Russia Offers Emergency Bank Aid to Prevent Otkritie Contagion

Central Bank of Russia file photo

(Bloomberg – – Jake Rudnitsky, Anna Baraulina – August 30, 2017)

Russia’s central bank moved to contain a slow-motion banking crisis, offering support to other lenders after announcing the takeover of the largest institution yet.

Bank Otkritie FC, Russia’s biggest private lender a month ago, is the first bank to be taken over by a fund created so that the central bank can carry out rescues without private investors. While the emergency funding is intended to calm the market, Otkritie’s troubles signal that Russia’s banking system is still suffering from the recession that ended late last year.

For the Kremlin, maintaining confidence in the banking system is a top priority important ahead of the March 2018 presidential elections, in which Vladimir Putin is expected to run for a fourth term highlighting the country’s nascent economic recovery. The rescue will be a test for the regulator’s new bailout mechanism, which is supposed to avoid the previous ballooning costs of often vain attempts to nurse banks back to health.

“Good for investors, probably bad for the system,” Dmitri Barinov, a portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said by phone about the rescue. “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?”

Otkritie had catapulted itself into the top ranks of Russia’s banks over the last three years even as the sector was battered by recession and growing bad loans. The bank took over other lenders, as well as a pension fund and an insurer, becoming so large the regulator declared it one of the country’s 10 “systemically important” banks — too big to fail — and provided billions of liquidity support.

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.

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 gambit failed, and the regulator will now take at least a 75 percent stake in the country’s eighth-biggest bank by assets. It represents an incremental addition to the more than 60 percent of the sector’s assets now by state-linked lenders.

“The strong balance sheets of the government and central bank mean that problems are unlikely to become systemic,” William Jackson, an analyst at Capital Economics, said in a note.

While the regulator said Otkritie will continue to meet its obligations and service clients, it is ready to write off the bank’s subordinated debt or convert it into shares if the bank’s capital adequacy ratio falls below the minimum level permitted. Otkritie has about $1.2 billion of such debt, Moscow-based Aton said in a research note Wednesday.

Otkritie’s subordinated bonds due in April 2019 jumped 30 cents on the dollar to 75 cents on Tuesday. They were little changed on Wednesday. The yield on the bank’s dollar debt maturing in April 2018 dropped 35.5 percentage points to 14.96 percent on Tuesday.

Strategic Mistakes

Otkritie’s problems stem from strategic mistakes, including the acquisition of Rosgosstrakh, Russia’s biggest insurance company, and its inability to effectively clean up National Bank Trust, according to the central bank. First Deputy Governor Dmitry Tulin said that he was confident that the problems would not spread. The regulator will offer emergency short-term loans at market rates, he said.

“We didn’t create this mechanism in order to allow for any collapses,” Tulin said Tuesday at a press conference. “We don’t expect any turmoil in the banking sector in the foreseeable future.”

[Why Russia’s Biggest Private Bank Needed a Rescue: QuickTake Q&A]

While the central bank didn’t say how much the bail-out could run, it will be pricey, according to Vyacheslav Putilovsky, an analyst at Expert RA. The most expensive in Russia to date was the 2011 rescue of Bank of Moscow, which cost 395 billion rubles.

“Not providing support for such a large bank would have been more expensive,” Putilovsky said by phone.

– With assistance by Natasha Doff, Anna Andrianova, and Olga Voitova

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