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. 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.