The gradual consolidation in the Russian banking sector seen in recent  years will accelerate from 2014-2016, bringing credit-positive  changes through the amalgamation of weaker banks into banks with greater  creditworthiness, says Moody’s Investors Service in a Special  Comment published today. Furthermore, well-executed  mergers will benefit some larger private banks because their acquisitions  of smaller entities will increase their scale and geographical diversification.

In this report, Moody’s focuses on (1) larger banks gaining  market share by acquiring smaller banks; (2) the slowing Russian  economy prompting banks to seek synergies through M&A; and (3)  consolidation increasing economies of scale, improving income stability,  and reducing the number of weak banks in the system.

The new report, entitled “Russian Banks: Consolidation  will strengthen the banking sector”, is now available on  Moody’s subscribers can access this report via the link provided  at the end of this press release.

Moody’s says that Russia’s largest banks have been acquiring  other banks to boost their market share. In addition, banks  with stronger credit profiles have merged with distressed banks,  a trend the ratings agency expects will continue. Small banks have  been exiting the market, some of them prompted to do so by regulatory  actions, whilst foreign banks that have had less success in building  a presence in Russia have been exiting the market to free up capital and  re-focus on their core markets.

Moody’s says that a slowing Russian economy limits the potential  for organic growth in the banking sector due to rising credit costs and  declining net interest margins, prompting banks to seek synergies  and economies of scale. The rating agency forecasts real GDP growth  of 1.5-3% in Russia (Baa1 stable) for 2014-15.  At the same time, bank valuations have come down, making acquisitions  more affordable. In addition, capital-rich banks are  attractive M&A partners for banks that are capital-constrained,  as the level of capital is declining for the banking sector as a whole  while being asymetrically distributed from bank to bank.

Moody’s says that the consolidation process reduces the number of  very small, fundamentally weak banks within the system, increasing  economies of scale and geographical diversification and leading to bolstered  earnings stability. Fewer weaker banks will make the sector less  vulnerable to bank runs and Moody’s expects these factors to lower  the level of systemic risks for Russian banks.

The ratings agency believes that the Russian banking sector will remain  dominated by state-controlled institutions. However,  consolidation can improve the competitive position of the larger private  banks if they add scale and geographical scope through acquisitions.