Russian bank Otkritie significantly reduces its holding of Russia 2030 Eurobonds

Russian bank Otkritie significantly reduces its holding of Russia 2030 Eurobonds
By bne IntelliNews August 18, 2017

Wobbling Russian bank Otkritie has dramatically reduced its holding of Russian sovereign Eurobonds that mature in 2030.

Previously, the bank was the largest single holder of the bonds. The bank reported it held a 60% share in the entire 2030s worth RUB496.2bn (€7.14bn) at the end of 2016.

However, according to Otkrytie’s quarterly report the holding has fallen by about 85% to RUB85.4bn (€1.2bn equivalent) worth of the Russian sovereign Eurobonds. The bank appears to have been selling the bonds all year: the report also said the holdings in the 2030s declined from RUB171bn (€2.5bn) at the start of 2017 to RUB 121bn (€1.7bn) as of 1 April 2017.

“Although it is impossible to estimate the completeness of the 2030s ownership, we believe that the Russian banks and companies hold the lion’s share of the 2030s,” Raiffeisen Bank said in a note.

These bonds are in play, as they may be included in a Ministry of Finance plan to swap $4bn of sovereign debt later this year for longer maturities. The ministry is getting ready to swap the debt and buy back the outstanding notes due 2018, 2028 and 2030, reported Raiffeisen. The swap amount would be capped at $4bn by the 2017 budget law.

“Although Russia gave no timeframe for the swap, we believe that the transaction will be launched in the first half of September. We expect the swap to remove the issues with poor liquidity and/or shorter duration and to add medium-term to long-term new bonds which could positive for the market liquidity and sovereign risk pricing,” Raiffeisen said.

The problems with Otkritie emerged at the beginning of the month when bne IntelliNews sources said the bank was “in trouble” and that commercial banks were cutting their exposure to it.

Clients of Otkritie Bank then experienced disruptions with ATMs on August 5, which the bank attributed to an accident on power supply links to headquarters, amid reports that the Russian commercial lender was looking for ways to boost capital.

Otkritie’s woes are also showing up in the repo market, where banks used their bonds to borrow from the Central Bank of Russia (CBR) using its 10% short-term liquidity facility.

Borrowing by Russian banks making use of the repo facility soared to levels last seen at the end of 2016 this year. The total outstanding has shot up in the last month to RUB516bn ($8.6bn), according to official figures, the highest since January. The collapse of Jurga bank, the biggest commercial bank to die so far, is also thought to blame for the repo spike.

As concerns build, Otkritie has also seen a major outflow of assets. The bank’s non-consolidated assets downsized by 12% in July 2017 amid significant fund outflows. According to local GAAP figures, during the month the bank lost RUB320bn ($5.7bn) of corporate and RUB36bn of retail savings, which together accounted for 23% of total deposits as of 1 July 2017. Additional RUB262bn of funds were withdrawn by banks. In total Otkritie has lost $10.4bn in assets in recent months.

These outflows were partially refinanced by means of the CBR repo facilities, says Raiffeisen, where the bank was the major consumer of RUB repo line.  

Otkritie has also reduced its loan portfolio seemingly, to large extent within reverse repos, according to Raiffeisen, and the liquidity cushion. “As indicated by separate CBR disclosure, the regulator received Russian sovereign Eurobonds worth RUB 183bn (about $3bn) as collateral under repo lines in July, i.e. Otkritie Holding might have partially transferred Russia 2030 securities,” says Raiffeisen.

According to the bank the deposit outflows were partially planned and related to the recent downgrade to BBB-(RU) rating assigned by Russia’s new domestic rating agency ACRA, which cuts the bank off from certain sources of funding including deposits of MinFin and non-state pension funds.

Meanwhile, the rest of the withdrawals were caused by the informational attack on the entity, according to the bank’s representative.

An Alfa Capital analyst caused a storm in the market this week with a note to clients suggesting that several major commercial banks, including Otkritie but also mentioning Promsvyazbank and B&N Bank, were in serious trouble and may need to be bailed out before the end of this year. The author of the report has since been reprimanded and faces possible disciplinary action, but the tension in the bank sector is now high.

So far no one is predicting a bank crisis. Otkritie is formally a bank of “strategic importance,” and as such should be helped by the CBR.

As of 1 August 2017, Otkritie was in compliance with regulatory liquidity requirements, having the N2 ratio (instant liquidity) at 74% (vs 15% minimum), N3 ratio (current liquidity) at 186% (50% minimum) and N26 (the LCR as adopted by the CBR) at 97% (80% minimum).

But it seems that the CBR is not taking any chances, as it has just increased the funds available via its repo facility to RUB 676bn as of August 16.