Banking Sector: A Fragile Stability
Belarus’ banking sector is dominated by state-owned and Russian banks, while the only major Western bank has recently been sold to a UAE investor. After a temporary rise in 2022, interest rates fell below the pre-war level, while the recovery of 2023 drove credit growth in the corporate sector, but also consumer loans and real estate. Western sanctions pushed Belarusian banks to a progressive decoupling from Western financial markets, including a forced reduction of foreign debt and a decrease in dollarization. Banks managed to increase their profit, as decreased competition allowed them to pass the higher cost to their customers and benefitted from the sustained growth in 2023-2024. Major downside risks are possible losses due to the inability of households and businesses to service their debt once the economy cools down.
A market dominated by state-owned banks
The Belarusian banking sector is dominated by state-owned banks, which together have a market share of 66%. Russian banks, including the private “Alfa-Bank”, account for 19% of the market. Priorbank is the third largest bank, with a market share of 7%, and was the only major Western bank, but has been recently sold by the Austrian Raiffeisen Bank International to the “Soven 1” holding from the UAE with effect from 1st January 2025.
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All other banks have a market share of less than 2%, 7 of them are private banks with a market share below 1%.
The value of the assets owned by the Belarusian banking sector amount to around 60% of GDP in 2023, substantially smaller than Russia’s (98%) and Poland’s (88%), but larger than Ukraine’s (45%). All banks with a Russian capital share have been sanctioned by Western countries since 2022, as have state-owned Belarusian banks. Belarusbank has not yet been excluded from the SWIFT system but is subject to sanctions for international financing.
Interest rates increasing, but still below pre-war levels
After a temporary increase in the direct aftermath of the outbreak of the war in Ukraine, driven by the increased risk and the hike of the key interest rate by the central bank, interest rates went back to pre-war levels already by Sep-22. In 1H2023 the central bank gradually lowered the interest rate from 12% to 9.5%, which further eased credit conditions for the real sector. Since mid-2023, rates are again increasing and have reached the level of 2020.
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Strong credit growth with uncertain outlook
Since 2Q2023, the recovery led to the growth of lending to corporates, while in 2H2023 growing salaries increasingly drove the growth of consumer credit and mortgages.
Credit growth has stabilised in 2024, but at the relatively high level of more than 20% yoy, which raises concerns about loan quality, once the economy cools down and wage growth comes to a halt.
Ongoing decline in dollarization
Since mid-2022 deposits in foreign currency stagnated at around USD 10 bn, discouraged by the low interest rates on deposits in FX at Belarusian banks, instead deposits in Belarusian Roubles increased. While the high inflation of 2021 and 2022 has inflated this increase, deposits in Belarusian roubles increased also in real terms, driven by the high increase in real wages. Consequently, the level of dollarization of the economy sank, and now lies below 50% for deposits and below 25% for loans.
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External debt of the banking sector
In an environment characterized by high interest rates in international markets, sanctions, and rating downgrades, the traditionally high external debt of Belarusian banks is of additional critical importance. Since the outbreak of the war in Ukraine, the NBRB started to report only the aggregated debt of central and commercial banks.
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Short-term external debt of the banking sector showed a temporary increase in the immediate aftermath of the outbreak of the war (2Q2022) due to the inclusion of NBRB debt, but then it swiftly went back to the previous level and started to decline, while also long-term external debt progressively declined. Being cut off from Western financial markets due to sanction or compliance concerns, Belarusian banks were forced to reduce their external debt. Despite an ongoing decline, external debt (USD 4.7 bn, or around 6.6% of GDP at the end of 1H2024) still represents a source of risk in the event of exchange rate volatility and restricted market access abroad.
Profitability
In spite of the abovementioned risks, the Belarusian banking sector remains well-capitalised and profitable. Return on equity (ROE) in 1H2024 amounted to 17%, higher than pre-war levels, which fluctuated around 10%. Lower international competition and sanctions allowed domestic banks to pass the increased costs to their customers and even increase their margins. Since 2023, the better-than-expected performance of the Belarusian economy has sustained bank profitability.
Outlook
Sanctions against major companies and banks in the country led the banking sector to become more and more decoupled from Western financial markets. The level of dollarization also decreased, and the only major Western bank left the market. While sanctions damaged the economy, the banking sector benefited by reduced international competition and was able to increase its margins.
Downside risks hinge on the slowdown of the economy that started in 2H2024, and which is expected to continue this year. Stagnating or negative wage dynamics may lead to non-performing loans and cause losses in the balance sheets. To which extent the Belarusian economy slows down and the ability of Belarusian authorities to cope with difficulties in the domestic financial sector depends equally on the developments in Russia and those in Belarus itself.
This Newsletter is based on the Policy Briefing PB 04 | 2024.
