Russia readies emergency loans to contain Otkritie crisis

Bloomberg

Russia’s slow-motion banking crisis claimed its biggest victim yet, forcing the central bank to provide support for other lenders to prevent panic from spreading.
Bank Otkritie FC, a month removed from being Russia’s biggest private lender, was taken over by a government-backed fund set up by the central bank to consolidate the sector. The move will place at least 75 percent of the bank in state hands and could wipe out subordinated debt holders. The rescue prompted the central bank to provide funding to other banks to contain the crisis.
Otkritie began experiencing massive deposit outflows in June, which accelerated after a surprise ratings downgrade, prompting clients to withdraw the equivalent of about $7.4 billion through July and sparking fears of contagion. While the central bank’s offer of money to other lenders is intended to calm the market, the takeover of Otkritie will expand the state’s already dominant role in the banking sector.
The bailout is “the clearest sign yet of the damaging legacy from the sharp run-up in credit seen up to 2014,” William Jackson, an analyst at Capital Economics, said. “The strong balance sheets of the government and central bank mean that problems are unlikely to become systemic.” The outflows prompted Vadim Belyaev, the bank’s largest shareholder, to return as chief executive officer of the bank’s holding company in an attempt to calm investors. The central bank will now be in control with a temporary administration.

“Lehman Effect”
“Good for investors, probably bad for the system,” Dmitri Barinov, a portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said. “They prevented the Lehman effect in the Russian banking system and created a too big to fail mentality. How many other banks in Russia with the same sort of problems will need a bail out soon?”
Bank of Russia Governor Elvira Nabiullina has overseen a purge that has seen one in three lenders lose their licenses since 2014 as she attempts to eliminate under-capitalised institutions. This is the first time the cull has impacted one of the 10 lenders designated as systemically important by the central bank.
Otkritie’s subordinated bonds due in April 2019 jumped 25 cents on the dollar to 69.97 cents as of 5:45 pm in Moscow. The yield on the bank’s dollar debt maturing in April 2018 dropped 27 percentage points to 23.4 percent, while the shares climbed 3 percent.
Bank Otkritie’s Eurobond yields surged last month after Russia’s ACRA credit agency assigned the lender a BBB-rating, below the level that allows the bank’s obligations to be included in the central bank’s collateral list. The agency cited “significant” pressure on its creditworthiness from a “weak” asset quality and risks to capital adequacy from its parent. Otkritie Holding is currently in the process of buying Russia’s biggest insurance provider.

Strategic Mistakes
Otkritie’s problems stem from strategic mistakes, including the acquisition of Rosgosstrakh insurance company and its inability to effectively clean up National Bank Trust, according to the central bank. First Deputy Governor Dmitry Tulin said he was confident that the problems would not spread. “We didn’t create this mechanism in order to allow for any collapses,” Tulin said during a press conference. “We don’t expect any turmoil in the banking sector in the foreseeable future.”
Otkritie is the eighth-biggest bank in Russia by assets, having ceded the title of top private bank to Alfa-Bank JSC last month. The rescue, which will take at least half a year, gives the central bank at least a 75 percent stake and will wipe out its other shareholders if its capital is still negative after three months.
Expensive acquisitions and an aggressive expansion strategy pushed Otkritie into the top 10 among Russian banks, but didn’t ensure profits.
Before the Otkritie takeover, state-linked banks already controlled about 60 percent of the sector’s assets and include the country’s five biggest lenders.