Russian zombie bank reanimated and prepares to go public

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It lives!

Once one of Russia’s leading non-state banks, Otkritie (meaning “discovery” in Russian), died, went to heaven (at the Russian Central Bank), and is now waking up again. Otkritie comes back to life and is ready to leave the Russian Central Bank (CBR) control group. An IPO is on the table.

If it did, they would be listed on the Moscow Stock Exchange. It would be a gigantic I am convinced of that.

The Russian central bank took over Otkritie in 2017. It was then the eighth largest lender in the country. By that time, after years of aggressive M&A strategy, the bank had hit a wall with the acquisition of Rosgosstrakh Insurance Company and the National Bank Trust. Otkritie’s balance sheet almost tripled between 2015 and 2017. The central bank under Elvira Nabiullina feared that the private sector banks had bitten off more than they could chew, leading to a banking crisis in Russia. She was one of the main architects in cleaning up dozens of private banks and basically under CBR administration for years to clean them up.

The shift to state control of Otkritie Bank raised the state’s role in the Russian banking sector to a level not seen since the days of the Soviet Union. Now we’re moving in the other direction again.

Otkritie emerged from the years after Gorbachev in Moscow. It grew out of the implosion of the Soviet system when many entrepreneurial Russians – most with political connections – began making quick capital and building new business empires from nothing or the ashes of what was previously under state control.

There was only one state bank in Russia before Gorbachev, with a few subsidiaries serving the entire Soviet economy. It wasn’t until the 2000s that nearly a thousand private financial organizations began to sprout across the country. Otkritie was one of the largest, largely thanks to its Moscow corporate banking business at the time.

The Asian Tigers Crisis, the housing crisis of 2008 that led to the collapse of the mortgage-backed derivatives market in the US and Europe, each had its own repercussions on Russian banks, which often borrowed from US and European lenders in dollars and euros.

The Russian banking system became unstable within a decade of its inception, and many banks collapsed, losing (or stealing) their customers’ money.

Nabiullina stepped in. She took over the central bank in 2012 and made it her primary goal to clean up the private banking sector and change its governance model. Otkritie was arguably the most famous of the great banks to be captured first.

“We have to shut down these zombie banks, and we will, one at a time,” said Ksenia Yudaeva, who was trained at MIT, who was then the first deputy governor of the Russian central bank. Most of these banks were not publicly traded, so they had no major impact on the market other than helping the flow of money to Sberbank, arguably the best-run, but state-controlled, major bank in Russia.

Over the past five years, Sberbank’s share price in dollars has risen 38.6% while the VanEck Russia ETF (RSX) has risen 30%.

The CBR mercilessly took licenses and closed small regional and large banks for a period of five years to around 2017.

At the time, Otkritie had assets of over $ 50 billion, which is a lot of rubles, thanks to his aggressive M&A program.

When it became known that the CBR was considering taking it over, clients began withdrawing funds from the bank and the bank began to buckle. In typical Russian fashion, its owners fled the country.

Vadim Belyaev and his partner, senator and real estate tycoon Boris Mints, are the main men behind Otkritie. They started around 2006. By 2013, the bank was widely regarded as the vehicle for Anatoly Chubais, a well-connected Russian businessman and was considered Boris Yeltsin’s right-hand man when it came to speaking to the International Monetary Fund in the 1990s Russian economy. Chubais later became a shareholder in Otkritie, a fact confirmed by a brief announcement in 2013 that Chubais sold his position to Belyaev and the bank’s then manager, a man named Ruben Aganbegyan.

Commenting on the bank’s acquisition in 2017, Ben Aris of BNE IntelliNews wrote that Chubais was the main character behind Russia’s infamous stock loan privatization in the Yeltsin years. He is known to have allowed oligarch Boris Berezovsky to repair the privatization of telecommunications giant Svyazinvest. He was considered to be closely connected with the well-connected business / political powers of Moscow and got a fee of US $ 100,000 for the “book advance” of famous billionaire Vladimir Potanin to write about the privatization of Russia after the Soviet Union in the 1990s.

Some commentators speculated that one of the reasons the CBR was slow to take over Otkritie was because Nabiullina served as Chubais’s deputy on the Economic Reform Committee in the 1990s and didn’t want to lose his friendship. Aris believes that “the CBR has been remarkably generous with Otkritie” and given her ample cash for her rescue operation.

It is unclear whether any of these actors will still be part of Otkritie, except perhaps as shareholders. A new management team has been brought on board.

The situation with Otkritie is sometimes compared to the decision by the US government to 40% stake in Citigroup to capitalize on it when the US subprime mortgage crisis erupted in 2009.

CBR went much further and took full control of Otkritie in the summer of 2017. It took about two years to clean it up.

Nabiullina has been credited with keeping the Russian banking system alive. Not only did Otkritie survive, the bank is reportedly in much better shape and ready to leave the CBR nest.

The CBR cleaned up the bank’s balance sheet by consolidating all the bad assets into a “bad bank” trust and so far has recovered 221 billion rubles from 482 billion rubles in assets.

Otkritie is alive and well. Russian investors often consider it one of the most transparent banks, is no longer a black box and follows Russian regulations. Although the company is actively investing in technology and IT infrastructure, it is being revitalized as a traditional banking business with a large network of branches in all regions of Russia – with an emphasis on commercial and residential lending and savings.

Otkritie has retained its successful wealth management and brokerage business with a focus on private clients. That part of the business now makes up a significant portion of the company’s revenue.

According to the latest figures from the CBR, Otkritie almost doubled its net income to 58.7 billion rubles ($ 832 million) in the first nine months of 2021. The net interest margin rose 4.8% from 3.9% in 2020. Otkritie will be an all-time high, its record profit since the CBR boot camp.

The next step is for CBR to reduce its ownership stake.

In 2019, Nabiullina was once considered the leading central banker in the world from Euro Money magazine, said the ultimate goal is always to bring Otkritie to the public. That should happen last year. Then a pandemic hit. All hell is going on. We know the drill.

Let’s say it sticks to its stated goal and bank insiders I’ve heard of trust that one of Russia’s fastest growing banks will likely go public within a year. The stock offerings will likely resemble Citigroup’s when the US reduced its stake until there was nothing left.

Citi’s stock has nearly doubled since the financial crisis. If Otkritie’s IPO happens and the bank can stand on its own, it will likely see a similar outcome for investors – just maybe wilder since this is an emerging market and Russia is the wildest of them all.


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