Russian banks got off to a bright start to 2011 in the international bond market with credits from state development bank VEB down to upstart consumer finance firm Tinkoff Credit Systems all in action. But the outlook soon darkened for reasons home-grown and foreign born leading analysts to caution about seeing more new Russian bank paper anytime soon. A scandal at Bank of Moscow in June damaged sentiment towards the sector that was only compounded by turmoil in July and August in global capital markets.
"Secondary market curves have widened in the recent correction and this will dissuade banks from pricing new Eurobonds," said Maxim Raskosnov, a banking analyst at VTB Capital in Moscow. "Theyre not in a position to overpay for the funding and as there is not much lending portfolio growth, the need to be cost efficient is crucial."
The question of need for Russian banks to tap the market had already been debated in the first half of the year, but then, the debate was in different terms. Banks were reluctant to borrow then from the Eurobond market because deposit growth was running high total individual deposits have grown from Rb3.81tr in January 2007 to Rb9.82tr in January 2011, according to the Central Bank of Russia and consumer lending low, so there was little need for dollar borrowing despite the low rates on offer.
"Post-crisis, the Russian banks have had a lot of capital and liquidity and lower ambitions to grow, which has made them less willing to tap the Eurobond market," says William Weaver, head of CEEMEA debt capital markets at Citi in London.
That reluctance has grown over August. Analysts say that in large part as a result of the Bank of Moscow situation and the central banks revocation of a licence for another lender, AMT Bank which highlighted the opaqueness of many institutions, investors are differentiating further between strong names with links to the government and other banks which could be less well supported in times of extreme difficulty.
Russia has a history of having supported its banking sector over the recent crisis, but some analysts saw the central banks AMT Bank decision as evidence that it intends to be much more stringent than in the past, provoked, perhaps, by the embarrassment of Bank of Moscow having much weaker financials than thought. State-owned VTB had bought Bank of Moscow in April but uncovered an $8bn hole in the accounts in June, leading to a bail-out of the lender.
Bankers say that quasi-sovereign banks would still have access to the Eurobond market in the fourth quarter at yields only 10bp-15bp wider than in pre-summer levels. That is because US Treasury yields have fallen so fast in the global flight to quality. But much wider credit spreads for lower rated banks means that they have been harder hit.
"If you look at the secondary trading levels, you can see that particularly over August its obvious that investors are markedly differentiating between highly rated state-owned banks and the others," says Weaver. "The highly rated names have certainly outperformed."
Take Alfa Bank, one of the only privately-owned banks with a liquid curve, for example. It is far from being one of the weaker banks in Russia but its $1bn 7.75% 2021s fell around three points from mid to late June, from 103 to 100 on the discovery of the Bank of Moscow problems, and only recovered two points when the state bail-out plan was announced. After the deepening of the eurozone crisis that follwed immediately afterwards, the bonds then fell to 97.2 by the end of a volatile August.
State owned names such as Sberbank held in more firmly. Its bonds lost less than two points in the last half of June and then stabilised. Alfa Bank now trades 225bp wider than Sberbank in 10 years, up from 156bp at the start of June.
However, despite the reluctance of these banks to issue senior Eurobonds, rumours of subordinated issues from the Russian banking sector over the next few months abound. Some banks are expected to refinance issues that are either maturing or have approaching call options. "There has been news about some of the Russian banks considering placement of subordinated debt, but its not out of a desperate need to raise new capital, but wanting to replace existing maturing or amortising subordinated debt," says Raskosnov.For the start of 2011, Russian bank Eurobonds looked to be in the midst of a regeneration, with a variety of issues akin to 2007. But investors are more wary than four years ago, and are cautious that Russian banking may not survive a second bout of global recession as untarnished as after the first.