In what is said to be Russia’s largest ever bank bailout, last week the Central Bank of Russia moved to prop up Otkritie, after the country’s second-largest privately owned bank suffered a huge run of deposit outflows amid concerns over its loan portfolio and ‘questionable’ business practices. Otkritie is the seventh largest (by assets) of the 10 ‘systemically’ important banks in Russia and was thus considered too big to fail.
The bailout will be funded from the supplementary bank liquidity facility, which was set-up following Russia’s introduction of a new law which allows the central bank to effectively take control of a failing bank (that is worth saving). In this case the central bank has planned to take a minimum 75% stake in Otkritie, however, the exact amount of funding is currently unknown, and the assessment process could take as long as eight months. There is a risk that shareholders of the bank could potentially lose all ownership rights if Otkritie’s capital is negative in the next three months, and all subordinated debt could be written off, according to the Bank of Russia.
This ‘shock’ bailout comes at a surprising time, when Russia is experiencing stable economic recovery (Q2’17 GDP upwardly surprised at 2.5%yoy), and the county’s banking sector is showing signs of stabilising; NPLs appear to have peaked and capital ratios are more robust. The move to ‘save’ Otkritie is considered positive for Russia’s banking sector, which has seen a third of lenders lose their licenses since a purge was initiated in 2014. A good example could be Yugra Bank which had its licence revoked after reportedly falsifying its accounts.
We have never held Otkritie (rated sub-investment grade) and currently do not hold any positions in its largest stakeholders; which include Lukoil and VTB bank. Citing ‘elevated volatility of the bank’s customer deposits, which puts pressure on its liquidity position’, Moody’s placed Otkritie’s rating on review for a downgrade last month. According to the rating agency, the customer deposits fell to ‘18% of the bank's liabilities as of 1 June 2017, largely driven by material outflows as both non-state pension funds and several large corporates withdrew funds.’
We often discuss the merits of quasi-sovereign holdings and the importance of their implicit support from the government. In this example, Otkritie is actually privately owned but systemically important to the country’s banking system; and as such received a bailout. As regular readers know we prefer to hold positions in high quality government-owned securities, which offer sufficient risk-adjusted spread cushion. One example could be a position in Russia state-owned-and-run Vnesheconombank (VEB) 5.942% 2023s. The bank has a very high probability of support from the Russian government, according to Moody’s. The ratings agency goes on to comment that ‘VEB is closely linked to the government, which gives VEB good access to state funding and capital when these are needed to finance various projects of government importance.’ So far this year the bond has rallied over 4 points, and continues to offer an attractive expected return (with yield) above 9.2%, and over two notches of credit cushion.