Ratings Zealot Spurs Russia Bank-Bond Rout as Purge Rolls On

(Bloomberg) -- With a banking purge grinding on and a government-backed ratings company proving unexpectedly harsh, bond investors are growing increasingly wary of Russia’s non-state lenders.

Eurobonds issued by Bank Otkritie FC, Promsvyazbank and Credit Bank of Moscow are the worst performers among their emerging-market peers this quarter, data compiled by Bloomberg show. Fund managers including Banque Audi (Suisse) SA recommend avoiding the notes after Otkritie, Russia’s biggest private lender, was slapped with a credit score in July that rattled the market and drove its yields to the highest since March last year.

Pressure in parts of the banking system is forcing investors to reassess liquidity risks amid anemic economic growth and a clampdown that’s seen central bank Governor Elvira Nabiullina revoke more than a third of all licenses since the start of 2014. High-yielding bank debt in the world’s biggest energy exporter is also suffering as investors weigh the economic impact of a hardened U.S. sanctions regime and crude trading near $50 per barrel.

“Investors will keep a more cautious eye on the second- and third-tier Russian banks,” said Apostolos Bantis, a credit strategist at Commerzbank AG in Dubai. “This is mainly driven by expectations that state support will not be as strong if the banking system comes under stress again.”

One gauge of the pain -- the outstanding amount of costly fixed-rate repurchase agreements lenders use to borrow from the central bank -- surged to 584 billion rubles ($9.8 billion) on Wednesday, the highest level since January.

That increase is probably linked to the demise of the country’s 15th-largest holder of individual savings, Jugra Bank, according to S&P Global Ratings. The revocation of Jugra’s license in July may have driven outflows from client accounts throughout the industry as depositors and counterparties review risks at major lenders, S&P said.

Jugra’s collapse will entail a record $2.9 billion compensation payout from Russia’s Deposit Insurance Agency, a safety net that was first expanded to help counter a banking crisis in the summer of 2004.

Read more: Bank of Russia Brushes Off Prosecutors to Close Down Lender

Black List

Then, the Bank of Russia shut down Sodbusinessbank amid money-laundering accusations, fanning rumors of a central bank black list that eventually sparked a cash crunch as banks stopped lending to each other. The run on some of Russia’s biggest private lenders led to the collapse of Guta Bank, the nation’s 22nd-largest by assets at the time.

Thirteen years on, investors are focusing on Bank Otkritie. Its Eurobond yields have surged more than 300 basis points since Russia’s ACRA credit-rating company assigned the lender a BBB- ranking on July 3, below the threshold for investments by pension funds and for its securities to be included in the central bank’s collateral list.

Cash Injection

Bloomberg reported on Friday that Bank Otkritie is holding talks for a significant capital injection with a new investor. Deposits fell by 104 billion rubles in June after government-related entities and businesses pulled funds, according to Fitch Ratings data. 

The yield on the bank’s April 2019 bond fell 24 basis points to 9.36 percent as of 2:36 p.m. in Moscow on Thursday.

Dollar borrowing costs at Promsvyazbank and Credit Bank of Moscow have also surged more than 100 basis points since the start of July. That compares with an increase of nine basis points to 3.92 percent for Russian corporate bond yields, according to a Bank of America Merrill Lynch Index.

“You feel the economic downturn’s biggest consequences in the banking sector, especially in the banks that have a risky loan portfolio,” said Ogeday Topcular, who helps oversee $300 million in fixed income as managing partner at RAM Capital SA in Geneva. Banks will “continue to suffer unless there’s huge growth momentum in Russia," he said.

Credit Bank of Moscow was cut to BB-, the third-highest non-investment grade, from BB on June 21 by Fitch Ratings, which cited a “significant” volume of potentially risky loans and other debt, estimated at about 127 billion rubles as of the end of 2016.

Delinquent Debt

Promsvyazbank’s share of overdue loans at the end of 2016 more than doubled over the year to 8.5 percent. At Otkritie the share was 7.5 percent, up from 4.9 percent at the end of 2015.

Otkritie and Credit Bank of Moscow declined to comment on the performance of their Eurobonds. Promsvyazbank’s press service said the drop in its notes was a standard market correction after growth and said that the bank’s $500 million sale in July, which was oversubscribed, shows there’s investor appetite for Russian banking debt.

Yannick Naud, the head of fixed income at Banque Audi in Geneva said he refrained from participating in Promsvyazbank’s Eurobond sale, citing concerns about deteriorating asset quality in the sector.

“It’s best to stay away from smaller Russian banks at the moment,” he said.

--With assistance from Anna Baraulina and Jake Rudnitsky

To contact the reporter on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Alex Nicholson, Paul Abelsky