Russian Equity Inflows Will Reverse as Bad Loans Soar, VTB Capital Says

24 April 2009

Bloomberg, April, 24, 2009

By Laura Cochrane

Russian equity funds, which have recorded five straight weeks of investor inflows, will return to posting outflows by September as bad loans soar to 15 percent, according to VTB Capital.

“Investment sentiment towards Russia will definitely become rotten as non-performing loans upset expectations” Ivan Ivanchenko, global head of research strategy at the investment banking arm of VTB Group, said in an interview. Analysts’ forecasts that bad loans will reach 10 percent of total portfolios this year are “too good a scenario,” he said.

OAO Sberbank, Russia’s largest lender, and VTB, the second-biggest, have raised reserves for bad debts this year on expectations companies will struggle to repay loans as the global recession cuts revenue and increases borrowing costs. The World Bank said last month a “silent tsunami” of bad debt threatens to stall an economic recovery in Russia and the share of non-performing loans will reach 10 percent in 2009, from 3.8 percent in January.

“Near-term the market will be really turbulent and if non-performing loans collide with another downturn in the Russian economy, the result will be a massive sell-off,” Ivanchenko said. “We will see a return to investment outflows by autumn.”

Russian equity funds attracted $23 million of net inflows in the week to April 15, the fifth straight week of gains, according to data from research company EPFR Global. The Micex index of stocks in Russia, the world’s biggest energy-exporting economy, rose more than 22 percent in the same period as oil
gained and optimism the global recession is easing attracted investors to higher-yielding assets.

Huge Uncertainties

“Fund managers are in their mind facing huge uncertainties and probably don’t want to be that risky, but this wall of cash pushed them to push the buy button,” Ivanchenko said.

Russian banks’ bad loans will quadruple to $70 billion this year, increasing to 12.8 percent of the 18.4 trillion rubles ($549 billion) owed by Russian companies and individuals by the end of this year, from 3.2 percent in March, according to the mean estimate of 17 banking analysts polled by Bloomberg in first week of April.

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Natalia Cherepova
Corporate Communications VTB Capital