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Russia Bank Cull Not Over as Rating Firm Says Owners to Pay

Russia Bank Cull Not Over as Rating Firm Says Owners Must Pay Up

(Bloomberg) -- Even a cull that has shut one in three Russian banks since 2014 isn’t enough to clean up the financial sector, according to the head of a domestic rating agency that’s been a thorn in the side of local lenders.

With private investors uninterested in helping out, some bank owners will need to recapitalize their struggling businesses or the state will have to brace for more interventions, Ekaterina Trofimova, chief executive officer of ACRA, said in an interview.

“There is long, hard work ahead to strengthen the financial sector,” the head of the ratings firm said. “Many banks, including several big ones, need to be cleaned up because the amount of problem assets that they’ve accumulated over the last five to six years has stayed pretty much the same and, in some cases, isn’t adequately provisioned.”

While Russian banks’ profits have recovered since the end of the longest recession in two decades late last year, the numbers conceal an under-capitalized sector still facing existential threats, Trofimova said.

Analytical Credit Rating Agency estimates that about 14 percent of lenders’ assets are problematic, compared with the central bank’s official figure that non-performing loans make up 7.6 percent of the top 30 lenders’ assets. Capital levels at about a third of Russian banks are either weak or critical, according to the Moscow-based firm.

Crucial Judgment

Still, for ACRA to name names can be risky. An Alfa Capital investment adviser who questioned the stability of four of Russia’s biggest private lenders was summoned by the central bank and will now face the scrutiny of regulators.

ACRA’s judgment of a lender is critical because of a new law requiring Russian banks to be rated investment grade by a domestic agency if they want to attract money from pension funds. In effect, that means ACRA or its rival Expert RA.

So far, only 21 percent of Russian bonds have an ACRA rating, though 79 percent of banks’ bonds have been graded. Some banks that received domestic ratings have declined to publish them, according to ACRA’s Trofimova.

Provided there are no “artificial delays of the process from the issuers themselves,” then banks that are rated by the main international agencies will be able to obtain gradings from local agencies by the end of the year, Trofimova said.

ACRA’s tough talk suggests the central bank faces an uphill task in finishing the task of cleaning up Russia’s banking system. As recently as July, the nation’s 15th-biggest retail deposit holder, Jugra Bank, collapsed, triggering the largest-ever payout from the state’s Deposit Insurance Agency.

Emergency Measures

After spending more than 3 trillion rubles ($50 billion) on emergency measures to keep the system afloat from 2014 to 2016, the Bank of Russia is looking for less expensive ways to intervene. Despite more than a third of this money going to bail out failed lenders, the cash often failed to resuscitate the struggling institutions.

Russia Bank Cull Not Over as Rating Firm Says Owners to Pay

ACRA was created as a domestic alternative to the Big Three rating firms after President Vladimir Putin complained about the international agencies’ treatment of Russia. But it hasn’t shied away from harsh judgments. Last month, it assigned a rating to Bank Otkritie FC, the country’s biggest private bank, that was below the threshold for investment by pension funds and for its securities to be used as collateral for central-bank loans.

State-owned VTB Group, Russia’s second-biggest lender, commissioned an ACRA rating last year but it hasn’t been published yet. CEO Andrey Kostin has complained about the rating firm’s methodology, saying its assessments are even harsher than those of S&P Global Ratings, Moody’s Investors Service and Fitch Ratings.

‘Liquidity Down’

The market is already feeling the pinch from the ban on buying unrated assets, which went into effect last month and which will become even more restrictive in January.

“Liquidity is down and spreads between buying and selling paper have widened -- there’s only demand for blue-chip bonds,” said Dmitry Borisov, head of Moscow-based AO IK Locko-Invest’s asset-management unit.

The biggest beneficiaries of the banking-sector consolidation will be state-owned banks and quasi-state lenders, which will expand their market share, according to Trofimova.

“When there was double-digit asset growth, the problems were eroded and covered to a degree by additional revenues,” she said. “Now, given virtual stagnation” in the economy and low interest rates, allowing the weakest banks to keep operating “is becoming dangerous to the stability of the system as a whole.”

--With assistance from Olga Voitova

To contact the reporters on this story: Anna Baraulina in Moscow at abaraulina@bloomberg.net, Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Paul Armstrong