Fitch: Bail-in Talks Further Reduce Support for Russian Banks
OREANDA-NEWS. Ratings assigned to private Russian banks do not factor in sovereign support, and the recent drive towards introducing bail-in legislation further reduces the probability of government assistance, says Fitch Ratings. We think the move towards bail-in illustrates the authorities' determination to stop using government money to support rescues of poorly-managed banks. It should also standardise procedures for dealing with bank failures.
During 2014-January 2016, 186 bank licenses were withdrawn in Russia and the Depositary Insurance Agency (DIA) spent over RUB600bn (USD8bn at current exchange rates) to reimburse retail depositors. The DIA has also spent at least RUB860bn since 2011 (partially since repaid) to recapitalise some failed banks. In these cases, license withdrawals and losses for uninsured senior creditors were averted. We believe that decisions on whether to rescue or close down banks depended on their size, the extent of their problems and, possibly, the authorities' relations with bank shareholders or creditors.
Sovereign support drives our ratings of only two Russian commercial banks: Russian Agricultural Bank, or RusAg, (BB+/Negative), a state-owned policy bank, and Gazprombank (BB+/Negative), whose main shareholder, Gazprom, is majority state-owned. Bail-in legislation would not necessarily result in a downgrade of these issuers' ratings. Our opinion might be that, given their ownership, their policy role (RusAg) and a strong corporate shareholder (Gazprombank), support would still be available. Ratings of Russia's private sector, domestically owned, banks range from 'BB+' to 'B-', and are driven by their stand-alone profiles.
The idea of bailing-in bank shareholders and creditors is a cornerstone of the Financial Stability Board's key attributes of effective resolution regimes. But among major developing countries, only South Africa has introduced similar legislation, while a handful of other countries are advancing on this front. The Russian Central Bank and Ministry of Finance have recently outlined their ideas for the introduction of bail-in in Russia, which may come into force in 2017.
Russian officials have indicated that deposits of individuals - with the possible exception of large accounts of over RUB100m (USD1.3m) - would not be subject to bail-in, whereas other senior creditors could be. This would largely mirror the priority of claims in Russian bankruptcy legislation, which places uninsured retail customers above other senior liabilities. With the implementation of bail-in legislation, certain Russian depositors (corporates and possibly high net-worth individuals) might be more motivated to choose less risky banks to deposit their funds. This could encourage consolidation in the country's highly fragmented banking sector, which we would view positively.
The Russian authorities have replenished the deposit insurance fund after recent pay-outs. By end-9M15, the DIA had received RUB1.1trn of capital injections from the government and RUB873bn of loans from the central bank. Separately, the Russian authorities over the last two years have spent (mainly out of the National Wealth Fund) approximately RUB940bn on providing capital to performing banks, including development institution Vnesheconombank. In total these measures are equal to USD37bn (at current exchange rates) or 3.9% of 2015 estimated GDP. We think this is significant, but manageable for Russia given its low sovereign debt levels.
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