decreased to 5% as of April 1, 2016 from peak levels of 12% as of year-end 2014.

"These improved funding profiles are driven by strong deposit growth -- 20% in 2015 -- which exceed loan growth -- 8% in 2015 -- and allow banks to reduce reliance on CBR funding," explains Ms. Pavlova.

In 2016, Russian banks' strong funding and liquidity metrics are likely to continue, with deposit growth likely to outpace loan growth again, according to the rating agency.

"Government spending increases money supply and stimulates deposit inflows, while the high cost of risk at 3-4% and high interest rates limit loan growth potential," adds Ms. Pavlova. "As a result, in 2016, deposit growth is likely to again outpace loan growth."

In addition to improving banks' resilience to refinancing risk, Moody's expects the increasing money supply to have a positive impact on funding costs, which are likely to reduce for all banks, as they replace the relatively expensive CBR funding with deposits and lower the deposit interest rates.

Moody's notes, however, that the effects of absorbing additional liquidity differ between large and small institutions. While all groups of banks, in terms of size, have increased the proportion of liquid assets on their balance sheets in the past 12 months in response to deposit inflows, this trend tends to get stronger as banks become smaller. More liquid balance sheets make small and mid-sized and banks less exposed to the potential of deposit runs. For the larger banks, the benefit the additional liquidity flowing into the system mainly takes the form of reduced reliance on the relatively expensive CBR funding.

Sources: https://www.moodys.com