Russia's Central Bank Rescues Otkritie After Run on Deposits

  • Clients withdrew about $7.4 billion of funds in June and July
  • Rescue is first of a bank designated systemically important

Russia seized control of stricken lender Bank Otkritie FC after the bank lost a quarter of its deposits in recent months and the return of its largest shareholder failed to steady investor nerves.

The rescue -- Russia’s first of a systemically important lender -- will see shareholders’ stake in the bank shrink to a maximum 25 percent and potentially be wiped out, according to a statement on Tuesday. Investors with subordinated debt may also see their paper become worthless.

The central bank said today it’s preparing emergency liquidity measures for other lenders after bailing out Otkritie, once Russia’s biggest private bank. Otkritie began experiencing massive deposit outflows after a surprise ratings downgrade, prompting clients to withdraw the equivalent of about $7.4 billion in June and July and sparking fears of contagion.

“Good for investors, probably bad for the system,” Dmitri Barinov, a portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said by phone. “They prevented the Lehman effect in the Russian banking system and created a too-big-to-fail mentality. How many other banks in Russia with the same sort of problems will need a bailout soon?”

Bank of Russia Governor Elvira Nabiullina has overseen a purge that has seen one in three lenders lose their licenses since 2014 as she attempts to eliminate under-capitalized institutions. This is the first time the cull has impacted one of the 10 lenders designated as systemically important by the central bank, with the bailout financed through a new fund created to assist in the consolidation of the banking sector.

Otkritie’s subordinated bonds due in April 2019 jumped 25 cents on the dollar to 69.97 cents as of 5:45 p.m. in Moscow. The yield on the bank’s dollar debt maturing in April 2018 dropped 27 percentage points to 23.4 percent, while the shares climbed 3 percent, their first gain in six days on low trading volumes.

“The measures to improve the bank’s financial stability will be carried out in cooperation with its existing owners and managers, which will ensure continuity of its activities on the banking-services market,” according to the central bank statement.

The regulator said it won’t place a moratorium on the bank’s debt servicing or use a bail-in mechanism. Otkritie is the eighth-biggest bank in Russia by assets, having ceded the title of top private bank to Alfa-Bank JSC last month. The rescue will take between six and eight months, according to the Bank of Russia. If Otkritie’s capital is negative after three months, its current shareholders will lose their stakes, it said.

Alfa Capital faced regulatory scrutiny after investment adviser Sergei Gavrilov suggested that four of Russia’s five biggest private banks, including Otkritie, could be forced into a central bank-mandated clean up by this fall. The investment firm later retracted the letter.

Otkritie clients withdrew 26 percent of deposits in June and July, totaling 433 billion rubles ($7.4 billion), making it increasingly dependent on central bank funding, according to the Analytical Credit Rating Agency, which put the lender on watch for a rating downgrade last week.

“This is good news across the board for the Russian banking sector,” said Ian McCall, who manages $185 million in emerging-market assets at First Geneva Capital Partners in Geneva. “Banking bonds which got pulled down with the recent Otkritie developments can now get pulled back up. ”

— With assistance by Olga Voitova, Natasha Doff, and Alexander Nicholson

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