Russia's Svyaznoy Bank set to lose its license following serious breach of capital levels

By bne IntelliNews October 2, 2015

Jason Corcoran in Moscow -


The Central Bank of Russia (CBR) is expected next week to revoke the banking license of Svyaznoy Bank following the lender’s serious breach of its regulatory capital ratio, according to senior banking sources.

The toppling of Svyaznoy would be the first domino to fall among Russia’s consumer lenders, which are struggling to withstand the headwinds from a recession, falling incomes and rising household indebtedness. More are expected in the coming months.

A bid by rival Renaissance Credit to take out the troubled consumer lender has fallen apart after it withdrew in September its application with the Federal-Anti Monopoly Service.

Russian daily Kommersant reported on October 2 that the Deposit Insurance Agency was already assessing the bank for possible rehabilitation. Svyaznoy’s N1.0 capital adequacy ratio, the minimum, was dangerously low and has critically breached the 2% mark, according to senior banking sources.

Svyaznoy filed at least three lawsuits earlier this year accusing its founder Maxim Nogotkov of breaching loan terms. The lawsuits related to a RUB120mn loan that Nogotkov took out with the bank before the problems with creditors began. The bank requested the loan be repaid months ago, but Nogotkov has refused to comply, business daily Vedomosti reported.

Svyaznoy's capital adequacy level is believed to be at a critical level and near to the point where the central bank is obliged to intervene and revoke its license. In May, Forbes magazine reported that RenCredit shareholder Mikhail Prokhorov managed in a meeting to convince CBR Governor Elvira Nabiullina of the necessity to save Svyazynoy.

The toppling of Svyaznoy would be the first of several Russia’s consumer lenders to topple, which are struggling as the recession from the low oil price and Western sanctions takes its toll. Russian Standard Bank, controlled by businessman Rustam Tariko, is also under the microscope. It has sought another debt restructuring from its bondholders after already being bailed out twice this year. Its equity-for-debt swap is said by some bondholders to be "a complete writedown".

Vostochny Express is another consumer lender in trouble. On September 18, Moody's downgraded the bank's deposit and its debt ratings to 'Caa1' due to the "continued deterioration of the bank's asset quality and profitability because of the heightened risks in the bank's unsecured consumer loan portfolio".

Schoolboy trader

Nogotkov started in business as a 14-year-old schoolboy, selling cordless phones by mail order. Over two decades he built up a network of mobile and electronic stores with revenues reaching RUB111 in 2014 rubles thanks to sales of smartphones and tablets.

Svyaznoy diversified into money transfers and payments before Nogotkov decided to formally enter the banking world in 2010 by acquiring a small lender and renaming it Svyaznoy Bank. In the space of three years, he had built up a deposit and consumer loan operation by leveraging a network of more than 3,000 stores. 

Also in 2010, Nogotkov branched into jewellery after buying a franchise to open Pandora jewellery stores in Russia. A year later, he sought to replicate his retail success on the internet by building a Russian version of the online retailer Amazon.

Everything he touched quickly glittered and Nogotkov became one of the youngest entrants on the Russian Forbes rich list in 2013 with a fortune of $1.3bn. He was heavily leveraged, however, and Nogotkov's fortunes turned sharply over the past year as cheap credit dried up and he could no longer service his debt as his businesses stalled.

After last December's shock interest rate hike, many depositors started pulling their money from smaller lenders. Svyaznoy responded by restricting the amount of cash withdrawals from its ATMs to 25,000 rubles a day. The bank also suspended the issuance of new credit cards.

At the time, Kommersant reported that Nogotkov had approached the CBR about a reorganisation of his bank. Nogotkov rejected the report and said the bank was involved in talks with several potential investors.The most prominent was Prokhorov’s Onexim, where he had already racked up substantial debts. Those protracted talks ultimately came to nought.

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