Russia's Uniastrum to merge with Orient Express as banking consolidation accelerates

By Jason Corcoran in Moscow July 7, 2016

Russia's Uniastrum Bank is set to merge with troubled consumer lender Orient Express as the consolidation of the Russian banking sector accelerates. In another potential deal, it was reported billionaire Viktor Vekselberg may take control of a bank controlled by fellow oligarch Mikhail Prokhorov.

Uniastrum, which was sold by the Bank of Cyprus to Russia's Regional Credit bank a year ago, will take a 40% stake in Orient Express if the Federal Anti-Monopoly Service (FAS) approves an application made on July 1. In June, Uniastrum took a 24.99% stake in Orient Express Bank after an issue of RUB3bn.

Orient Express, a consumer lender focused on unsecured lending and credit cards, has been desperately looking for an investor for over a year. Other potential suitors, who have fallen by the wayside, include Asian-Pacific Bank shareholders, Sovcombank and Czech-Slovakian consortium J&T, according to financial daily Vedomosti.

The bank, which has a large presence in Siberia and the Far East, has suffered from a poor performance due to the rapid growth of household indebtedness in Russia in recent years and the country's weak macroeconomic environment.

Baring Vostok, the private equity fund headed by American Michael Calvey, boosted its stake to 74.4% from 67% following the departure last year of secretive dealmaker Igor Kim.

Fitch said in a report that Orient Express and Russian Standard Bank are "the most vulnerable" of the specialist consumer lenders due to their low capital adequacy ratio. Moody's in September downgraded its credit rating due to a continued deterioration of the bank's asset quality, its low capital buffer, which has been eroded by "substantial net IFRS losses".

Based on Fitch calculations, loan losses (loans overdue by 90+ days) reached 29% of the credit portfolio in mid-2015, and 27% at the end of 2015.

The assets of the merged bank would total about RUB260bn, which would allow the entity to enter the top 40 ranking of lenders in Russia. However, Uniastrum has its own problems and was operationally loss-making last year.

In a separate deal, billionaire Vekselberg may be set to take control of Prokhorov's International Financial Club (IFC) bank.

Vekselberg, whose Winterlux entity already owed a 19.7% stake, has doubled its stake in the bank to 39.4%, Vedomosti reported.  Prokhorov's Onexim controls 47.45% of the shares but the businessmen is seeking to offload all of his assets after his media holding RBK incurred the wrath of the Kremlin.

Prokhorov, who also owns a consumer Russian Credit and investment bank Renaissance Capital, is seeking buyers for his busineses just three months after his business offices were raided by the Federal Security Service (FSB).

Onexim, along with IFC and RenCap, were raided by the FSB after RBC reported on the business dealings of his daughter Ekaterina and her husband Kirill Shamalov.

The raids on Prokhorov's businesses triggered a run on deposits at IFC. Wealthy individuals withdrew almost RUB10bn ($156mn) from the lender in the same month as the FSB inspections.

Consolidation in the Russian financial system is accelerating as the Central Bank of Russia (CBR) cleans up the bloated banking sector and as stronger lenders increasingly buy up weaker ones. In September, Promsvyazbank, a leading commercial bank, took over the well-respected Vozrozhdenie Bank and one of the very few mid-cap Russian banks to be listed.

Likewise, the CEO of Renaissance Credit bank, Alexey Levchenko, told bne IntelliNews in September that it is on the lookout for acquisitions, while Tinkoff Bank has acquired several loan books from beleaguered rival Svaznoy Bank.

The appeal of merging is that it is the path to more state support: FC Otkritie and Promsvyazbank have already been included on the list of "systemically important banks" introduced by the CBR last year, which guarantees them bailouts if they get into trouble. If the other mergers go through, then the merged banks will probably also be given strategic status. Credit Bank of Moscow and B&N Bank have also been active, snapping up smaller rivals, who have been caught out by Russia's deepest recession since 2009.

The upshot of all these deals is that while the biggest state-owned banks will continue to dominate the top of the list, the swathe of second-tier commercial banks will be radically transformed.

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