* 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)
By Douglas Busvine
MOSCOW, July 1 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)