Around 10% of existing Russian banks will likely lose their licenses and face liquidation over the next 12 months as the Central Bank of Russia (CBR) continues its efforts to clean up the country’s banking sector, says Moody’s Investors Service.
“We expect recovery rates to remain very low, which means that creditors are likely to suffer significant losses as a result of bank liquidations in Russia,” says Lev Dorf, an assistant vice president (AVP) at Moody’s.
In a newly-published report, entitled ‘Banks – Russia: Frequent Liquidations Will See Continued High Creditor Losses’, the credit ratings agency (CRA) comments that low creditor recovery rates will reflect banks’ poor asset quality before liquidation, due to an increased number of bank failures attributed to fraudulent activity prior to licence revocation. Bank creditors have historically suffered higher losses where bank failures have been attributed to financial fraud or asset-stripping activity.
In addition, inefficient resolution procedures – which make it difficult for creditors to exercise their claims and force them to accept large losses – will also drive low recovery rates, according to the CRA. There is currently no full-scale creditor bail-in regime in Russia and, in the near term, Moody’s expects distressed banks to be “resolved”, mainly through bail-out, bankruptcy or ad-hoc resolution measures.
Recent data shows 711 licensed banks in Russia. More than 250 banks are being liquidated, while over 190 have lost their licences since the beginning of 2014 – a sharp increase from the 92 licence revocations during the previous four years, according to the CBR.
Although the majority of banks forcibly liquidated over a 27-month period to the end of March 2016 were smaller banks outside the top 100 by assets, larger banks are not immune to failure. Vneshprombank, ProbusinessBank and Nota Bank are notable examples of recently failed banks that were among the largest 100 in the country by assets.
The average recovery rate across all bank creditor classes was 25% for 2005-2014 according to CBR data; the rate varying from year to year depending on banks’ asset quality. Recovery rates have also varied significantly between two groups of creditors with different priorities of claims during the liquidation stage.
Moody’s notes that Russia, as a G20-member country, is expected to apply the Financial Stability Board (FSB) recommendations in accordance with the latter’s proposed ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ and that, in 2014, Russian banking legislation was updated to allow the bail-in of subordinated creditors.
The CRA adds that Russian regulators are likely to introduce further changes that will strengthen the bank resolution framework and broaden the government’s ability to resolve
distressed banks, which may ultimately result in more predictable resolutions and potentially lower creditor losses.
Yet while mismanagement and fraud remain a key driver of bank failures, Moody’s expects that losses for all but insured creditors are likely to remain high by international standards.
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