Tags: russia | bank | crisis | lenders

Russian Banks Seen Vanishing as Crisis Accelerates Cleanup

Thursday, 16 April 2015 11:04 AM

Hundreds of Russian banks are poised to disappear as the worsening economic crisis and a central bank cleanup force them to merge or close.

High interest rates and sanctions over the conflict with Ukraine are squeezing the country’s more than 820 lenders just as central bank Governor Elvira Nabiullina is shutting mismanaged and under-capitalized banks at a record pace.

“Russia has far too many licensed banks,” said Christopher Weafer, a senior partner at Moscow-based consulting firm Macro Advisory. “Cutting the number to between 200 and 300 would be a very positive step.”

Sweeping away weak banks would help the economy by improving lending practices, reducing corruption and increasing transparency, said Weafer. It could also fortify the dominance of the largest state-owned firms, OAO Sberbank and VTB Group, as customers seeking safety migrate to those institutions. Meantime, some mid-sized lenders say they’re ready to take over competitors in what could prompt a wave of deals.

Billionaire Mikhail Fridman’s AO Alfa Bank wants to participate in consolidation by joining in the bailouts of failing rivals, Chief Executive Officer Alexey Marey said in Moscow this month. Vladislav Khokhlov, the deputy CEO of PAO Promsvyazbank, Russia’s 11th largest lender by assets, said the next 18 months will be marked by deals.

Crisis ‘Opportunity’

“The bank wants to and will participate in M&A transactions,” said Khokhlov, who is joining the board with responsibility for mergers. The firm would like to “dramatically increase” market share in lending to consumers and small- and mid-sized businesses, he said in an interview.

OAO Credit Bank of Moscow, which postponed an initial public offering last year as the Ukraine conflict worsened, may assist banks experiencing problems.

“We are doing better than the market in terms of our balance sheet,” said Roman Avdeev, who controls Russia’s 15th largest bank. “So who if not us can use a crisis as an opportunity?”

The economy is poised to shrink 4.1 percent this year, hurt by sanctions and lower oil prices, a Bloomberg survey of economists showed. Russia’s banks trebled provisions for doubtful loans in 2014 as defaults by companies and individuals surged, according to central bank figures.

The pace of new lending slowed as the central bank more than doubled its key rate last year to 17 percent, before reducing it twice this year to 14 percent. By contrast, the benchmark U.S. federal funds rate is near zero.

‘A Must’

“Consolidation is absolutely a must,” said Igor Vayn, CEO of investment bank Renaissance Capital. “A lot of these banks are inefficient, can’t provide quality service and don’t provide their clients with prudential lending practices.” He predicted the number of banks could fall to 100.

Takeovers have been hindered so far by a lack of fresh capital in Russia because many companies can’t find buyers for securities to raise funds, according to Dmitry Dudkin, the head of fixed-income research at UralSib Financial Corp. in Moscow.

Russia’s Deposit Insurance Agency, which guarantees savings and provides loans to banks to rescue troubled lenders, facilitated some deals. OAO National Bank Trust was placed under the agency’s management in December and Bank FC Otkritie was picked to oversee a 127 billion-ruble ($2.4 billion) bailout.

Billionaire Mikhail Prokhorov, Renaissance Capital’s main shareholder, rescued Tavrichesky Bank in St. Petersburg, according to a central bank statement.

Revoking Licenses

While banks study possible combinations, Nabiullina is revoking banking licenses, including about 100 since the start of last year. In the past six weeks, the central bank stripped licenses from eight banks for risky lending amid suspicions that in some cases they enabled money laundering and financed terror, statements on the regulator’s website show.

Svyaznoy Bank ZAO, the country’s 96th largest lender, said yesterday the central bank restricted it from accepting deposits by individuals, or issuing new cards, for six months.

Moody’s Investors Service forecast Wednesday that bad loans at Russian banks would jump to 15 percent by the end of 2015 from 9.5 percent at the start of this year.

A bout of consolidation encouraged by central banks “is the kind of thing that happens from time to time,” usually during periods of economic distress, said David Green, a former Bank of England official and member of an independent commission on Cyprus’s banks. The U.K. cut the number of small banks by a third when Green was at the BOE in the early 90s by closing lenders, forcing mergers and increasing capital demands, he said.

Crises Past

The crisis is helping Sberbank gain market share in corporate deposits and retail loans, its first-quarter earnings indicate. The shares rose 39 percent this year through Wednesday, contributing to a 33 percent advance in the seven- company RTS Financials Index. VTB is down 13 percent.

Sberbank and VTB gained the most from the 2008 financial crisis as foreign firms shrank or left the country and privately-owned lenders were bailed out and taken over by state- run firms.

In 1998, most of the largest consumer lenders were wiped out after Russia devalued the ruble, defaulted on domestic debt and declared a moratorium on payments to foreign creditors. Today, Russia has foreign currency reserves of $300 billion.

Sberbank, which has about 45 percent of the nation’s deposits, won’t look to acquire banks during this crisis, said Chief Financial Officer Alexander Morozov. “Sberbank is ready to sacrifice its market share in order to preserve asset quality,” he told analysts on March 26.

Earnings Drop

Even the biggest banks are feeling the strain a year after sanctions were imposed against Sberbank and VTB over the annexation of Crimea.

Sberbank’s earnings fell 20 percent last year after it almost tripled provisions for loan losses. VTB’s profit plunged 96 percent in 2014, and it said in March it could face “significant losses” this year unless interest rates fall.

In a sign of concern about the industry, investors are demanding a premium of about 10 percentage points over U.S. Treasuries to own bonds of lenders including Home Credit & Finance Bank, Gazprombank and Russian Agricultural Bank. Many small banks don’t have traded securities.

President Vladimir Putin’s government committed 1 trillion rubles to support the capital of the banks, an amount equal to about 1.5 percent of gross domestic product, Standard & Poor’s said in a report in February. That’s about the same as during the last crisis, S&P said.

“The situation for Russian banks is worse than in 2009,” said Tom Adshead, a director at Adshead Consulting in Moscow. “Russia was then very dependent on foreign financing and that access was cut off, but everyone knew it was only temporary. This time, it’s going to be for a lot longer.”

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Hundreds of Russian banks are poised to disappear as the worsening economic crisis and a central bank cleanup force them to merge or close.
russia, bank, crisis, lenders
Thursday, 16 April 2015 11:04 AM
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