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Mortgages will remain a key loan growth driver for Russian banks

Mortgages will remain a key loan growth driver for Russian banks

Residential mortgages have been the fastest growing loan segment over the past three years. They now comprise 44% of gross retail loans, up from 28% in 2010.

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The growth has been driven by a government subsidy program, gradually falling lending rates (which declined on average to 9.8% at end-2017 from 13.35% at end-2015) amid reductions in the CBR’s key interest rate and falling inflation and continuously strong borrower demand.

However, mortgage penetration in Russia, at around 6% of GDP, is still far below averages of 20% for Central and Eastern European peer countries.

Mortgages have potential for further growth due to their relatively low cost of risk, a further likely cut in the CBR’s key rate and existing demand from creditworthy borrowers. The affordability of mortgages increased thanks to declines in interest rates and monthly payment instalments.

Mortgages outperform other loan types in asset quality in Russia

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Mortgage loan quality continued to improve in 2017, with nonperforming loans (NPLs) falling to 2.2% as of end-2017 from 2.6% in 2016, due to stabilizing market conditions and lending growth.

Mortgage loans perform better than other loan segments in asset quality. The average NPL ratio for non-housing loans to households was 11.6% at end-2017, and we expect this differential to be maintained in the coming quarters.

The quality of mortgage loans is underpinned by banks’ focus on relatively creditworthy borrowers and limited exposure to foreign-currency denominated mortgages, which make up less than 1% of total mortgages.

The CBR’s recent introduction of higher risk weights for mortgages with down-payment ratios of less than 20% -applicable to loans originated after 1 January 2018 -is a preventive measure aimed at containing potential credit risks in the mortgage sector amid strong growth.