Russia bank rescue eases market concerns about contagion

* Central bank bailed out top-10 lender Otkritie

* Russian banking second index rises on rescue

* Otkritie bailout reduces risk of contagion - analysts

* Markets were nervous about health of other banks

By Andrey Ostroukh and Zlata Garasyuta

MOSCOW, Aug 30 (Reuters) - A central bank rescue of Russian bank Otkritie has eased market concerns that other banks could be in trouble, prompting banking stocks to reverse three days of losses.

Russia’s central bank stepped in on Tuesday to take at least a 75 percent stake in Otkritie, the country’s biggest privately-owned bank, to plug a hole in its balance sheet.

The bailout highlights problems among Russia’s banks and the challenge the authorities face in trying to clean up the sector. Bank of Moscow, a mid-sized lender, had to be rescued in 2011 but since then the central bank opted for revoking licences, shutting down more than 200 banks over the past two years.

The central bank blamed poor management for problems at Otkritie, exacerbated by excessive spending.

But the swift action to rescue Otkritie has gone a long way to reducing the risks of broader contagion, financial analysts said.

“Everyone is breathing a sigh of relief. The panicky mood has been dampened down,” Maxim Ryabov, a trader with Russian brokerage BCS, said.

The Moscow stock exchange’s financial sector index was up 1.5 percent at 1125 GMT on Wednesday after falling for three days in a row. The index is down 15 percent so far this year, underperforming the broader benchmark Micex index that has lost 10.4 percent since the beginning of this year.

Shares in Russia’s second-biggest bank, VTB, which is a shareholder in Otkritie, were up more than 6 percent, after having fallen for several days.

“The central bank cannot really allow to create an aura of vulnerability around a major bank because there are other banks that are rumoured to be in trouble,” Lubomir Mitov, Chief Economist for Central and Eastern Europe at UniCredit, said.

“So they basically took the step to ensure that nobody loses their money,” he said. “The whole idea is to create some sense of stability in the banking system”.

The central bank said that Otkritie’s obligations to creditors and bondholders would be honoured, reducing the risk of a domino effect taking down other banks.

Other Russian banks hold Otkritie bonds and loans they made to Otkritie on the interbank market.

Credit rating agency Fitch had already flagged up concerns over a number of Russia’s banks which could have liquidity problems because they had seen an outflow of deposits in the past few weeks or had borrowed heavily from the central bank.

“Otkritie, B&N Bank, Promsvyazbank and Credit Bank of Moscow 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,” Fitch said in a statement published on Aug. 18.

The central bank did not say how much money it would put into Otkritie, or where the cash would come from.

A 75 percent stake in Otkritie would be worth $51 billion, based on the current value of the 7 percent of the bank’s shares that represent its free float on the Moscow Exchange.

But the central bank is likely to pay much less for the shares held by investors.

Shares in Otkritie were down 0.5 percent on Wednesday. Yields on Otkritie bonds, which act as a gauge of the risk of owning the bank’s paper, fell to 36 percent on Wednesday, from a record high of 82 percent his shortly before the bailout on Tuesday.

Shares in Credit Bank of Moscow were 0.5 higher, Promsvyzbank shares rose 0.8 percent. The other bank mentioned by Fitch, B&N, is not publicly traded. (Additional reporting by Katya Golubkova in MOSCOW and Marc Jones in LONDON; Writing by Christian Lowe; Editing by Jane Merriman)