MOSCOW - The return on equity in the Russian banking sector dropped to 11.6 percent in the first half of the year, compared with 11.8 percent in the same period last year, while the return on assets remained unchanged, at 1.7 percent, it is said in the Central Bank’s report published Tuesday.

According to the report, returns dropped throughout the entire sector. Large commercial banks managed to retain profits, but smaller banks lost part of their revenues. Among credit organizations, returns on equity fell to 10.7 percent in January-June 2003, compared with 11.0 percent in the corresponding period last year. For banks with a capitalization of EUR 5m and more, the figures were 4.7 percent and 6.3 percent, respectively.

According to the Central Bank, 1330 credit organizations are currently operating in the country. Of them, 352 banks (26 percent) have equity of more than EUR 5m. Central Bank officials think the future is for these banks, at least regarding their financial indicators. Smaller banks are finding it more difficult to survive.

“While net profits are comparable in percentage terms (50-60 percent), credit organizations with a capitalization of more than EUR 5m have higher returns, in the first place, due to the fact that these organizations have better opportunities to profit from operations with securities,” it is said in the Central Bank’s report.

However, returns on government bonds dropped in the first half of the year. On the one hand, banks profited from a re-evaluation, but on the other hand, it led to a drop in future revenues. Similar trends were reported in the corporate bond sector. Returns on operations with securities will decrease further as inflation will slow down and interest rates will fall.

In some sense, the impact of changes on the financial markets on returns can be assessed if we take the example of the country’s largest bank. Sberbank’s net profit rose to RUR 21.6bn in the first half of the year, compared with RUR 17bn in the same period in 2002. But the situation has changed in the third quarter. Sberbank’s net profit in January-September, calculated according to Russian standards, was RUR 26.5bn, down from RUR 28.7bn in the corresponding period last year. This information was reported by the Western media Monday. Citing an anonymous source in the bank, they also reported that Sberbank’s balance sheet profit was RUR 29.85bn as of October 1, compared with RUR 31.8bn a year ago.

Analysts blame this on an unfavorable situation on the market and growing competition, something many bankers have complained about in recent months. In their opinion, the Central Bank should ease its reserve requirements, so that credit organizations could operate more effectively. But the Central Bank is concerned about the impact of this measure on inflation. In addition, the Central Bank’s leadership makes no secret of its desire to consolidate the country’s banking system. By 2007, each Russian bank should have a capitalization of at least EUR 5m. In view of this, the Central Bank pointed to the positive effect of a large capitalization in its report, highlighting the more successful performance of large credit organizations. But the problem is that no one knows for how long the leading bankers will manage to maintain their high returns.