«effectiveness of russian state banks as financial intermediaries» ekaterina glushkova, banking...

«Effectiveness of Russian state banks as financial intermediaries»

Ekaterina Glushkova, Banking Department, Higher School of Economics, Moscow

Efficiency of state banks: empirical findings on transition countries

Bonin, Hasan, Wachtel [2005]: government-owned banks are less efficient than domestic private banks but not significantly so;

Kraft, Hofler and Payne [2006]: green-field private and privatized banks are not more efficient than public banks, privatization does not immediately improve efficiency, while foreign banks are substantially more efficient than all domestic banks;

Russia:

Fries, Taci [2005]: foreign ownership and private ownership are both associated with greater efficiency;

Styrin [2005]: Russian banks affiliated with the state are not either more or less cost-efficient, other things equal, greater efficiency of foreign banks concluded, whereas public ownership is not significant for explaining efficiency;

Karas et al. [2010]: in the Russian banking market foreign banks are more efficient than domestic private banks, but domestic private banks are not more efficient than public banks.

Motivation

controversial findings of panel-data estimates on transition countries;

little research devoted to the analysis of the issue with regard to Russian banking industry;

thus, demand in a more in-depth analysis.

State banks performance: theoretical assumptions

DEVELOPMENT VIEW

POLITICAL VIEW

performance different from that of private banks;

variant strategic goals and management incentives;

inability to operate on purely commercial terms

…

VS

Research questions

«intermediation quality»of state banks’ activities

relative profitability of state banks

state banks’ risk-profile

assets and liabilities structure - focus:

key activities;

funds sources;

state-authorities’ and non-residents’ «intensity»

ROA; ROE; NIM;

Staff expenses/assets;

Assets income / Liabilities expenses

leverage; loan quality;

credit and liquidity risk prudential ratios

«Target» sample

Source: Vernikov, A.V. (2009), Russian Banking: The State Makes a Comeback? - BOFIT Discussion Paper No.24/2009, Bank of Finland.

Group-wise comparisons of:

«target» sample:

state-owned banks

state-governed banks

state-influenced banks

VS

«target» sample:

domestic and foreign private banking institutions

5774

Data:

Statistics:

Interfax agency quarterly (balance sheet and P&L-based) bank-level data :

1 Quarter 2006 – 1 Quarter 2009

13 observations for each sampled bank

Results: intermediation measures

State-owned banks ~ foreign banks:

willingly invest in government (and non-government) securities;

exhibit relatively high share of interbank loans in total assets;

enjoy continuing growth of the proportion of loans to non-residents in total loans,

high non-residents’ share in assets and liabilities.

but:

still enjoy high share of public authorities in total loans to non-banks;

high share of the state in residents’ deposits, current and settlement accounts;

are much less dependent on interbank loans as the source of funds compared to

private banks (both domestic and foreign);

exhibit much lower «loan-to-deposit» ratio than private banks (both domestic and

foreign.

!!! These trends majorly relate to the sub-category of banks with direct state

ownership at federal level, while other state-connected banks in most cases do not

significantly differ from national private institutions.

Figure 1. Government securities/ total assets, %

0

1

2

3

4

5

6

7

8

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state corp.non-ow n_gov.infl.

Figure 3. Interbank loans/ assets, %

0

5

10

15

20

25

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state corp.non-ow n_gov.infl.

Figure 6. The share of non-residentsin loans to non-banks, %

0

1

2

3

4

5

6

7

8

9

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state corp.non-ow n_gov.infl.

Figure 12. The share of non-residents intotal liabilities, %

0

10

20

30

40

50

60

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state corp.non-ow n_gov.infl.

Figure 5. The share of state authorities in total loansto non-banks, %

0

1

2

3

4

5

6

7

8

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state corp.non-ow n_gov.infl.

Figure 10. The share of state authoritiesin residents' accounts, %

0

1

2

3

4

5

6

7

8

9

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state corp.non-ow n_gov.infl.

Figure 9. Interbank loans/ total liabilities, %

0

1

2

3

4

5

6

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state corp.non-ow n_gov.infl.

Figure 14. Loan-to-deposit ratio, %

0%

500%

1000%

1500%

2000%

2500%

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state corp.non-ow n_gov.infl.

Results: profitability

! State-connected banks are definitely not more efficient than either banks with foreign ownership or national private banks: much lower ROA (with directly state-owned banks at federal and sub-federal level being the least efficient);

the efficiency gap is less solid in terms of ROE;

in terms of NIMs national private banks are the most efficient (even compared to foreign-owned banks) while the latter do not substantially differ from all groups of state-connected banks;

on average are less efficient than private banks in terms of the extent to which the overall expenditures on liabilities are covered by total income on assets.

Figure 15. ROA

0,0%

0,2%

0,4%

0,6%

0,8%

1,0%

1,2%

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

priv ate_domestic

priv ate_f oreignown_f ed.

own_sub-f ed.own_state corp.

non-own_gov .inf l.

Figure 16. ROE

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

priv ate_domestic

priv ate_f oreign

own_f ed.

own_sub-f ed.

own_state corp.

non-own_gov .

inf l.

Figure 17. NIM

0,0%

0,2%

0,4%

0,6%

0,8%

1,0%

1,2%

1,4%

1,6%

1,8%

2,0%

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

priv ate_domestic

priv ate_f oreign

own_f ed.

own_sub-f ed.

own_state corp.

non-own_gov .

inf l.

Figure 19. Assets income/ Liabilities expenses

0,0%

50,0%

100,0%

150,0%

200,0%

250,0%

300,0%

350,0%

400,0%

450,0%

500,0%

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

priv ate_domestic

priv ate_f oreign

own_f ed.

own_sub-f ed.

own_state corp.

non-own_gov .

inf l.

Results: risk characteristics

! State banks:

on average exhibit quite similar level of credit risk in terms of the share of NPLs to that of their private peers:

while:

the NPLs share ratio substantially differs within the group of state-connected banks;

the proportion of loan-loss provisions in total loans is much lower for banks with state ownership;

do not significantly differ from private peers in terms of large credit risk.

Figure 22. NPLs / Loans(non-banking sector)

0%

1%

2%

3%

4%

5%

6%

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state.corp.non-ow n_gov.infl.

Figure 23. LLPs / Loans(non-banking sector)

0%

2%

4%

6%

8%

10%

12%

1 Q 2006 1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state.corp.non-ow n_gov.infl.

Figure 24. N7-ratio(large credit risks, %)

0

50

100

150

200

250

300

350

400

450

500

1 Q 2007 1 Q 2008 1 Q 2009

private_domesticprivate_foreignow n_fed.ow n_sub-fed.ow n_state.corp.non-ow n_gov.infl.

Conclusions and further research:

Findings are rather mixed and in some cases significantly differ from the previous studies of the issue => further investigation needed.

Directions for future research:

at micro level: factors affecting the differences in operating efficiency and other performance indicators of Russian banks with respect to ownership structure;

at macro level: the impact of state presence on the depth of financial intermediation and stability of the banking sector.

Thank you for your attentionThank you for your attention!!

References:

1. Andrews, A. M. (2005), State-Owned Banks, Stability, Privatization, and Growth: Practical Policy Decisions in a World Without Empirical Proof, IMF Working Paper № WP/05/10, January 2005, www.imf.org

2. Barth, J. R., Caprio, G., Levine, R. (2002), Bank Regulation and Supervision: What Works Best?, World Bank Working Paper 2725, http://econ.worldbank.org.

3. Bonin, J. P., Hasan, I., Wachtel, P. (2005a), Bank Performance, Efficiency and Ownership in Transition Countries, Journal of Banking and Finance, 29, pp. 31–53.

4. Bonin, J. P., Hasan, I., Wachtel, P. (2005b). Privatization matters: Bank Efficiency in Transition Countries, Journal of Banking and Finance, 29, pp. 2155–2178.

5. De Nicolo, G., Loukoianova, E. (2007), Bank Ownership, Market Structure and Risk, IMF Working Paper 07/215.

6. EBRD Transition Report (2006), Finance in transition, http://www.ebrd.com/ pubs/econo/6813.htm.

7. Fries, S., Taci, A. (2005), Cost Efficiency of Banks in Transition: Evidence from 289 Banks in 15 Post-Communist Countries, Journal of Banking and Finance, 29, pp.55–81.

8. Fungacova, Z., Poghosyan T. (2009), Determinants of Bank Interest Margins in Russia: Does Bank Ownership Matter?, BOFIT Discussion Paper No.22/2009, Bank of Finland.

9. Fungacova, Z., Solanko L. (2008), Risk-Taking by Russian Banks: Do Location, Ownership and Size Matter? - BOFIT Discussion Paper No.21/2008, Bank of Finland.

10. Glushkova E., Vernikov А. (2009), How big is the visible hand of the state in the Russian banking industry? - MPRA Paper No. 15563, June 2009. Munich University Library. http://mpra.ub.unimuenchen.de/15563

References (2):

11. Glushkova E. (2009), Granitsi gosudarstvennogo sektora v bankovskoi sisteme (The boundaries of public sector in the banking industry), Bankovskoye delo, 8/2009, pp.34-37 (in Russian).

12. Haselmann, R., Wachtel, P. (2007), Risk Taking by Banks in the Transition Countries, Comparative Economic Studies 49, pp.411 – 429.

13. Iannotta, G., Nocera G., Sironi, A. (2007), Ownership Structure, Risk and Performance in the European Banking Industry, Journal of Banking and Finance, 31, pp.2127-2149.

14. Karas, Alexei, Koen Schoors and Laurent Weill (2010), Are Private Banks More Efficient than Public Banks? Evidence from Russia, The Economics of Transition, 18/1, pp.209-244.

15. Kraft, E., Hofler, R., Payne, J. (2006), Privatization, Foreign Bank Entry and Bank Efficiency in Croatia: a Fourier-Flexible Function Stochastic Cost Frontier Analysis, Applied Economics, 38, pp.2075-2088.

16. La Porta R., López-de-Silanes F., Shleifer A. (2002), Government ownership of banks // Journal of Finance, 57 (1), pp.265–301.

17. Maechler, A. M., Mitra, S., Worrell, D. (2007), Decomposing Financial Risks and Vulnerabilities in Eastern Europe, IMF Working Paper 07/248.

18. Sapienza, P. (2004), The Effects of Government Ownership on Bank Lending, Journal of Financial Economics, 72, pp. 357-384.

19. Styrin, K. (2005), What Explains Differences in Efficiency Across Russian Banks?, Economics Education and Research Consortium, Russia and CIS, Final report, Moscow.

20. Vernikov, A.V. (2007), Russia's banking sector transition: Where to?, BOFIT Discussion Paper No.5/2007, Bank of Finland.

21. Vernikov, A.V. (2009a), Dolya gosudarstvennogo uchastiya v bankovskoi sisteme Rossii (Assessing government participation in Russian banking system), Dengi i Kredit, 11/2009, pp.4-14 (in Russian).

22. Vernikov, A.V. (2009b), Russian Banking: The State Makes a Comeback? - BOFIT Discussion Paper No.24/2009, Bank of Finland.

Contacts:

Ekaterina Glushkova

Banking Department - Higher School of Economics, Moscow, Russia,

katia_glushkova@mail.ru