5 Reasons Russia’s Banking System Is Heading For Trouble

Russia’s recent bailout of two major banks will cost the country billions of rubles. But the future of the Russian banking system, and its impact on the nation’s economy, is still uncertain.

Russia is finally emerging from a serious recession, with growth predicted for 2018. However, the recent rescue of B&N Bank and Otkritie Bank highlighted serious problems in Russia’s banking industry – problems that have not gone away following the bailouts, and could endanger the economic recovery if it doesn’t progress quickly enough.

A tale of two banks

Bank Otkritie FC, Russia’s biggest private lender in term of assets, started seeing huge cash outflows in June 2017. Then, in August, came a sudden ratings drop by Fitch.

“Otkritie, B&N Bank, Prosuyazbank 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 Ratings report, 18 August

The day before, Moody’s had placed Otkritie on review for a possible downgrade, citing increased financing of assets held by its parent company Otkritie Holdings, and volatility of customer deposits.

“Since mid-2017 and following the recent regulatory changes regarding the placement of non-state pension funds’ and state budget deposits, BOFC has experienced a significant outflow of customer deposits.”

Moody’s report, 17 August

It wasn’t long before the Central Bank of Russia (CBR) was forced to intervene. In late August, it became the biggest owner of Otkritie with a 75 percent stake, worth approximately US$51 billion. The strategy was to assuage depositors’ fears of losing their deposits, and stabilise the Russian banking system.

The takeover hurt Otkritie’s shareholders. Their ownership in the bank was reduced to a maximum of 25 percent, with the risk of seeing their investment wiped out completely. CBR deputy chairman Vasily Pozdyshev indicated that the bailout and Otkritie’s recapitalization would cost between US$4.34 billion (250 billion rubles) and US$6.96 billion (400 billion rubles), though the final tally could be higher. This bailout far surpassed the CBR’s rescue of the Bank of Moscow in 2011, which totaled 395 billion rubles. But another disaster was soon to follow.

Three weeks after the Otkritie bailout, B&N Bank, also known as Binbank and Russia’s 12th largest bank by assets, sought help from the CBR. Customers reportedly withdrew approximately 56 billion rubles from B&N in September 2017. Affiliated lender Rost Bank and other banks were rumoured to also require emergency financing from the CBR’s Fund for the Consolidation of the Banking Sector.

The five reasons behind Russia’s banking system troubles

1. Rapid expansion

Otkritie and B&N both had a propensity for rapid expansion through acquisitions. Otkritie was permitted to grow at a very fast pace by purchasing Russian banking competitors such as Nomos, bailing out Rosneft Bank in 2014, while diversifying into non-bank companies. B&N had ambitiously expanded its operations after 2010 by acquiring smaller institutions such as Moskomprivatbank, SKA-Bank, and others, prior to making its biggest acquisition in 2016 by merging with MDM Bank, a large Russian lender. However, it turns out that the banks that B&N acquired had financial problems more serious than previously reported. B&N’s assets expanded fivefold in less than four years while also obtaining funds from the state in order to salvage smaller banks. As it turned out, Otkritie and B&N purchased big financial headaches that later came back to haunt them – and other Russian banks may be in similar situations.

2. International sanctions

US and EU sanctions over Ukraine probably did more economic damage than President Vladimir Putin is willing to admit – and Russia’s banking sector has not been immune. B&N’s situation was aggravated by the residual effects of an economic slowdown partly caused by the sanctions, and the rise of bad debt during the previous three years. Moreover, a key provision of the sanctions prevents Russian banks from raising financial capital on Wall Street. This prevents American investment firms and commercial banks from buying equity stakes or making long-term financing deals, and restricts Russian banks access to foreign capital. For example, Vnesheconombank (VEB)’s access to foreign capital was cut off due to the sanctions and looking at in foreign currency debt totaling US$16 billion. A bailout of VEB could cost the Russian government at least US$18 billion or 1.3 trillion rubles.

3. Sharp decline in oil prices

Under Putin, Russia has effectively become a petrostate, heavily dependent on oil as a source of revenue for the government. The higher the price of oil, the more rubles the Russian government can deposit into state and private banks resulting in a greater influx of financial capital. However, the price of oil has dropped in recent years as the market has become awash in oil due to increased uses of clean energy. This has lowered the amount of funds the Russian government can put into the nation’s banks and, therefore, hurt their cash flows. Compounding the problem is that Russian banks made loans to the nation’s oil companies under the assumption that oil prices will rise.

4. Ruble devaluation

The Russian ruble has lost value in recent years leading to a lack of liquidity for the nation’s banks. In an attempt to stabilize the ruble exchange rate, the Bank of Russia raised interest rates to 17 percent from 10.5 percent.  But this move was not enough and the ruble devalued further. The combination of a depreciating ruble and rising inflation has made it more difficult for large, and especially small Russian banks, to remain liquid. As many Russian banks rely on cash as their main asset, the ruble’s depreciation causes them to lose value and have to acquire more funds. This means increased borrowing at possibly higher rates or seeking government bailouts so they can stay solvent.

5. High number of bankruptcies

As if Russia does not have enough financial headaches, the country has seen a wave of bankruptcies among banks in recent years. Adding to these closings is the increased amount of non-performing loans (NPLs). For example, NPLs went from 6 percent in all of 2013 to 9.2 percent in the first quarter of 2016. The higher the number of NPLs, the greater the chance of bankruptcies among Russia’s financial institutions. Officially, these NPLs make up about 10% of all loans. However, the International Monetary Fund (IMF) estimates the true level of bad loans could be closer to 13.5%. Either way, many Russian banks are facing financial catastrophe. In order to stem the tide of these bankruptcies, between January 2014 and mid-2016, the CBR revoked 214 bank licenses and placed 28 banks into open bank resolution, using public moneys totaling 1.1 percent of Russia’s GDP.

Persistent risks

“The bailout was good for investors, probably bad for the system. They prevented the Lehman effect in the Russian banking system and created a too-big-to-fail mentality.  How many other banks in Russia with the same sort of problems will need a bailout soon?”

Dmitri Barinov, Portfolio Investor, to Bloomberg News

In September there seemed to be a glimmer of hope when Fitch revised upwards the outlooks of 23 Russian banks. Tellingly however, this was off the back of a sovereign outlook upgrade, meaning that it wasn’t the strength of the sector that prompted the change, but the allegedly improved ability of the state to bail them out if required.

Even that capability is in question. Russia is probably in worse financial and economic shape than its policymakers and leaders are willing to admit. It’s well known but worth repeating, that Russia has become too dependent on oil at a time of sustained low oil prices. Oil was supposed to be Russia’s source of financial capital that it could put into its banks and always provide them with the cash flow they needed in good and bad economic times.

But now Russia is walking a financial tightrope that could impact the nation’s banking system for years to come. Unless Russia makes a strong economic recovery in the near future, its banking sector could see more hard times that the CRB will not have the power or resources to bring under control.


Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School. Article as originally appears at: https://globalriskinsights.com/2017/12/russia-banking-system-risks/


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Bank Merger In Malaysia To Create Second Largest Islamic Lender; Five Other Banks To Watch

Acquisition of Asian Finance Bank to create second largest Malaysian bank

Malaysian lender Malaysia Building Society Berhad (1171.KL) could soon become a full-fledged bank. The lender recently laid out plans to acquire Asian Financial Bank (AFB) in a deal that would result in the merged entity becoming Malaysia’s second largest Islamic bank by assets. After the merger, Malaysia Building Society would have an asset base of $10.5 billion (44 billion ringgit) and operate 46 branches.

Malaysia Building society will buy the stake held by foreign shareholders – Qatar Islamic Bank, Financial Assets Bahrain, RUSD Investment Bank and Tadhamon International Islamic Bank – for $153 million (645 million ringgit). The company recently stated that it would pay $94 million (397 million ringgit) in cash and the remaining $59 million through the issuance of 225.5 million shares at 1.10 ringgit per share. The proposed merger will be completed by the first quarter of 2018.

In a note to investors, officials from Malaysia Building Society Berhad said, “The merged entity is expected to leverage on the strength of MBSB’s business and the banking license held by AFB is anticipated to provide a unique opportunity for the merged entity to emerge as a full-fledged Islamic banking franchise in Malaysia.” In the last few years, the company has been trying hard to get a banking license that would give it access to cheaper sources of funding. Moody’s said this merger would be “credit positive” for Malaysia Building Society and would lower its funding costs, thereby widening margins. Further, it would also broaden its revenue streams as the merger would enable the company to offer a wider range of products and services through Asian Finance Bank’s banking license. However, this merger would intensify competition in the Malaysian banking sector.

ETFs offering exposure to Malaysian banks

Foreign investors seeking exposure in Malaysia’s banking sector could invest in country focused ETFs that offer diversification through investment in a single US security.

The most popular ETF for U.S. investors is the iShares MSCI Malaysia ETF (EWM). The iShares MSCI Malaysia ETF (EWM) invests in 43 of the most liquid companies in Malaysia.

With assets under management of $448 million, the EWM ETF offers concentrated exposure to Malaysian companies. Financials is the top sector with 31% of assets, followed by utilities, industrials and telecommunication services with weightings of 14.8%, 14.5%, and 9.9% respectively. The ETF’s exposure to the financials sector has remained in the 30% to 32% range in the last five years. EWM’s top five holdings include 3 large banks – Public Bank, Malayan Bank, and CIMB Group Holdings. The fund is up 5.7% over the last one-year period, and year-to-date in 2017 it has gained 14.6%.

Largest banks in Malaysia

Year-to-date, the MSCI Malaysia Index has returned 5.9% while the Malaysian benchmark FTSE Bursa Malaysia KLCI Index has appreciated 6.2%. In comparison, the MSCI Malaysia Financials Index has soared 10.8%, outperforming broad based Malaysian stock market indices.

The largest Malaysian banks by assets are Malayan Bank, CIMB Group Holdings, Public Bank, RHB Bank and Hong Leong Financial. In 2016, these banks held assets worth $164 billion, $108 billion, $84.7 billion, $52.7 billion and $50.9 billion respectively.


Malayan Banking Berhad, commonly known as Maybank is Malaysia’s largest bank by market cap as well as assets.

It is also among the largest banks in Southeast Asia with assets of $164 billion in 2016. The company has a current market cap of $23.5 billion. Maybank’s Islamic banking arm, Maybank Islamic, is currently ranked as the top Islamic bank in Asia Pacific and fifth in the world in terms of assets.

The company has a widespread international network spanning across all ASEAN countries. The bank currently has 2,400 branches in nearly 20 countries of the world and employs 45,000 employees.

In 2016, Maybank generated revenues of $7.6 billion and net interest margins of 1.9%.

Maybank‘s shares trade on the Kuala Lumpur Stock Exchange, Bursa Malaysia with ticker 1155.KL and on US OTC Markets with ticker MLYBY. The bank’s Kuala Lumpur listed shares have surged 20.7% in 2017.


CIMB Group Holdings is Malaysia’s second-largest bank by assets and third largest by market capitalization. The company has a current market cap of $13.5 billion. The company is one of the largest Islamic banks in the world and the largest Asia Pacific (ex-Japan) based investment bank. CIMB also has a wide presence in retail banking with 1,080 branches across the Asia Pacific region.

Currently, the group’s businesses are spread across 18 countries across the globe, primarily in the ASEAN region as well as global financial centers like New York, London and Hong Kong. The bank’s geographical reach is aided by strategic partnerships in various countries. Its largest partners include Principal Financial Group, Bank of Tokyo-Mitsubishi UFJ, Standard Bank and Daewoo Securities.

In 2016, CIMB group generated revenues of $6 billion and net interest margins of 2.5%, highest among its peers.

CIMB’s shares trade on Bursa Malaysia with the ticker 1023.KL and on US OTC Markets with the ticker CIMDF. The bank’s Kuala Lumpur listed shares have surged 40.8% in 2017 so far, and have outperformed its banking peers as well as the Malaysian benchmark KLCI Index.

Public Bank Berhad

Public Bank Berhad is Malaysia’s third-largest bank by assets and the second largest by market cap. The bank offers financial services across the Asia Pacific region. The company has a current market cap of $18.8 billion.

Public Bank is more focused on its retail banking business even though it offers a complete suite of services ranging from personal banking, commercial banking, Islamic banking, investment banking, share broking, trustee services, nominee services, sale and management of unit trust funds, and general insurance products.

In 2016, Public Bank Berhad generated revenues of $4.62 billion and net interest margins of 2.0%.

Public Bank’s shares trade on the Bursa Malaysia with ticker 1295.KL. The bank’s shares have surged 6.8% in 2017 so far, and have underperformed its banking peers.

RHB Bank Berhad

RHB Bank Berhad is Malaysia’s fourth-largest bank by assets and the fifth largest by market cap. RHB Bank was incorporated in 1994 as DCB Holdings Berhad. The company, a subsidiary of RHB Capital (1066.KL), has been formed by three mergers with Kwong Yik Bank Berhad, Sime Bank Berhad and Bank Utama (Malaysia) Berhad in 1997, 1999 and 2003.

Currently, the bank has a network spanning 8 countries across Asia including Brunei, Cambodia, Indonesia, Hong Kong, Malaysia, Singapore, Thailand and Vietnam.

In 2016, RHB generated revenues of $ 2.6 billion and net interest margins of 1.7%.

RHB Bank’s shares trade on the Bursa Malaysia with ticker RHBC.KL. The bank’s shares have surged 4.9% in 2017 so far.

Hong Leong Bank

Hong Leong Bank, part of Hong Leong Group is the fifth-largest Malaysian bank by assets, and the fourth largest in terms of market cap. The company has a current market cap of $7.8 billion.

Based in Malaysia, Hong Leong Bank has a presence in Singapore, Hong Kong, Vietnam, Cambodia and China.

In 2016, Hong Leong generated revenues of $1.8 billion and net interest margins of 1.8%.

RHB Bank’s shares trade on the Bursa Malaysia with ticker 5819.KL. The bank’s shares have surged 21.8% in 2017 so far.


The MSCI Malaysia Financials index is currently trading at a PE of 12.8x and price to book ratio of 1.4x. In comparison, the MSCI Malaysia Index trades at 16.5 times its past 12 months earnings and a price to book ratio of 1.7x.

Investors see valuations of Malaysia bank stocks as lucrative.

Alliance Bank Berhad, AMMB Holdings, RHB Bank, Hong Leong Financial and Affin Holdings are currently trading at inexpensive valuations compared to their peers. They have price-to-book multiples of 0.6x, 0.8x, 0.9x, 1.1x and 1.1x respectively.

Meanwhile, Public Bank, Hong Leong Bank, Malayan Bank, and CIMB Holdings are currently expensive with price-to-book multiples of 2.2x, 1.4x and 1.3x respectively.