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Second Russian Bank Bailout Sparks Jitters Over Financial Sector

The second bailout of a private Russian lender in less than a month is raising concerns about further potential rescues, but the risk of a wider financial crisis will likely be limited, market observers say.

The Russian central bank said Sept. 21 that it approved a rescue plan for one of the country's largest privately owned lender by assets, B&N Bank, after the latter requested a bailout, three weeks after the biggest, Otkritie Financial Corp. Bank, was bailed out following massive withdrawal of deposits.

Unlike Otkritie, B&N Bank is not on the list of Russia's systemically important lenders, but the regulator referred to it as a "significant lending institution."

"The situation at Otkritie was really a trigger for the privately owned banks," Ruslan Gadeev, a Russian banks analyst at Raiffeisen Bank International in Vienna, said in an interview.

Central bank Deputy Chairman Vasily Pozdyshev, cited by the Financial Times, said customers withdrew 56 billion rubles from B&N in September.

B&N, along with Otkritie and several other private lenders, acquired failing banks as part of a central bank-coordinated rescue operation in 2014. This beefed up B&N's balance sheet but left it saddled with problem assets. Reuters quoted central bank officials as saying it may need between 250 billion rubles and 350 billion rubles — up to $6 billion — in additional provisions for bad loans.

Gadeev said problem assets, along with liquidity problems, played a part in the bank's need for help because it would have been unable to sell off assets to restructure.

"Both factors are playing together," he said.

Economy under pressure

Russia's economy has been impacted by falling oil prices, rising inflation and Western sanctions following the country's annexation of Crimea, with knock-on effects for the banks. The central bank closed more than 300 lenders in its cleanup effort, leaving a total of about 600 active banks.

B&N Bank shareholder Mikail Shishkhanov said in a statement that difficulties faced by the banks taken over by B&N were more serious than initially expected due to current economic conditions. He cited JSC Rost Bank, whose bailout has been overseen by B&N since 2014 and OAO MDM Bank, acquired by B&N Bank's shareholders in 2015.

"Financially [B&N] wasn't one of the best private banks," said a Moscow-based analyst who declined to be named. "They had some problems with profitability."

He said there had been no signs of stress but that "it may have been different underneath." There had been little sign of panic among depositors on the streets of Moscow following the news of the rescue, he said.

Nevertheless, he stressed that it was difficult to assess exactly what the impact might be on the rest of the sector. Central bank officials said their actions were designed to avert a domino effect within the financial system.

The bailout will help protect against a wider crisis, Olga Naydenova, a bank analyst with brokers BCS Prime in Moscow, said in an interview.

"Following the bailout, this will not have an impact on payment processing, corporate clients and retail customers," she said.

Smaller banks could be hit

But some other banks that took over problematic lenders as part of the central bank's financial sector cleanup could face troubles, according to Raiffeisen's Gadeev. He declined to say which might be potential candidates for bailouts.

He said one of Russia's largest banks, Promsvyazbank PJSC, had been involved in the 2014 cleanup but had made good progress in dealing with nonperforming loans. The bank said Sept. 20 that it did not see an impact from B&N, Reuters reported.

B&N's Shishkhanov told RBK newswire Sept. 21 that the state would take 75% of B&N during a three-to-eight-month recovery process, while the remaining 25% would remain in the hands of the current owners.

The central bank "is not going to be the ultimate shareholder," the unnamed Moscow-based analyst said. "This is a transitional agreement."

As of Sept. 21, US$1 was equivalent to 58.03 Russian rubles.