Another “Garden Ring” bank may go to the wall, after the Central Bank of Russia (CBR) said that leading commercial lender Binbank has asked for a bailout.
Also known as B&N Bank (its international brand) Binbank is one of a set of major commercial banks, which include Financial Corporation Otkritie that was taken over by the central bank in September, that all have offices on the Garden Ring road that encircles the centre of Moscow, hence the nickname.
These banks have grown huge in recent years and have been used by the CBR to rescue other smaller banks; the central bank provides generous cheap funding to manage the takeovers. They are all also part of the 11 banks of “strategic importance” that are too big to fail. That also includes all the main state-owned banks.
In effect the CBR has been using the Garden Ring banks to consolidate the sector and build up a small circle of powerful commercial and state-owned banks to dominate the sector as part of its clean-up operation. Part of the deal is these banks are subject to much stricter regulation, which ironically is one of the sources of Binbank’s woes, according to a statement issued by the CBR on August 20.
The problem is that the fast growth and concentration of assets have undermined this plan and the Garden Ring banks in particular are all heavily exposed to each other, manly via bond holdings. Given too much almost-free money, instead of building up solid viable banking businesses, the owners have been tempted to go on asset-grabs to bulk up too fast.
That is proving expensive. This week the CBR admitted it has lent Otkritie RUB1.1 trillion ($19bn at current exchange rates) as part of its rescue package, smashing the previous $14bn record bail out package for the Bank of Moscow, which collapsed in 2011. The news came as a shock. In August the CBR said it had made an unsecured loan to Otkritie but declined to say how large it was. The regulator initially said it had found a $6bn hole in Otkritie balance sheet, but as bne IntelliNews reported in our banking cover story this month our own estimation, based on the bank’s 2015 accounts, was the hole would be north of $14bn.
The money spent on Bank of Moscow was more than was given to help the entire banking sector following the 2008 financial crisis, but the CBR’s “clean up” operation has clearly gone up to a new level. To put the cost of the Otkritie bailout into context, RUB1.1 trillion is over 1% of GDP and only slightly less than the entire federal budget deficit is expected to be this year.
Russia simply cannot afford bailouts of this size. The CBR has dodged the issue by taking direct control of Otkritie using the newly formed Banking Consolidation Fund mechanism, which allows the bank to continue to operate and avoids closing the bank and calling on the Deposit Insurance Agency (DIA) to reimburse trillions of rubles of depositor money.
Lenders under pressure
Now it appears that the CBR may be called on again to dish out another trillion rubles to rescue yet another big commercial bank that is also on the strategically important bank list.
Binbank is the 12th largest bank in Russia in terms of assets and has been growing extraordinarily fast in the last couple of years. The bank said it is under pressure from tighter regulations that the CBR has been slowly introducing, especially since the start of this year, and high levels of bad debt.
The CBR report on banks for August show that Binbank was the hardest hit by the spill over fears from the Otkritie take over.
"According to monthly local GAAP data, Binbank appeared the most affected name among private majors amid the liquidity stress at Otkritie FC. Particularly, the bank saw RUB13bn ($225mn) of net customer deposit outflows (including RUB22bn related to retail and RUB13bn to state clients, partially substituted by new non-state corporate accounts of RUB22bn) and about RUB 25bn of lost interbank funding, which was met with a sale of liquid debt securities (about RUB80bn)," Raiffeisen bank said in a note.
However, the other Garden Ring banks saw deposits increase: Alfa-Bank (+RUB 24bn); Credit Bank of Moscow (+RUB 9bn) and Promsvyazbank (PSB: +RUB 30bn). For PSB, the customer funding was supported by new short-term state-related corporate placing (+RUB 47bn), which covered RUB20.6bn of withdrawals by individuals.
The CBR said in an emailed statement on August 20 that the bank’s owners, Mikhail Gutseriev and his family, the richest family in Russia, had approached the regulator for help via the Bank Consolidation Fund. The regulator has yet to make a decision but said it will do so “in the near future.”
The Garden Ring banks have all come under increased pressure since the spring as the CBR tightened its grip on the sector. Problems first surfaced in June when Russia’s new domestic ratings agency the Analytical Credit Rating Agency (ACRA) downgraded Otkritie to BBB, which precludes it from holding state money like pension funds. That led to an outflow of capital from Otkritie: the bank lost RUB433bn (€6.2bn), or 26% of its client deposits, in June–July, ACRA said. Worries spilled over to the other Garden Ring banks as big state enterprises started moving their cash to the safer state bank coffers. Sberbank has been a big winner here and has large surpluses of liquidity now.
At the same time falling interest rates – the CBR cut rates again to 8.5% in September – have squeezed net interest margins, which is a major source of profits for Russia’s banks. And the CBR has increased the provisions banks have to put aside for non-performing loans (NPLs) removing yet more capital that banks could use to earn profits.
Binbank’s founder Mikhail Shishkhanov was born in Grozny, Chechnya and flourished in the southern republics on the Caspian sea that are hard to work in, even for Russians, Shishkhanov has told bne in multiple interviews.
More recently Shishkhanov tied up with the family of Mikhail Gutseriev, who is an ethnic Ingushetian but was educated in Grozny, to found and build up Binbank. The bank was founded in 1996 and Shishkhanov still owns 59%. Gutseriev came out of the 2008 crisis extremely well after he was persuaded by his bankers to take out a currency hedge on a large FX loan that paid out massively following the 2008 crisis. He then went on a shopping spree, accumulating, amongst other things, a third of all the warehousing in Moscow.
Previously, Gutseriev, who is Shishkhanov’s uncle, set up Binbank in 1992, originally as part of his financial-industrial group. It was only later in the mid90s that Binbank became a real banking business in its own right.
Binbank as a bank made its first money catering to Russia’s large Muslim population and made a killing from exploiting the Yeltsin-era tax-free regions that turned into giant tax scams. However, Gutseriev made the largest part of his money from founding and running Russneft (not to be confused with Rosneft) from 2002 that bought up and consolidated small oil fields that were too small for the oil majors to bother with.
Binbank, like Otkritie, has been favoured by the CBR and since 2010 has taken over a number of struggling lenders as part of a de facto consolidation of the sector including Moskomprivatbank, Rost Bank, and SKA-Bank.
Last year it took over MDM bank, which used to belong to banking prodigy Andrey Melnichenko and emerged from the 1998 crisis as the top commercial bank in Russia. However, after banking dealmaker extraordinaire Igor Kim bought the bank it fell on hard times. Binbank’s deal to buy MDM paralleled Otkritie take over of Trust Bank using CBR funds. The bank was of a similar size and profile, but went south thanks to a failed restructuring that contributed to Otkritie’s collapse.
No crisis yet
If Binbank goes belly up then the CBR could well be saddled with another enormous bill on the order of the one Otkritie is going to cost it. However, as bne IntelliNews explored in its cover story of the current issue of our magazine, “Russia’s Banking Sector on the Edge Again,” the CBR has clearly been anticipating this problem, which is why the Banking Consolidation Fund was set up at the start of this year and the DIA is being sidelined as the state can no longer afford to bail these banks out as they are too large.
So far, the problems seem to be contained among the Garden Ring banks, which also include the Credit Bank of Moscow that was just added to the list of strategically important banks, and Promsvyazbank, which recently boosted its capital with a perpetual bond.
The two factors that mean a full blown banking crisis is not on the cards for the moment is fact that the state-owned banks have increased their market share and now control between 55% and 64%, depending on sources, of the bank sector assets. Moreover, these banks are flush with cash as depositors’ retreat to the safety of state-owned entities that the CBR is bound to rescue.
In August all the state own banks saw deposits rise thanks to the “flight to quality” in the retail segment: VTB24 (+RUB64bn), Gazprombank (+RUB22bn) and Russian Agricultural Bank (+RUB17bn), against Otkritie FC (-RUB151bn).
Secondly, the banking sector has become much more profitable, earning more in the first eight months of this year than it earned in all of 2016. The profit of Russian banks in January-August 2017 reached RUB997bn ($17.3bn), according to the CBR, a m/m gain of RUB85bn, a slow month for Russia’s banks thanks to the long summer holidays. By September last year banks had earned only RUB533bn and earned RUB945bn for the full year.
This summer was a nervous time for bankers, but there has been no sector-wide run on deposits. While corporate deposits have fallen, they started falling at the start of last year, and have been more or less flat since last autumn. In other words the summer’s bank crisis is not visible in the deposits statistics. Even the slight dip in corporate deposits in the last few months is more than made up for by the rise in retail deposits, which have been growing strongly since the start of 2015.
And finally the acid test of nerves in the bank sector is the volume of repo deals banks do with the CBR. These are short-term loans taken from the CBR using a bank’s bonds and other securities as collateral. There was a clear spike in repo deals starting in June when ACRA downgraded Otkritie but it peaked at the start September when the CBR took over the troubled lender and, while still very elevated, the volumes have been falling since then. As of 1 September 2017, Otkritie FC accounted for the bulk of the CBR repo utilisation, having a total of RUB1.07 trillion due to the regulator (including non-repo facilities). In August, the repo limit was also tapped by Alfa- Bank (+RUB30bn), which however was not driven by refinancing needs. It remains to be seen what will happen to the repo market after Binbank’s request for help.
The Garden Ring banks all have very similar profiles. They are large and have been protected by the CBR as strategically important. They have all been used by the CBR to buy weaker banks that had their licenses pulled. They have all built up considerable non-core holdings in sectors other than banking. They all have issued bonds and they all have significant holdings in each other bonds. And they all have bought or control large pension and insurance funds.
This last one has also been a source of trouble. Following a pension reform, Russians could allocate part of their social payments to a private pension fund, which became sources of risk-free and regular cash for the banks, which used the money to fund their operations. However, following the 2014 collapse of the ruble the government grabbed this money and shows no signs of letting it go again.
They even share some of the same owners: amongst the major shareholders of Promsvyazbank is real estate mogul Boris Mints, who was a founding owner Otkritie until he sold out for unknown reasons in 2013.
Eyes will now turn to Promsvyazbank and Credit Bank of Moscow to see if they will also run into trouble and ask the regulator for help. However, according to bne sources many of the corporate clients that fled Otkritie went to Promsvyazbank, while Credit Bank of Moscow has probably been the most modest, and remains the smallest, of the Garden Ring banks.