CIS Banking Systems Have Mixed Prospects But Pose Common Risks
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CIS Banking Systems Have Mixed Prospects But Pose Common Risks

S&P report says CIS banks among the riskiest in the world

CIS banking systems are among the riskiest in the world, and remain vulnerable to external shocks and potential government policy reversals--illustrated by the current pressure on Ukrainian banks due to domestic political instability and the turbulence in the Russian banking sector this summer, Standard & Poor's Ratings Services said in a report published today.

The report, "CIS Banking Systems: Mixed Prospects But Common Risks," is a broad, first-ever pan-regional look at the banking prospects and risks in the CIS region that fills an informational and analytical gap for market participants and investors.

"Although most of the 12 CIS countries have made great progress in transitioning to market economies, much remains to be done, particularly in the banking sectors," said Standard & Poor's credit analyst Ekaterina Trofimova, author of the report. All banks in the region face numerous and large challenges: the development of financial intermediation, the expansion of product ranges, revenue diversification, efficiency improvements, and the introduction of more sophisticated tools for operations and risk management.

"The ability and willingness of CIS governments to maintain and accelerate economic, industrial, and legislative reforms is crucial for the longer term growth and prosperity of their countries and banks," Ms. Trofimova emphasized. This huge region, more than five times the size and half of the population of the European Union, has vast potential for growth of its banking systems. It is still underintermediated and demand for a full range of banking services is largely untapped. This growth potential varies from country to country, however, as the report shows. The banking systems of Kazakhstan, Russia, and Ukraine lead the pack and have the largest growth potential.

"Despite the growing divergence of policies and in the performance of the CIS banking systems, one thing they share is exposure to a variety of common risks," Ms. Trofimova said. "These risks include: high economic and industry risks; cyclical volatility; low population wealth and high income inequalities; underdeveloped regulatory and legal systems; varying accounting practices; weak bank financial profiles; and limited confidence in the banking system."

Reflecting these weaknesses, most of Standard & Poor's ratings on banks in this region are in the lower to middle range of speculative grade. So far, CIS banks have grown mostly inside of their home markets without much foreign investment. They are beginning, however, to increasingly look across their borders, driven by the needs of major corporate clients, improving macroeconomic conditions, and increasing intraregional cooperation and trade. While international banks are still looking over the region, none has identified the region as its targeted market or has articulated a pan-regional strategy.

 

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