Sobering up: A purge of Russia’s banks is not finished yet

WHEN Elvira Nabiullina took over the governorship of the Russian Central Bank (CBR) in 2013, she faced a bloated and leaky finance sector with over 900 banks. Since then, more than 340 have lost their licences. Another 35 have been rescued, including, in recent months, Otkritie, once the country’s biggest private lender by assets, and B&N Bank, its 12th largest. The costs have been steep. According to Fitch, a ratings agency, over 2.7trn roubles ($ 46bn, some 3.2% of GDP in 2016) have been spent on loans to rescued banks and payments to insured depositors. Fitch reckons another few hundred banks could go before the clean-up concludes. More large private banks are whispered to be among them.

The CBR has rightly been praised for preventing a wider crisis and undertaking a clean-up during a punishing recession. Non-performing loans are at a manageable level, of around 10%. Bringing Otkritie and B&N under CBR stewardship calmed panicked markets. Yet nationalisation also raises questions about oversight and competition. Alexei Marei, recently departed chief executive of Alfa-Bank, now Russia’s largest private bank, has called the CBR’s dual role as regulator and owner an “enormous conflict of interest”. The share of the state in the banking industry has climbed to about 65%. Ms Nabiullina herself admits the need to bring it down.

Such concentration in state hands is not new. Russia’s banking sector has long had a chaotic private sector and an outsized, though stable, state one. It is anchored by a well-run behemoth, Sberbank, the successor to the Soviet Union’s savings banks, which controls about one-third of banking-sector assets. In the wake of the Soviet Union’s collapse, more than 2,000 new banks popped up, many engaging in speculation, asset-skimming and money-laundering. Early attempts at reform met fierce resistance—the last central banker to embark on a purge was murdered in central Moscow in 2006. Booming oil-fuelled growth helped cover up problems in the 2000s, but following the financial crisis of 2008, many lenders failed and state banks consolidated their hold on the sector.

Ms Nabiullina has made reshaping the banking system a priority, and secured the backing of President Vladimir Putin. The regulator intensified oversight and tightened standards, including capital-adequacy and liquidity requirements. The changes amounted to a “paradigm shift”, says Kirill Lukashuk of ACRA, a Russian ratings agency.

Early on, the CBR focused on stemming shady capital outflows and purging “pocket banks” that serviced their owners’ businesses. The CBR reckons nearly $ 40bn left the country in “dubious operations” in 2012 alone; in 2014-16 just over $ 10bn left. Ms Nabiullina has complained to Mr Putin that many rogue bankers also flee the country after transferring funds abroad. (Bankers joke that a situation with no way out has only three ways out: Domodedovo, Sheremetyevo, and Vnukovo—Moscow’s three international airports.)

As the oil-price collapse and Western sanctions sent Russia’s economy into recession in 2014, many banks began to wobble. To avoid a string of destabilising collapses, the CBR offered cheap financing to other banks willing to absorb the troubled lenders. Among those who participated in the scheme were Otkritie and B&N. Since 2016, attention has turned to bigger banks, many long considered politically untouchable. Early this year, the CBR created a new rescue mechanism, the Consolidation Fund, to absorb troubled bigger banks. In August Otkritie became the first casualty, following a run on its deposits; in September, B&N followed.

Otkritie and B&N, which together accounted for about 5% of banking assets, were typical: they grew aggressively through acquisitions, indulged in related-party lending and were mismanaged. Fitch’s Alexander Danilov says private banks’ owners often see them not as stand-alone businesses, but as cash cows for their other interests. The CBR reckons that repairing their balance-sheets will cost around 800bn roubles. It accused Otkritie of overstating the value of government bonds on its books. The two banks will be merged and placed under the stewardship of Mikhail Zadornov, a respected former finance minister. Officials speak of cleaning up and privatising the resulting bank after a few years. Yet many doubt that a healthy private lender will emerge. For Mr Danilov, the challenge is akin to “making a sober man from two alcoholics”.

But Mikhail Matovnikov, an analyst at Sberbank, argues that “rumours of the death of private banking are overblown”. He notes that despite the state’s advance in banking since 2013, the share of deposits and credit taken by the ten biggest private banks has not fallen. Nimbler retail banks, such as Tinkoff, Russia’s leading online bank, have also found ample opportunities to expand. Oliver Hughes, Tinkoff’s British boss, says the right business model can still offer “enormous reward”.

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