Another bailout of a private Russian bank, this time of B&N, the 12th largest bank by assets, has been on the newswires. On Thursday the Central Bank of Russia announced that it will bailout B&N Bank although details are limited at this stage. This is perhaps interesting as B&N was not, unlike Otkritie, on a list of banks deemed as systemically important in Russia. But the Central Bank was keen to avoid a ‘domino effect’ and has intervened.
Another bail-out, so soon after Otkritie in August, is negative for sentiment. However, the Russian Central Bank has been proactive in addressing weaknesses within the sector and has already shut down a third of banks seen as being too weak and undercapitalised. Moreover, the Central Bank has a list of 11 banks it has designated as systemically important (SIBs) and these banks have rigorous liquidity and capital requirements and are subject to greater scrutiny but they are also able to rely on liquidity from the central bank. Starting from 2018 these banks will also be required to comply with the Basel III Net Stable Funding Ratio requirements. Moody’s estimate that the SIBs comprise 67% of Russian bank assets.
In a recent (15 September) review S&P affirmed its long-term foreign currency rating on the Russian Federation at BB+ with a positive outlook. They view the banking system as ‘fragile’ but note that Russia has ‘strong external and fiscal balance sheets’ and expect some improvement in the economy, expecting GDP growth to recover to 1.8% for 2017.
S&P note the vulnerabilities of the financial sector and estimate: ‘The size of funding provided by the CBR to resolve ailing banks and make depositor insurance payouts has exceeded 2% of GDP over the last few years. The cost will increase with the rescue package for Bank Otkritie and might become even higher if other relatively large private banks require CBR support.’ In dealing with this, ‘the government has not explicitly used budget funds’ but even when S&P factor this liability and the foreign debt of Vnesheconombank (VEB) they still project that government debt net of liquid assets will remain below 15% of GDP over the 2017-2018 forecast period; but there will be some draw-down from the reserve funds and domestic market issuance to fund any deficits. Low government debt levels remains a key credit strength for Russia.
Similarly, Fitch noted after the Otkritie bail-out that they did not see it having a material impact on the sovereign balance sheet: they estimated that the government had used 3.7% of 2016 GDP (RUB86tn), or RUB3.2tn since 2014, to bail out the sector. So far reports put the cost of the Otkritie bailout at USD6.9bn and the Vasily Pozdyshev, the Central Bank Governor, is reported to have said that based on preliminary estimates B&N and its affiliates would need 250-350bn(~USD6bn) roubles in additional provisions for bad loans.
Arguably, one of the biggest uncertainties for Russia remains the sanction situation. But S&P have already factored this increased uncertainty into their assessment and they assume the sanctions implemented in 2014 by the US and Europe will remain in place to 2020: certainly any removal by the US is likely to be more protracted as it now requires Congressional approval. However, as we have noted before, Russia has proved adept so far at dealing with the sanctions given its sizeable reserve and asset buffers. Plus, it has been effective in finding alternative funding sources by making a number of large multi-year energy deals with China.