Category Archives: Russian banks

6/7/18: Central Bank of Russia Injects Capital in Three Lenders, Continues Sector Restrcturing


Reuters reported (https://www.reuters.com/article/russia-banks/russian-c-bank-says-to-deposit-2-8-bln-at-otkritie-trust-and-rost-idUSR4N1TT00E) on Central Bank of Russia (CBR) setting up a 'bad bank' to resolve non-performing assets in three medium- large-sized banks that CBR controls. In 2016, the CBR took over control over three medium- large-sized banks, Otkritie, B&N Bank and Promsvyazbank. Last month, the CBR announced an injection of RB 42.7 billion of funds to recapitalise Otkritie with funds earmarked to cover losses in Otkritie's pension fund.  Most Bank received RB37.1 billion in new capital. The CBR also deposited RB 174.2 billion (USD2.78 billion) in three banks (RB63.3 billion of which went to Otkritie) on a 3-5 years termed deposit basis.

The funds will be used to reorganise banks operations and shift non-performing and high risk assets to a Trust Bank-based 'bad bank' which will operate as an asset management company.

After divesting bad loans, Otkritie is expected to be sold back to private investors.

CBR's total exposure to troubled banks is now at RB 227 billion (USD3.5 billion), with CBR having spent RB 760 billion (USD 12 billion) on its overall campaign to recapitalise troubled lenders. CBR holds RB 1.3 trillion (USD30 billion) on deposit with lenders it controls.

As BOFIT note: "...the CBR to date has used over 45 billion USD (about 3% of 2017 GDP) in supporting the three banks that it took over last year. Some of this amount, however, should be recovered when assets in banks acquired by the CBR are sold off as well as in the planned privatisations of the banks." At the beginning of June, Otkritie stated that the bank aims to float a 15-20% stake in 2021. The bank said t's target for pricing will be "at least 1.3 times the capital the bank has at the end of 2020". Otkritie targets return on equity of 18% in 2020, and so far, in the first five months of 2018, the bank made RB 5.4 billion in net profit, per CBR.

Otkritie ranked sixth largest bank in Central and Eastern Europe by capitalisation by The Banker in 2017 prior to nationalisation. Following nationalisation, Otkritie ranked 16th in CEE, having lost some USD2.4 billion in capital.

Another lender, Sovetsky bank from Saint Petersburg lost its license on July 3. The bank gas been in trouble since February 2012 when the CBR approved its first plans for restructuring. In February 2018, the bank was in a "temporary administration" through the Banking Sector Consolidation Fund. The latest rumours suggest that Sovetsky deposits and loans assets will retransferred to another lender.  Sovetsky was under original administration by another lender, Tatfondbank, from March 2016, until Tatfondbank collapsed in March 2017 (official CBR statement https://www.cbr.ru/eng/press/PR/?file=03032017_105120eng2017-03-03T10_47_12.htm, and see this account of criminal activity at the Tatfondbank: https://en.crimerussia.com/financialcrimes/collapse-of-tatfondbank-robert-musin-siphoned-off-funds-from-state-owned-bank/ and https://en.crimerussia.com/financialcrimes/tatfondbank-officially-collapses/). Tatfondbank's tangible connection to Ireland's IFSC was covered here: https://realnoevremya.com/articles/1292-tatfondbank-raised-60-million-via-obscure-irish-company-just-before-collapse.

Overall, CBR have done as good a job of trying to clean up Russian banking sector mess, as feasible, with criminal proceedings underway against a range of former investors and executives. The cost of the CBR-led resolution and restructuring actions has been rather hefty, but the overall outrun has been some moderate strengthening of the sector, hampered by the tough trading conditions for Russian banking sector as a whole. A range of U.S. and European sanctions against Russian financial institutions and, more importantly, constant threat of more sanctions to come have led to higher funding costs, more acute risks profiles, lack of international assets diversification, and even payments problems, all of which reduce the banking sector ability to recover low quality and non-performing assets. The CBR has zero control over these factors.

Russia currently has 6 out of top 10 banks in CEE, according to The Banker rankings:


Source: http://www.thebanker.com/Banker-Data/Banker-Rankings/Top-1000-World-Banks-Russian-banks-mixed-fortunes-influence-CEE-ranking?ct=true.

These banks are systemic to the Russian economy, and only the U.S. sabre rattling is holding them back from being systemic in the broader CEE region. This is a shame, because opening up a banking channel to Russian economy greater integration into the global financial flows is a much more important bet on the future of democratisation and normalisation in Russia than any sanctions Washington can dream up.
 


As an aside, new developments in the now infamous Danske Bank case of laundering 'blood money' from Russia, relating to the Magnitzky case were reported this week in the EUObserver: https://euobserver.com/foreign/142286.

28/9/17: Pimco on Russian Economy: My Take


An interesting post about the Russian economy, quite neatly summarising both the top-line challenges faced and the resilience exhibited to-date via Pimco: https://blog.pimco.com/en/2017/09/Russia%20Growth%20Up%20Inflation%20Down. Worth a read.

My view: couple of points are over- and under-played somewhat.

Sanctions: these are a thorny issue in Moscow and are putting pressure on Russian banks operations and strategic plans worldwide. While they do take secondary seat after other considerations in public eye, Moscow insiders are quite discomforted by the effective shutting down of the large swathes of European markets (energy and finance), and North American markets (finance, technology and personal safe havens). On the latter, it is worth noting that a number of high profile Russian figures, including in pro-Kremlin media, have in recent years been forced to shut down shell companies previously operating in the U.S. and divest out of real estate assets. Sanctions are also geopolitical thorns in terms of limiting Moscow's ability to navigate the European policy space.

Banks: this issue is overplayed. Bailouts and shutting down of banks are imposing low cost on the Russian economy and are bearable, as long as inflationary pressures remain subdued. Moscow can recapitalise the banks it wants to recapitalise, so all and any banks that do end up going to the wall, e.g. B&N and Otkrytie - cited in the post - are going to the wall for a different reason. That reason is consolidation of the banking sector in the hands of state-owned TBTF banks that fits both the Central Bank agenda and the Kremlin agenda. The CBR has been on an active campaign to clear out medium- and medium-large banks out of the way both from macroprudential point of view (these institutions have been woefully undercapitalised and exposed to serious risks on assets side), and the financial system stability point of view (majority of these banks are parts of conglomerates with inter-linked and networked systems of loans, funds transfers etc).

Yurga, another bank that was stripped of its license in late July - is the case in point, it was part of a real estate and oil empire. B&N is another example: the bank was a part of the Safmar group with $34 billion worth of assets, from oil and coal to pension funds.

The CBR knowingly tightened the screws on these types of banks back in January:

  • The new rules placed a strict limit on bank’s exposure to its own shareholders - maximum of 20% of its capital, forcing the de-centralisation of equity holdings in banking sector; and
  • Restricted loans to any single borrower or group of connected borrowers to no more than 25% of total lending.
I cannot imagine that analysts covering Russian markets did not understand back in January that these rules will spell the end of many so-called 'pocket' banks linked to oligarchs and their business empires.

The balance of the banking sector is feeling the pain, but this pain is largely contained within the sector. Investment in Russian economy, usually heavily dependent on the banks loans, has been sluggish for a number of years now, but the key catalyst to lifting investment will be VBR's monetary policy and not the state of the banking sector. 

Here is a chart from Reuters summarising movements in interbank debt levels across the top 20 banks:


The chart suggests that net borrowing is rising amongst the top-tier banks, alongside deposits gains (noted by Pimco), so the core of the system is picking up strength off the weaker banks and is providing liquidity. Per NYU's v-lab data, both Sberbank and VTB saw declines in systemic risk exposures in August, compared to July. So overall, the banking system is a problem, but the problem is largely contained within the mid-tier banks and the CBR is likely to have enough fire power to sustain more banks going through a resolution. 


22/4/16: Russian Economy: Renewed Signs of Pressure

Earlier this week, I posted my latest comprehensive deck covering Russian economy prospects for 2016-2017 (see here: http://trueeconomics.blogspot.com/2016/04/20416-russian-deck-update-april-2016.html). Key conclusion from that data was that Russian economy is desperately searching for a domestic growth catalyst and not finding one to-date.

Today, we have some new data out showing there has been significant deterioration in the underlying economic conditions in the Russian economy and confirming my key thesis.

As reported by BOFIT, based on Russian data, “Russian economy has shrunk considerably from
early 2015. Seasonally adjusted figures show a substantial recovery in industrial output in the first three months of this year. Extractive industries, particularly oil production, drove that growth with production in the extractive sector rising nearly 3.5 % y-o-y. Seasonally adjusted manufacturing output remained rather flat in the first quarter with output down more than 3 % y-o-y.”

As the result, “the economy ministry estimates GDP declined slightly less than 2% y-o-y in 1Q16. Adjusting for the February 29 “leap day,” the fall was closer to 2.5%.”

Meanwhile, domestic demand remained under pressure. Seasonally adjusted volume of retail sales fell 5.5% y/y and is now down 12% on same period in 2014. “Real household incomes contracted nearly 4% y-o-y. Driven by private sector wage hikes, nominal wages rose 6 % y-o-y, just a couple of percentage points less than the pace of 12-month inflation.”

A handy chart:


Oil and gas production, however, continued to boom:



What’s happening? “Russian crude oil output was up in January-March by 4.5% y-o-y to record levels. Under Russia’s interpretation of the proposed production freeze to January levels, it could increase oil output this year by 1.5‒2%. The energy ministry just recently estimated that growth of output this year would only reach 0.5‒1%, which is quite in line with the latest estimate of the International Energy Agency (IEA). However, Russia’s energy ministry expects Russian oil exports to increase 4‒6% this year as domestic oil consumption falls.”

It is worth noting that the signals of a renewed pressure on economic growth side have been present in advanced data for some time now.

Two charts below show Russian (and other BRIC) Manufacturing and Services PMIs:




Both indicate effectively no recovery in the two sectors in 1Q 2016. While Services PMI ended 1Q 2016 with a quarterly average reading of 50.0 (zero growth), marking second consecutive quarter of zero-to-negative growth in the sector, Manufacturing PMI posted average reading of 49.1, below the 50.0 zero growth line and below already contractionary 49.7 reading for 4Q 2015.

Russia’s composite quarterly reading is at 49.9 for 1Q 2016 an improvement on 4Q 2015 reading of 49.1, but still not above 50.0.

In simple terms, the problem remains even though its acuteness might have abated somewhat.

10/4/16: Russian Bonds Issuance: Some Recent Points of Pressure


Catching up with some data from past few weeks over a number of post and starting with some Russian data.

First, March issue of Russian bonds. The interesting bit relating RUB22.8 billion issuance was less the numbers, but the trend on issuance and issuance underwriting.

First, bid cover was more than four times the amount of August 2021 bonds on offer, raising RUB22.8 billion ($337 million) across
  • fixed-rate notes (bids amounted to RUB47 billion on RUB11.5 billion of August 2021 bonds on offer)
  • floating-rate notes (bids amounted to RUB25 billion on issuance of RUB9.33 billion of December 2017 floating coupon paper) and 
  • inflation-linked securities (amounting to RUB2.01 billion)
This meant that Russia covered in one go 90 percent of its planned issuance for 1Q 2016, as noted by Bloomberg at the time - the highest coverage since 2011. With this, the Finance Ministry will aim to sell RUB270 billion in the 2Q 2016.

Bloomberg provided a handy chart showing as much:


Now, in 2011, Russian economy was still at the very beginning of a structural slowdown period and well ahead of any visibility of sanctions.

Sanctions are not directly impacting sales of Russian Government bonds, but the U.S. has consistently applied pressure on American and European banks attempting to prevent them from underwriting Moscow's Government issues (http://www.wsj.com/articles/u-s-warns-banks-off-russian-bonds-1456362124). Prior to the auction, Moscow invited 25 Western banks and 3 domestic banks to bid for USD3 billion worth of Eurobonds (the first issuance of Eurobonds by Russia since 2013). Despite the EU official statement that current sanctions regime does not prohibit purchases or sales of Government bonds, Western banks took to the hills (at least officially).

The point of the U.S. pressure on the European banks is a simple threat: in recent years, the U.S. regulators have aggressively pursued European banks for infringements on sanctions against Iran and other activities. In effect, U.S. regulatory enforcement has been used to establish Washington's power point over European banking institutions. And the end game was that, despite being legal, sale of Eurobonds was off limits for BNP Paribas, Credit Suisse, Deutsche Bank, HSBC, and UBS, not to mention U.S.-based Bank of America, Citi, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Another dimension of pressure is the denomination of the Eurobond. Moscow wanted Eurobond issued in dollars. However, dollar-issuance requires settlement via the U.S., enhancing U.S. authorities power to exercise arbitrary restriction on a deal that is legal under the U.S. laws (as not being officially covered by sanctions).

Beyond underwriters, even buy-side for Russian Government bonds is being pressured, primarily by the U.S., with a range of European and American investment funds getting hammered: http://www.bloomberg.com/news/articles/2016-03-24/russia-loses-buyside-support-for-eurobond-after-banks-balk.

Russian Government bonds (10 year benchmark) are trading at around 9.26-9.3 percent yield range, well down on December 2014 peak of over 14.09 percent, but still massively above bonds for countries with comparable macroeconomic performance statistics.



Interestingly, there is a huge demand in the market for Russian Eurobonds, as witnessed by mid-March issuance by Gazprom of bonds denominated in CHF (see: http://www.bloomberg.com/news/articles/2016-03-16/gazprom-taps-switzerland-with-russia-s-first-eurobond-this-year).

It is worth noting again that Russian Government bonds are not covered by any sanctions and are completely legal to underwrite and transact in.

Beyond this, the Western sanctions were explicitly designed to avoid placing financial pressures on ordinary Russians. Government bonds are used to fund general Government deficits arising from all lines of Government expenditure, including healthcare, social welfare, education etc, but also including military spending, while excluding supports for sanctioned enterprises and banks (the latter line of expenditure is linked to funds being sourced from the SWF reserves). Given this, the U.S. position on bonds issuance represents a potential departure from the U.S.-stated objective of sanctions and can be interpreted as an attempt to directly induce pain on ordinary Russians (the more vulnerable segments of the population, such as the elderly, children and those in need of healthcare, or as they are termed in Russian - budgetniki - those whose incomes depend on the Budgetary allocations).

This is a sad turn of events from markets and U.S. policy perspectives - placing arbitrary and extra-legal restrictions on transactions that are perfectly legal is not a good policy basis, unless the U.S. objective is to fully politicise financial markets in general. Neither is the U.S. position consistent with the ethical stance de jure adopted under the sanctions regime.