Russia’s fund industry faces hard competition for assets from bank deposits
The move by Russian banks to start hiking interest rates, in a bid to attract more liquidity, is likely to harm the country’s mutual fund market, which is already struggling with less than $4bn total assets.
The industry in Russia has been losing money over the past few years and currently stands at a mere 0.25% of gross domestic product.
It faces stiff competition for attracting cash from bank deposits, often paying interest at near 10%.
And as bank rates continue to rise to double digits – well above Russia’s inflation rate of 6%-7% – the mutual fund industry has little chance of competing for attention, practitioners say.
Anton Rakhmanov (pictured), managing director at Russia’s Troika Dialog Asset Management says: “99% of the Russian population prefers to keep their assets in bank deposits.
“There is simply no point in investing in funds, which are higher volatility, but don’t bring better returns.”
Although Russian mutual funds have seen inflows this week, investment manager UralSib Capital says more incentives are needed to attract investor money.
This year to 15 August inflows to Russian mutual funds amounted to $888m, according to Emerging Portfolio Fund Research (EPFR). In the week to 9 August they received $23m, though this did not replenish them from losing $60m the week before.
UralSib Capital comments: “The increase in oil price helped improve the attitude of investors towards Russian assets. But market participants will need additional incentives.”
The banks justify increasing their rates by the fact that loan increases in July exceeded retail deposit growth, by an average of 3%. As funding costs continue to rise, they are being forced to look for extra liquidity.
As a result, nine out of Russia’s 30 leading private banks have announced interest rate hikes in an effort to attract more client money. Among them are Rosbank, Promsvyazbank, UniCredit Bank and TRUST Bank.
The move is expected to help them keep regular customers from “deserting” to competitors, reports Russia’s news source Kommersant. This news came in the same week that Russian Standard Bank entered the top 10 banks ranked by retail deposits, helped by its offering rates of up to 12% on some accounts.
So far, the largest state banks have held back from further rate hikes. At the moment Sberbank offers savers 8.24%, while VTB’s rate is 8.4%. Troika Dialog says “it will be interesting to see what path they take in the near term.”
Russian banks have not had it all their own way recently.
In the first quarter net capital flight from the country amounted to $35.1bn, significantly higher than the equivalent figure for Q1 last year of $19.8bn. Capital flight last year totalled $84.2bn, almost triple the figure for 2010 ($33.6bn).