Russia’s Bad Bank Eyes $15 Billion Hole From Rescued Lenders

(Bloomberg) -- More than a year after Russia nationalized three leading private lenders, the magnitude of the losses is starting to take shape and criminal investigations are being opened against former owners and management.

The bad bank that took on some 2 trillion rubles ($30 billion) in non-performing assets from Bank Otkritie FC, B&N Bank and Promsvyazbank still isn’t ready to estimate how much it will ultimately recover. But Bank Trust PJSC’s Chief Executive Officer Alexander Sokolov is trying to manage expectations.

“About half are assets that can be worked with, where you can find a source of funding,” Sokolov said in an interview in Moscow. That means the Bank of Russia may have a harder time recovering much of the 2 trillion rubles it has provided in the lenders’ bailout. Trust will conclude discussions with the central bank about the recovery target by the end of the year, he said.

The central bank expects a recovery rate at the lower end of the 40 percent to 60 percent spread that it is targeting, Deputy Governor Vasily Pozdyshev told journalists this month.

The three private lenders collapsed last year under a mountain of bad debt, much of which was loaned to companies connected to their owners. Sokolov said that multiple criminal cases have been opened against the banks’ former management and shareholders, without naming the individuals. Most of them are minor, he said.

The rescue of these banks, treated as systemically important, contrasted with the central bank’s ongoing purge of the financial industry as it seeks to eliminate mismanaged and undercapitalized lenders. Since Governor Elvira Nabiullina took over the regulator in 2013, she has cut the number of banks in half, to less than 450.

Even among the salvageable loans that Trust took on, many involved related parties and were structured as sweetheart deals, according to Sokolov. They often included balloon payments due in several years without a reasonable financial model that would allow for the debt to be serviced, he said.

With Trust’s negative capital as of Nov. 1 at about 650 billion rubles, the central bank may face additional losses, according to Fitch analyst Alexander Danilov. The Bank of Russia has already provided about 1.3 trillion rubles in subsidized loans to Trust, in addition to the bailout package for Otkritie, B&N and Promsvyazbank.

“If Trust can save some assets that have already been provisioned for, the central bank’s losses would shrink,” Danilov said in a written response to questions. “If, on the other hand, it needs to create additional reserves, the losses will grow.”

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