UPDATE 4-Accusations fly as Bank of Moscow gets record bailout
* Bailout bigger than expected, largest ever in Russia
* Hostile bid, management ouster revealed hole in books
* Bonds rally, VTB stock underperforms Sberbank
* VTB alleges fraud, Kudrin calls for criminal probe
(Adds VTB, minority shareholder, ratings agency comments)
MOSCOW, July 1 (Reuters) - Bank of Moscow received the largest bailout in Russian banking history on Friday after a hostile takeover bid by VTB revealed a gaping hole in the books of Russia's fifth-largest bank.
The $14 billion rescue package was bigger than expected and followed a central bank review Bank of Moscow's books that found bad loans totalling $9 billion, or nearly a third of its assets.
VTB accused former Bank of Moscow management, led by Andrei Borodin, of "fraudulent lending", and Finance Minister Alexei Kudrin demanded a criminal probe.
"We hope that law-enforcement agencies will launch an investigation, and expect foreign investigators also to do so," he told reporters in Ulan Ude, near Mongolia.
Borodin, a protege of former Moscow mayor Yuri Luzhkov, has fled Russia and is wanted on an international arrest warrant. He issued a statement saying he was shocked by the size of the bailout and called VTB's takeover of Bank of Moscow political.
"This latest announcement by the central bank that it will provide financial aid to VTB to help deal with alleged and non-disclosed problem loans at Bank of Moscow only further supports this conclusion," read the statement, issued in London.
Under the bailout, the central bank will fund a 10-year loan of 295 billion roubles ($10.6 billion) to Bank of Moscow from the Deposit Insurance Agency (DIA) at a rate of 0.51 percent.
State-controlled VTB, Russia's second-largest bank, will contribute 100 billion roubles to recapitalise Bank of Moscow.
Analysts said the scale of Bank of Moscow's problem loans -- 60 percent of which the head of the DIA said were "completely bad" -- was of great concern.
"The details that came out today addressed the support package, but not Bank of Moscow's balance sheet," said Alexander Danilov, a banking analyst at Fitch Ratings in Moscow.
"What kind of loan recovery there will be is still unknown," Danilov said, adding that Fitch would probably confirm Bank of Moscow's BBB- long-term foreign currency rating, now on review for a downgrade. Fitch rates VTB a notch higher at BBB.
The equity injection should take VTB's stake to the 75 percent threshold required to qualify for state aid. It will be paid for by VTB and conducted through two affiliated structures to meet legal requirements for the bailout loan to be disbursed.
VTB shares closed up 2.1 percent in Moscow, underperforming market leader Sberbank , which rose 5.1 percent. Shares in Bank of Moscow fell 0.3 percent in volatile trade.
Bank of Moscow's Eurobonds rallied after earlier being sold off on concerns that its failure to present its 2010 accounts to its annual shareholders meeting this week could trigger redemption clauses on $2.5 billion in Eurobonds.
Analysts said bond investors were betting that yields on Bank of Moscow bonds would fall, and their prices rise, to converge with returns on VTB paper as Russia's second-largest bank moves to consolidate control.
Bank of Moscow's 2015 dollar Eurobond yields around 5.4 percent, compared with about 4.2 percent on VTB's bonds of similar maturity .
"The central bank's action is very positive for bondholders but puts equity investors at risk," said ING strategist Chris Weafer. A Bank of Moscow default threatened "seriously negative consequences for the whole sovereign and corporate debt market".
TAKEOVER GONE WRONG
VTB paid $3.5 billion for a 46.5 percent stake owned by the City of Moscow and a blocking minority stake in an insurer that owns a further 17 percent earlier this year.
With minority support, VTB managed to oust managers loyal to Luzhkov, who was fired last year by President Dmitry Medvedev, but VTB failed to win direct ownership control after Borodin and allies sold a 19.9 percent stake to businessman Vitaly Yusufov.
Once VTB had secured control over Bank of Moscow, it found around 250 billion roubles in doubtful related-party lending to real estate projects. Borodin has insisted the loans are backed by sound collateral.
Yusufov said he would seek to join the consolidation effort, but if that is ruled out he would consider selling at a premium. "I don't think the current market price reflects the real value of the bank," he told Reuters.
The problematic takeover dealt another setback to VTB CEO Andrei Kostin, whose bank received a $6.4 billion bailout and an injection of hybrid capital in the form of subordinated loans from the state during the recent financial crisis.
It also marks a drastic failure of oversight by banking regulators and an embarrassment for Kudrin, who served as the supervisory board chairman of VTB until stepping down recently.
"Investors will start questioning whether this is a one-off event or a systemic issue stemming from deficiencies in banking supervision," said Okan Akin, emerging debt strategist at RBS. (Additional reporting by Darya Korsunskaya in Ulan Ude, Oksana Kobzeva in Moscow and Carolyn Cohn in London; Editing by Jessica Bachman and Will Waterman)
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