Industry Forecast - Privately-Owned Banks In Crisis Mode - 02 OCT 2017

The Latest: On September 21 the Russian Central Bank (CBR) announced that it will nationalize B&N Bank, the country's 12th largest lender by assets, using the newly created Banking Sector Consolidation Fund to acquire a majority equity stake. B&N had earlier in the week requested a rescue due to mounting pressure on capital adequacy levels from problematic assets in its books, largely stemming from its merger with MDM Bank in 2016.

Implications: The intervention marks the second takeover of a private lender by the CBR in only a few weeks. Unlike Otkritie, the bank nationalised at the start of September, B&N Bank is not on the list of "systemically important banks" (lenders deemed too big to fail). Its rescue thus suggests that the central bank will not allow any bank to have a disorderly collapse. While this reduces the risk of a broader banking crisis unfolding due to a loss of confidence in the sector, concerns over the soundness of the country's privately owned banks have spiked. Recent developments also raise questions with respect to the CBR's regulatory and surveillance capabilities, and how they have managed the ongoing clean-up of the financial sector.

What's Next: Scrutiny of privately-owned lenders will intensify going forward. Alongside Otkritie and B&N Bank, Promsvyazbank and Credit Bank of Moscow are currently on the radar, particularly if fears of contagion provoke further deposit flight. Eurobond yields at both institutions have spiked in recent days, indicating rising investor caution. Relatively minor players only a few years ago, Russia's private lenders embarked on aggressive expansion drives after 2010, acquiring smaller failing competitors in part using cheap central bank credit. However, larger-than-anticipated problem assets on the books of the acquired banks have been among the triggers for the current problems, and may prompt further CBR takeovers or capital injections. In the meantime, with no clear exist strategy for the CBR in the near term, this will lead to a greater state role in the banking sector. Following B&N's rescue, the state accounts for over 60% of total assets.

Privately-Owned Banks Increasingly Under Pressure
Promsvyazbank Subordinated 2019 USD Yield, %
Source: Bloomberg, BMI

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