The Central Bank of Russia (CBR) has started work on cleaning up the ailing Binbank (also known as B&N Bank), the regulator announced on its web site on September 21.
The CBR has given the bank an unsecured loan, but has not disclosed the amount. The regulator made a similar loan to Otkritie in August, which it later transpired run into the hundreds of billions of rubles.
All of the lenders that are part of BIN Group, including Rostbank, Binbank Digital and Uralprivatbank, will continue operation in a normal mode, CBR said, without specifying the size of a bailout package it will have to extend to the lender.
The terms of cleaning up are apparently very similar to those for Otkritie financial group, as there will be no credit moratorium or bail-in.
The bank is the second to be included in the new Banking Sector Consolidation Fund (BSCF) that was set up earlier this year and also used to rescue Otkritie. Apparently the fund was established for the express purpose of dealing with commercial banks that get into trouble but are too large to bail out.
The advantage of the fund is it allows the CBR to take direct control of a troubled bank and using its reputation as the backer, keep the troubled bank’s doors open and so reducing the cost of the rescue. Previously the CBR would simply pull a bank’s licenses and then use the Deposit Insurance Agency (DIA) to reimburse depositors – and extremely expensive way of cleaning up the sector. The CBR has spent over $18bn on rescuing banks this year, or more than 1% of GDP.
This week the CBR admitted it has lent Otkritie RUB1.1 trillion ($19bn), which is over 1% of GDP on its own and is only slightly less than the estimated RUB1.3 trillion the federal budget deficit for this year. Russia simply cannot afford to bail out banks with this sized hole in their balance sheets.
Binbank owner Mikhail Shishkhanov was quoted by Vedomosti as saying that the cleaning up of the lender may take between three and eight months, during which Binbank will be operating in a normal mode.
"This is difficult, hard work, and I will put all effort into it, working 24 hours a day," he said.
According to Shishkhanov, who has a strong reputation as a good banker, the main reason for Binbank's difficulties were toxic assets it inherited from its CBR-sponsored rescue of MDM Bank, formerly one of Russia’s best commercial banks, which BIN acquired in late 2016.
"I didn't expect MDM Bank's assets to be so bad," Shishkhanov said, adding that he expects to retain a 25% share in the lender, while the remaining 75% will be nationalised.
Otkritie also ran into trouble from a failed rescue: it received funds from the CBR to rescue Trust bank, but botched the job and only increased its problems, according to the CBR.
Rostbank also added to BIN’s woes. It needed over RUB600bn, entirely supplied by BIN, to shore up its capital, which was negative RUB70bn under its IFRS accounts at the end of the first half of this year, versus BIN’s entire capital of RUB83bn over the same period, Vedomosti reported. Fitch estimates that the combined capital of the two banks was a very thin RUB13bn. And the increasing prudent CBR regulations, especially on strategically important banks, have been eating into all banks’ capital. The hidden bad loans in MDM, for example, required more provisions than expected and so ate into capital.
Shishkhanov also said that BIN "fell hostage" to rumours spread in messengers and social media against the backdrop of cleaning up Otkritie.
The CBR report on banks for August show that BIN 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.
The CBR said on August 20 that outflows from Binbank have continued in September, but without giving any details.
The so-called Garden Ring banks, the leading commercial banks that have been included on the CBR’s “strategically important banks,” have all come under increased pressure since the spring as the CBR tightened its supervision of the sector. Problems first surfaced in June when Russia’s new domestic ratings agency Analytical Credit Rating Agency (ACRA) downgraded Otkritie to BBB, which precludes it from holding state money like pension funds.
That lead 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 (NLPs) removing yet more capital that banks could use to earn profits.
However, analysts are not expecting BIN’s problems to lead to a banking crisis as the rest of the sector is doing well and earned more profits in the first eight months of this year than in all of 2016.
The CBR is now assessing Binbank’s problems and says it will give more details as it gets them.
“Now we are in an active negotiating stage with the Bank of Russia. Our goal - with the support of the Central Bank through the Fund for the Consolidation of the Banking Sector – is to conduct an effective financial recovery of Binbank and Rostbank,” Shishkhanov said.