At the same time, a moratorium on creditors' claims has not been introduced. The mechanism for converting creditors' funds into shares (bail-in) does not apply either, the central bank said.
Otkritie is a commercial bank that was formed as a result of the amalgamation of more than 10 banks of various sizes. The bank has over 30,000 corporate clients, 165,000 small business customers and about 3.2 million retail customers. The key shareholder of the bank is Otkritie Holding, which owns 66.64 percent of the voting shares. According to the RIA Rating, Otkritie was ranked eighth among Russian banks in terms of total assets, as of August 1.
CENTRAL BANK TAKES CONTROL
Management of Otkritie Bank has been completely transferred to the Russian Central Bank with its subsequent entry into the capital as the main shareholder, the regulator said.
The regulator noted that Otkritie would continue to work as usual, providing services to all categories of customers and counterparties, fulfilling its obligations in full, servicing deposit and settlement accounts, making new transactions, including borrowing and lending. The Bank of Russia will provide financial support to Otkritie, guaranteeing the continuity of its activities.
The bailout process will take six to eight months, the regulator said. "The process of financial recovery using the funds of the Banking Sector Consolidation Fund can be provisionally divided into two stages, the implementation of which is estimated to take six to eight months, after which the bank will work in compliance with all mandatory standards. For comparison: the credit scheme of bailout may take 10 to 15 years," the central bank noted.
The regulator will definitely try to meet the one-year deadline, Russian Central Bank's First Deputy Governor Dmitry Tulin said.
WHAT ARE THE REASONS?
The acquisition of the Rosgosstrakh insurance company by Otkritie has become a catalyst for the deterioration of the bank's condition, Tulin said.
"Rosgosstrakh is not the only reason, but it was a kind of trigger, which served as a catalyst for the process, brought this event closer. In fact, the bank's expenses for financing this activity far exceeded the expectations of the Otkritie group's owners. The bank spent a fair amount of its liquidity for this purpose," Tulin explained.
Tulin noted that the deal had put the bank in a vulnerable position. "It became clear that the owners of the bank will have to recognize the fact that the regulatory capital has been reduced to the regulator and to external auditors sooner or later, and before the rating agencies, and that has happened," Tulin added.
The situation in Otkritie became even worse following the bailout of Trust Bank, Russian Central Bank's Deputy Governor Vasily Pozdyshev said.
"Another strategic weakness of the group — it is not entirely successful bailout of Trust Bank, in general, here we have a case where bailout has created certain problems of the special administrator," Pozdyshev said.
PROBLEMS, RISKS WERE KNOWN
Problems of Otkritie Bank, associated with capital overvaluation and high risks, have been known to the central bank since the fall of 2016, Tulin said.
"At the level of professional judgment, here at the central bank, we identified the main problems of the bank, in fall last year, as well as possible ways of solving these problems and the risks that accompany it. In any case, we were going to seek from the management of the bank, its owners either additional capitalization, or reduction of operations, so that they become adequate to the amount of capital," Tulin said.
Tulin reminded that Otkritie group had grown very rapidly in all respects in recent years, including through mergers and acquisitions, and this process was financed by borrowed funds, when the main risks were taken by the bank.
"The bank's capital was obviously clearly inadequate compared to the volume of transactions and the level of risks accepted by the bank. The bank's capital published in the official financial statements was apparently significantly overestimated compared to its real values," the official added.
WHAT ABOUT SHAREHOLDERS?
The rights of the current shareholders of Otkritie will be restored after the withdrawal of the temporary administration, but their share in the bank will not exceed 25 percent, the Central Bank of Russia said.
"After the end of the temporary administration, the rights of existing shareholders are restored, while the proportion of ordinary shares of the bank that they continue to own can not exceed 25 percent," the materials say.
During the work of the temporary administration, the bank's authorized capital is adjusted to the size of its own funds, and in case they are negative, the authorized capital is reduced to one ruble. In the latter case, the current shareholders completely lose their ownership, the regulator specified. At the final stage of recovery, the administration plans to convene an extraordinary meeting of shareholders, where it will decide to create new management bodies, after which its work will cease.
The first deputy governor of the central bank noted that the current owners and management of the bank were actively and constructively cooperating with the regulator and would also cooperate with its interim administration.
The central bank's decision to start bailout of Otkritie does not mean the clearance of the bank, it is about continuity and its development, Tulin explained.
"It's not about a surgical operation, the cleaning up of a financial group or a bank — it's about continuity in the management and development of the bank and the group with a new owner," he said.
The first deputy governor stressed that during Otkritie bailout, its best staff will be retained, activity will be maintained, and development of potential advantages will be ensured.
"The bank has a good platform, an IT platform, which we intend not only to maintain, but also to continue its development," Tulin added.
The support of the Russian Central Bank as a shareholder gives Otkritie Bank good opportunities for further development, Otkritie Managing Director Alexander Dmitriev said.
He also confirmed that the bank's shareholders appealed to the Central Bank for support. "The transfer of Otkritie under the management of the Central Bank was the result of a productive dialogue between its owners and the regulator," he said.
"For the customers nothing changes, the bank will continue to fulfill all the obligations in full. Separately, I emphasize that it is related to deposits as well — they are kept in full and are serviced in the usual manner," the bank's managing director said.
"All this also applies fully to the organizations of the Bank's group: Trust Bank, Rosgosstrakh Insurance Company, Rosgosstrakh Bank, Lukoil-Garant, Electric Power Industry and RGS pension funds, Otkritie Broker, Tochka and Roketbank services. "All of them continue to work in a normal mode and serve customers," Dmitriev said.
The central bank's decision to improve the financial stability of Otkritie using the money from the consolidation fund is positive, President of the Association of Russian Banks (ARB) Garegin Tosunyan believes.
"Any measures aimed at increasing sustainability are extremely positive, I always support such measures, unlike measures that are aimed at license withdrawal or creation of administrative safeguards," Tosunyan said, answering the question how he evaluated the decision of the Russian Central Bank in respect of the Otkritie Bank.
He also noted that it was about improving sustainability, not revoking the license. "No one said that there is a question of revoking the license, since it is about improving sustainability, it means that there were issues with sustainability, and the Bank of Russia solved these problems in this way, using the means of the consolidation fund. I am extremely positive about these measures. They are aimed at improving, not destroying or creating problems for clients," he concluded.
NO SHOCKS EXPECTED
The Bank of Russia does not expect shocks in the Russian banking market in the foreseeable future, Tulin said.
"We do not expect any shocks in the banking sector of the economy in the foreseeable future," he stressed.
The financial recovery of Otkritie will increase the reliability of the Russian banking system, and certainly will not worsen the situation, the central bank's first deputy governor said.