UPDATE 1-Moody's upgrades Russia's banking system to stable from negative

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MOSCOW, March 31 (Reuters) - Ratings agency Moody’s said on Wednesday it had upgraded the outlook for Russia’s banking system over the next 12-18 months to stable from negative, thanks to the recovery of oil prices and a gradual lifting of coronavirus restrictions.

The COVID-19 pandemic and plunging prices for oil, Russia’s key export, have pressured the banking sector. Top lender Sberbank said earlier in March it missed its pre-pandemic profit target with a 10% decline in net profit last year due to provisions against bad loans.

However, fast-growing online bank Tinkoff posted a 22% increase in net profit last year, demonstrating some resilience in the sector.

Moody’s said it expected Russia’s gross domestic product (GDP) to grow by 2.3% in 2021 and 2.1% in 2022 after a 3.1% contraction in 2020. Those estimates were lower than the World Bank’s updated forecast, published on Wednesday, of 2.9% and 3.2% GDP growth in 2021 and 2022 respectively.

Economists at the Eurasian Development Bank (EDB) were even more optimistic, forecasting 3.3% GDP growth in Russia in 2021 and 4% growth in neighbouring Kazakhstan.

In an update on Russia’s banking system, Moody’s said it expected banking sector loans to increase around 12% in 2021, compared with 14% the year before when banks issued government-subsidised loans to support borrowers affected by the pandemic.

Moody’s said profitability, funding and liquidity would be stable, but the systemwide loan-to-deposit ratio would remain below 100% in the next 12-18 months.

“However, we also expect that the rising inflation and diminished appeal of fixed-income individual deposits will trigger a structural shift in bank funding, accelerating the flow of savings out of term deposits to current accounts and to the securities markets,” Moody’s said. (Reporting by Alexander Marrow and Tatiana Voronova; additional reporting by Mariya Gordeyeva in Almaty; Editing by Jon Boyle and Chizu Nomiyama)