Updated at 17:11,20-07-2018

Belarus banks rattled by surge in bad loans as economy contracts

by Aliaksandr Kudrytski, Bloomberg

The Belarusian central bank warned that the financial industry is under increasing strain from a buildup in overdue loans as company profits suffer during an economic contraction.

We are facing an accelerated manifestation of accumulated credit risks, central bank Chairman Pavel Kallaur said on Friday at a news conference in the capital, Minsk. The difficult situation in the real sector influences the stability and the functioning of the banking system.

The former Soviet republic of 9.5 million that borders three European Union countries is battling the effects of the recession and currency crisis in Russia, the regions biggest economy that accounts for about half of Belaruss total trade. Gross domestic product shrank 3.6 percent from a year earlier in the first quarter as demand faltered for its main exports of potash, tractors and refined oil products such as gasoline.

With more than 30 percent of the countrys companies posting losses in January and February, the share of banks bad assets soared by 4.7 percentage points in the first quarter to 11.5 percent of the total, according to Kallaur. Although lenders still have a certain reserve of resilience, their financial results and capital are already being negatively affected, he said.

Still Manageable

While the regulator and its international partners see further growth in toxic assets, the situation is manageable, Kallaur said. The government is looking to reorganize and restructure struggling companies, and in some cases let them go bankrupt. The central bank is also working with lenders to identify toxic assets and help them create special reserves as an additional safety buffer. That may require a recapitalization of some banks by their owners, Kallaur said.

The countrys biggest lenders, Belarusbank and Belagroprombank, are state-owned. They are followed by units of Russian banks Sberbank PJSC , Vnesheconombank and Gazprombank JSC. Russian-owned banks account for 27 percent of assets held by the countrys top five lenders, according to central bank data.

The central bank of Belarus has focused its efforts on stabilizing the financial system by controlling money supply and loosening the exchange rate while refusing to spend reserves to prop up the ruble. Such measures helped bring the financial market into what Kallaur called a dynamic equilibrium. The strategic goal is to restore trust in the national currency, he said.

The Belarusian ruble is the third-worst performer among its ex-Soviet peers this year with a 4.2 percent loss against the dollar, according to data compiled by Bloomberg.