14 Декабря 2017
Russian RMBS set for growth, says VTB
GlobalCapital spoke to Andrey Suchkov, head of securitization at VTB Capital, about the outlook for Russian RMBS issuance, which he believes has never looked better.
Government incentives are set to boost demand for mortgages and Basel regulations are falling into place, but the Russian RMBS market is yet to take off with domestic investors.
VTB Group and Russia’s agency for housing mortgage lending (AHML) recently completed a Rb48.2bn RMBS that was conducted within the agency's Mortgage-backed Securities Factory framework.
The weighted average life of the pool is about three years and the bonds typically price with a spread over treasuries which yield about 7.3%, said Suchkov.
Investors have a claim on a pool of prime residential Russian mortgages and, being issued within AHML’s lending framework, both the principal and interest is guaranteed by the government agency.
Domestic investors also benefit from a preferential taxation regime, as well as a reduced regulatory capital ratio requirement, said Suchkov.
Issuing through its mortgage subsidiary, VTB24, VTB plans to sell the single-tranche bonds with a fixed rate coupon of 11.5% to a range of investors and expects to issue further deals in 2018. "For the moment we are focusing on growing the domestic investor base,” he said.
Mortgage lending to improve
Russian mortgage lending is growing at a brisk pace of over 10%, but could well accelerate in 2018 as the Russian government is set to introduce a new interest rate subsidy to help families with two children, said Suchkov.
"I am quite optimistic about prospects for 2018 as mortgage lending is the fastest area of growth in banking activity and one of the major drivers of banking sector development,” he said.
The first deals issued off the factory framework were closed in 2016 and since the start of 2017 four deals have closed with a total volume of RUB60bn, a number which Suchkov considers quite modest compared with 2014’s peak.
In 2014 Russia witnessed record mortgage origination of RUB1.8tln of which 14% was funded by RMBS, according to Suchkov. In 2015 there was a serious decline in origination, but in 2016 origination volumes sprang back and this year a new record of about RUB2tln is expected.
Even so, mortgage penetration is very low and stands at about 6% of GDP which is less than most Eastern European countries.
Long term funding will be a major topic
99% of mortgage loans are long-term, fixed-rate, self-amortising with a high interest rate risk.
New origination is currently being funded by short term deposits but next year "growth in the market means the question of long term funding will become a major topic,” according to Suchkov.
Securitization could provide an efficient mechanism of long-term funding and interest rate risk transfer, and in Suchkov’s opinion, there is an objective and "definite need for a functioning RMBS market”.
So far RMBS have either been retained by the originator or purchased by AHML itself. But, in order to put the factory programme on a more sustainable footing it will be necessary to create a viable investor base.
VTB is looking to diversify sales to new private pension funds, insurance companies and life insurers — that being the fast-growing sector. "Currently, investor education is needed on the structure of RMBS which involves prepayment risk,” said Suchkov.
Basel III transposition on the way
Another critical issue is the regulatory framework.
From 2016 an interim capital requirement regulation was implemented which featured a 1250% risk weight for the most junior equity tranche.
The interim regime will remain in place until the introduction of a more complex regulatory framework based on Basel III recommendations.
Although the regulator left some space for flexibility to support the industry, the overall influence of the interim regulation was quite restrictive.
But since 2016 there has been a very constructive dialogue between the regulator and the market.
And, at the end of November 2017, the Russian central bank published a new draft which was positively received.
Simple and transparent
"We think balanced implementation of the new approach based on Basel III, which also introduces simple transparent and comparable (STC) securitization code, will encourage further market development,” said Suchkov.
There are three possible regulatory approaches. The first is based on the internal ratings based approach (IRB) which, to all intents and purposes, is not applicable in Russia.
The second is based on an external credit rating which is problematic given all ratings are capped by Russia’s sovereign ceiling.
The third and most practical option is based on the standardised approach. It is expected to be implemented in first quarter of 2018.