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bne September 2017 Cover story I 23
The current crisis has followed a similar path. bne IntelliNews issued the first report of problems on Friday August 4 after market sources said Otkritie was “in trouble”. Commercial banks had spent the previous week cutting their exposure to Otkritie. That weekend the bank’s ATMs stopped working, which Otkritie blamed on “technical problems”, and things snowballed from there.
The market was already nervous after the CBR closed down major commercial bank Jugra in July and press reports
on Otkritie’s troubles only made things worse. Clients withdrew over RUB520bn
an emergency unsecured loan of an undisclosed amount as things started to get really hairy about two weeks after Otkritie’s problems became public. Otkritie and the central bank declined to comment on the details of the loan.
Loans are a last ditch measure for the regulator to stop a bank going bust. The logic is that it is far cheaper to give a bank a loan to shore up its capital than it is to pay for the mess that occurs if a big bank goes bust.
Predictably the bank’s shares and bonds started to tank. Otkritie’s $500mn of
bud, the CBR announced a rather unorth- odox fix to the problem. It has imposed temporary administration and taken
over 75% of the bank’s equity, placing it into the new Bank Sector Consolidation Fund. Instead of placing a moratorium on the bank’s credits and using the Deposit Insurance Agency (DIA) to bail out insured deposits, the regulator has made itself a bank owner. The logic is that if the bank is owned by the most solid owner any bank could wish for then Otkritie can continue business as normal. Crisis over.
At the time of writing the deal was
still only a few days old, but in all likeli- hood the CBR’s action will work and the nerves will fade.
Clean up
Next the CBR will have to dig into Otkritie’s books to see just how bad the damage is. The rehabilitation process
is supposed to take six to nine months. During the first stage (months one to three), the CBR will determine the real value of Otkritie's capital and its need for additional funding after scrutinising the asset base and loan impairments. The CBR has already said that the bank’s capital adequacy ration is likely to fall below the mandatory minimum as the temporary administrators make provisions for bad or fake loans and
so the bank is almost certain to need a large capital injection in this period. In the second stage, the CBR will proceed with bankruptcy prevention measures intended to restore capital adequacy measures and credit ratings.
“The closure sent shockwaves through the system”
($9bn) from the bank from July 3 through August 24, with corporate clients withdrawing RUB389bn and individuals withdrawing RUB139bn, according to the director of the central bank’s department for supervision of systemically important credit institutions Mikhail Kovrigin. That is 20% of the bank’s total assets. By the middle of August, reports appeared that even the owners were taking their own money out of the bank.
As summer wore on it became clearer and clearer that Otkritie was desper- ate for cash and selling everything.
The bank dumped half of its Russian 2030 Eurobonds, selling RUB395bn ($6.9mn). The parent company Otkritie Holding owned RUB831.96bn of the Eurobonds, or 74% of the entire issue, as of December 31, 2015.
It also sold off its bad loan portfolio and was aggressively tapping the CBR’s repo facility – the very expensive short-term financing facility offered to banks by the regulator. Otkritie was largely respon- sible for a spike in repo deals that rose to RUB516bn, of which Otkritie accounted for RUB330bn.
Four bankers told the Financial Times that the central bank also gave Otkritie
subordinated bonds due in April 2019 slumped 41.72 cents on the dollar on August 25 to 50.24 cents, the lowest lev- el on record after Russian press reported that the CBR was considering nationalis- ing the bank and transferring it to a new bailout fund in the last week of August. The notes were the worst-performing corporate dollar bonds in emerging markets this quarter after Petroleos de Venezuela SA, reported Bloomberg.
Then on August 29 the CBR had had enough. The situation was deteriorating rapidly so to nip a full-blown crisis in the
Russian Repo volumes RUB mn
www.bne.eu
Amount allotted, millions of roubles