August 18, 2017 / 10:40 AM / 2 years ago

Fitch: Flight to Quality Pressures Some Russian Banks' Liquidity

(The following statement was released by the rating agency) MOSCOW/LONDON, August 18 (Fitch) A flight to quality triggered by depositors' concerns following the withdrawal of Jugra Bank's licence could intensify as the clean-up of Russia's banking sector continues, Fitch Ratings says. This would put some weaker privately owned banks' liquidity at risk. The clean-up is likely to highlight further problem banks, adding to concerns about weak solvency positions at certain private lenders and uncertainty about how the Central Bank of Russia (CBR) may address these issues. The flight to quality will increase the dominance of state banks and a handful of private and foreign-owned institutions, and may leave smaller banks having to pay higher deposit rates to retain customers. The liquidity squeeze is evident from the use of expensive CBR repo funding, which spiked by about RUB300 billion in July after the CBR started the process of withdrawing Jugra's licence, and then by a further RUB280 billion in the first half of August. Jugra, a mid-sized private bank (market share: 0.3%), was deemed unviable due to weak asset quality and doubts about its financial reporting. Its closure caused tension among depositors and other creditors, who started moving their money to stronger private, foreign or state-supported institutions, although it had no interbank or bond borrowings and posed no direct risks to other banks. New regulations that stop lower-rated and unrated banks from taking deposits from state entities and private pension funds and make their future bond issuance ineligible for repo financing with the CBR also appear to have affected some banks' access to funding. Otkritie, B&N Bank, Promsvyazbank and Credit Bank of Moscow (CBOM, BB-/Stable) are among the banks that have been subject to Russian media speculation in recent weeks, regarding the liquidity position of some and the potential knock-on effect on others. Otkritie reported the largest funding contraction in July, according to CBR data released this week, of about RUB620 billion or a third of its liabilities, although about half of this seems to be unwinding of repo transactions and the remaining outflows were offset by RUB333 billion of borrowings from the CBR. The bank's liquid assets (cash, short-term interbank and unpledged bonds) at 1 August were sufficient to cover over 20% of customer funding. B&N reported a moderate RUB20 billion (2% of liabilities) outflow of interbank funding in July after a larger RUB50 billion (5%) reduction in June, which was mostly covered by borrowing from the CBR. B&N's funding from the regulator was a significant RUB51 billion at 1 August, and its liquidity buffer was sufficient to cover about 20% of liabilities. Promsvyazbank's funding remained stable in June and July, while its liquidity buffer at 1 August was solid (38% of customer funding). CBOM's loans and funding significantly increased in July, by about RUB250 billion, suggesting that some of the repo transactions previously on Otkritie's balance sheet may now be with CBOM. The liquidity buffer is reasonable, covering 21% of customer funding at 1 August. Russian banks could pledge eligible corporate loans to receive extra funding from the CBR, and larger institutions could benefit from extra liquidity support aimed at preventing wider systemic stress. Some form of resolution cannot be ruled out at banks where the CBR identifies significant solvency concerns, although bail-in legislation in Russia has been postponed indefinitely. One bank, Peresvet, was resolved through a combination of state support and voluntary bail-in earlier this year. The CBR provided limited support, with the remaining capital shortfall covered by senior creditors, who accepted large haircuts. The CBR considered a similar approach for Tatartsan's Tatfondbank but this did not proceed, and the bank went into insolvency. The banks we rate (representing about 60% of sector assets) have limited direct unsecured exposure to Otkritie, B&N and Promsvyazbank through bonds or interbank lending. CBOM has significantly reduced its exposures to other large privately owned Russian banks since end-1Q17. But there may be significant additional exposures in other banks that we do not rate, and other indirect risks such as corporate exposures to businesses related to Otkritie, B&N, Promsvyazbank and their shareholders. Contact: Alexander Danilov Senior Director, Financial Institutions +7 495 956 2408 Fitch Ratings CIS Limited Valovaya Street, 26 Moscow 115054 James Watson Managing Director, Financial Institutions +7 495 956 6657 David Prowse Senior Analyst, Fitch Wire +44 20 3530 1250 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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