It seems improbable that the closure of Yugra — Russia’s 33rd lender by assets —could cause a 10 point sell off in the subordinated debts of CBM and Otkritie, but the chain of events leading from the bank’s closure to the bond crash shows the precariousness of the Russian banking system’s position.
Analysts attribute the recent sell-off to three events: Bank of Russia withdrawing Yugra’s banking licence, Otkritie receiving a negative report by Russia’s rating agency ACRA, and, most recently, the newspaper Vedomosti publishing the contents of a note by an Alfa Capital analyst questioning the stability of Russia’s private banks.
Whether well informed or not, that a single analyst email, plucked out of the thousands of buy and sell recommendations made every week, could cause a further sell-off is evidence of just how nervous international investors have become in Russia.
Alienating the international market is something no central bank could want to endorse. While Russian domestic investors are big buyers of any Russian debt, international interest in Russian bonds is an important component of order books, accounting for 89% of a recent $600m tier two trade from CBM.
It seems perfectly possible that a country which has closed around 300 (mostly tiny) banks, yet has around 500 remaining, could close a few more. The clean-up of Russia’s banking system is no doubt a positive for investors in the country, but fears that their investments could be next for the guillotine are not.
Otkritie is the largest privately owned bank in Russia and is identified as a systemically important bank by the Central Bank of Russia. Yet the regulator seemed to let rumours about the bank’s fate drive sentiment unchecked. It did eventually step in to give Otkritie a liquidity injection, but only after the bank’s deposits had dropped by Rb300bn-Rb350bn ($5.08bn), in June and July, according to ACRA, and its bonds by six cash points in the secondary market.
Bank of Russia should have been more supportive towards this large and important institution, by reacting quickly and being more communicative with the markets, rather than letting rumours and negative press headlines drive investors out. Given the importance of international investors to Russia, a better mechanism for dealing with turbulence that impacts a bank’s funding costs needs to set in place.
Otkritie is also the largest bank in Russia that has access to the capital markets — Russia’s state owned giants are under sanctions — and the successes, or failures, of its deals, fit into a narrative that the international appetite for Russian debt continues, despite US and European sanctions. In short Otkritie’s deals can be good, or bad, public relations for Russia.
This does not mean Otkritie has a clean bill of health. It is rated Ba3/B+/BB- and last week Moody’s placed the bank on review for a downgrade.
This is not to discredit the findings of ACRA, Russia’s ratings agency, which was expected to take a softer approach than international agencies to the Russian credit. Many analysts were already wary of Otkritie, on account of its organisational structure and relationship with its holding company.
CBM ended up tarnished by the same brush, despite its H1 results being relatively strong with it reporting increases of 16.6% in customer deposits and 1.9% in non-performing loans, and a capital adequacy ratio of 21.8%. Despite these not being the results of a distressed institution, CBM’s perpetual bonds fell nearly 10% over the course of July to trade at 90 last week.
Better communication from the central bank would have stemmed the panic. Russia’s authorities should not have let a credit worry became a sector concern.