The Daily Update - Russia Central Bank's bailout of private bank

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.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.