Following bailout, Moody’s downgrades Russia’s No. 2 bank

Moody’s ratings agency downgraded Russia’s second-biggest bank VTB on Friday following its controversial acquisition of a debt-ridden rival and a subsequent need to raise fresh cash.

The downgrade came after VTB took over the Bank of Moscow — the country’s fifth-largest bank but which holds $9 billion (6.3 billion euros) in bad debt — a move Moody’s said exposed VTB to new dangers.

Accordingly, Moody’s cut VTB’s rating’s outlook to ‘Negative’ from ‘Stable,” meaning it could be downgraded subsequently, and dropped the Bank of Moscow’s Bank Financial Strength Rating to E+ from D-.

A ratings downgrade, signalling higher risk, typically makes it more expensive and difficult for the company involved to raise fresh funds.

The change “reflects a higher risk that (VTB’s) … capitalisation could weaken as a result of the planned consolidation of Bank of Moscow, a financially-stressed institution which recently required extraordinary support from the Russian Central Bank,” Moody’s analyst Eugene Tarzimanov said.

The true scale of difficulties at the Bank of Moscow — whose rating was sent deeper into junk status on Friday — was confirmed this month and resulted in the launch of a $14.2-billion (9.9-billion-euro) bailout package.

It also led to questions about how Russian regulators could overlook the problem for so long and whether bad debt in the country’s financial system was worse than initially suspected.

VTB acquired Bank of Moscow in a hostile takeover that saw its top executive flee to London in the middle of an embezzlement probe.

Under the terms of the bailout, VTB will raise its stake in the Bank of Moscow rise from under 50 percent to 75 percent.

On Friday, VTB announced the completion of what it said was the largest syndicated loan agreement in Eastern Europe’s history to cover the acquisition of the additional stake in Bank of Moscow.

VTB said a $3.13 billion three-year credit would be sourced from nearly 30 global financial institutions including Bank of America Merill Lynch, Bank of Tokyo and Britain’s Barclays Capital along with France’s BNP Paribas.

VTB Deputy Chairman Herbert Moos called the loan “an inspiring achievement” for the lender.

The Bank of Moscow has a strong consumer banking network and access to cash flows from Russian utilities payments that made it a prime target for VTB.

But its assets also included a city property empire that unravelled with the construction industry collapse that followed the 2008 global recession.

Moody’s said the real test for VTB would come should its financial strength rating be downgraded by the agency — a possibility that could put the likelihood of it getting another state bailout “under pressure.”

The size of the bailout far outweighed analyst expectations and prompted Standard and Poor’s ratings agency earlier this week to extend VTB’s CreditWatch status, meaning it faced a possible downgrade.

S&P said the entire episode raised red flags for Russia’s banking sector as a whole.

“In our opinion, the recent events surrounding (Bank of Moscow) illustrate lingering asset quality problems from the 2009 recession and gaps in the supervision of large financial institutions in Russia,” S&P noted.

Regulators such as Alexei Kudrin — the Russian finance minister who stepped down as VTB board chairman this year — have come under some criticism for not raising alarm about the Bank of Moscow earlier.