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 subsequent need to raise fresh cash.

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

Moody’s said it was cutting VTB’s rating’s outlook to ‘Negative’ from ‘Stable’ in a move that foreshadows a possible downgrade. It also dropped the Bank of Moscow’s financial strength rating to E+ from D-.

A downgrade typically makes it more expensive for a company to raise fresh funds and is particularly painful for VTB because it is in the process of raising funds for an additional share acquisition in the Bank of Moscow.

Moody’s analyst Eugene Tarzimanov said the ratings change “reflects a higher risk that (VTB’s) … capitalisation could weaken as a result of the planned consolidation of Bank of Moscow.”

The true scale of difficulties at the Bank of Moscow was confirmed this month when the authorities put together a $14.2-billion (9.9-billion-euro) bailout package for the former Moscow city government bank.

It also led to questions about how Russian regulators could have overlooked the problems 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 the latter’s top executive flee to London in the middle of an embezzlement probe but under the terms of the bailout, it will now have to raise its stake from under 50 percent to 75 percent.

The bailout was taken to mean that the government would stand by the country’s second-largest lender after Sberbank.

It also hopes to address future cashflow problems by selling off another 10 percent stake next year to reduce the government’s stake to 65 percent.

“We are preparing it for the first half of next year,” Interfax quoted Finance Minister Alexei Kudrin as saying in London of the projected sale.

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 its 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 along with Asian and European giants.

Its 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.

The size of the bailout far outweighed analyst expectations and prompted Standard and Poor’s ratings agency earlier this week to keep VTB on its CreditWatch list of institutions facing imminent downgrades.

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