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VTB Weight around the Neck of the Bank of Moscow

EJ.ru

Bankovskoye Obozreniye, a banking review journal, published an anti-rating of banks with a maximum share of arrears in the overall volume of issued loans in mid-November. The rating treats separately the arrears on loans issued to individuals, companies and the share of arrears in the banks’ total loans.

The survey compares bank data as of 1 September 2012 with similar 2011 figures. Thus it is possible to compare the condition of the Bank of Moscow before its financial recovery was begun by VTB with government money and the comparison shows clearly the result of this operation, which cost taxpayers almost 300 billion roubles.

Out of the rating’s three parts, the Bank of Moscow figures only in two: in that assessing total arrears and in the ranking of banks with maximum arrears on loans to legal entities and individual entrepreneurs. The figures are very eloquent. While as of 1 September 2011 the share of past-due debts in total loans of the Bank of Moscow amounted to 19.84 per cent and on loans to legal entities and individual businessmen, to 19.98 per cent, by 1 September 2012 the former indicator had risen to 39.15 per cent, taking the Bank of Moscow from the 30th to the 8th place in the rating, and the second one more than doubled and reached 43.03 per cent and the bank went up in the anti-rating from the 42nd to the 12th place.

The doubling of past-due debts lets one talk about anything but financial recovery of the bank purchased by VTB. It is clear how efficient the actions of the new management are. Moreover, the figures confirm what a number of experts have been saying that, having bought the Bank of Moscow and having received from the government 295 billion roubles for its clean-up, VTB turned the former pivotal bank of the Moscow city hall into a “dustbin” for its own problem loans.

Very interesting are also data contained in the third part of the rating, which assesses the share of past-due debts on loans issued to individuals. The Bank of Moscow does not figure among the 25 leading banks in this ranking. Instead, VTB holds second place. In this second largest government bank the share of past-due debts amounted to 93.36 per cent as of 1 September 2011 and by 1 September 2012 the figure had grown (!) to 94.66 per cent.

The rating’s compilers point to the fact that issuing loans to individuals is not VTB’s core business. Retail operations belong to VTB24, a bank forming part of the group, and there the share of past-due debts is at a quite acceptable level. At the parent bank however, interest yields from loans issued to individuals in the profit structure do not exceed 1.5 per cent. Nonetheless, this “non-core” business of the VTB has a fairly large size. Thus, according to VTB balance sheet, the total sum of loans issued to individuals as of 1 September 2011 amounted to 286 million roubles.

Arrears Growth in the Bank of Moscow in Perspective

For fairness’ sake it should be noted that the almost 20 per cent of past-due debts in the Bank of Moscow by September 2011 is no testimony of the bank’s financial health. The Economic Investigation Bureau has decided to check the data contained in the ratings and at the same time find out when the arrears began to grow at threatening rates.

The Bureau’s figures, based on analysis of BM balances, differ a little from those in the rating but the dynamics are the same. Thus the past-due debt on loans to businesses amounted to 22.5 per cent as of 1 September 2011, and a year later it reached 44.7 per cent.

The most interesting thing however, consists in that practically all of the arrears emerged when the Bank of Moscow was managed by the new team. The Moscow government announced it was selling its stake to VTB on 22 February 2011. By that time, the BM board of directors was headed by Mikhail Kuzovlev from VTB. Thus, as of 1 March the share of past-due debt on loans issued to legal entities amounted to 2.35 per cent, which indicator was better than that of VTB by a factor of 3.5; VTB’s arrears on loans issued to corporate clients amounted to 8.24 per cent at that time.

Thus, it is possible to assert that the almost 10-fold growth of past-due debt in the Bank of Moscow (from 2.35 per cent to 22.5 per cent) is a result of the first six months of the management of the Bank of Moscow by a team from VTB. Two additional figures, taken from VTB balances, will address all doubts. Over the same six months from March to September of 2011, the share of VTB’s past-due debts magically dropped from 8.24 per cent to a decent 5.75 per cent. Both before and after those six months the arrears in VTB were only growing.

All those data lead to very unpleasant conclusions concerning VTB. Firstly, by early 2011, when the sale of the government stake in the Bank of Moscow was a decided matter, the pivotal bank of the Moscow government was enviably healthy and profitable (the bank’s net profit in the fourth quarter of 2010 amounted to 2.6 billion roubles) and needed no financial recovery. Secondly, the deplorable state in which the bank had found itself by September 2011 and which led to the government’s interference with billions of roubles, was a result of the takeover by the second largest Russian government bank, VTB. Notably, the rapid decline of financial stability in the Bank of Moscow was accompanied by an improvement of indicators in VTB. Thirdly and finally, over the first year during which a 295-billion-rouble financial recovery program was being implemented in favour of the Bank of Moscow, the share of past-due debt in the bank that was being “rescued” doubled.