RZB.AT - Governments support to Russian interbank market is reassuring...

Governments support to Russian interbank market is reassuring...	back

...but liquidity redistribution issue still has to be faced. KIT Finance downgrade Yesterday, on 17 September, Moody’s downgraded KIT Finance rating to Caa2 from B2, bank financial strength rating was downgraded from E+ to E. Among the reasons Moody’s cites KIT’s default on REPO transactions as well as asset quality problems that wiped out most of the bank’s capital. The ratings were placed under review with direction uncertain. Today Reuters reported that according to Gazprombank, its asset management arm Leader is in talks about acquisition of 100% stake in KIT. Gazprombank said in its statement that the talks are at the stage of agreeing on technical details. According to KIT Finance, VTB, another Russian state-owned bank, is also involved in this deal. Measures designed to prevent further contagion on money market The level of coordination between the Russian authorities is encouraging, which signals that the government is concerned about the liquidity situation in the banking system. Below are the measures and our assessment how they should impact the banking liquidity and systemic confidence: Bail-out of KIT Finance. Clearly the deal was initiated by the government, as showed by the involvement of two state-owned banks. Although this should not directly impact liquidity distribution within the system, the measure is designed to help restore systemic confidence. Cut of minimum reserve requirements. According to our estimates, the measure will add RUB 240 bn of free liquidity, while CBR head cited RUB 300 bn. Which is more important, the cut of reserve requirements will provide liquidity to all banks, even to smaller players, which currently look most hit. Liquidity packages from the federal budget. During the last two days, the government has pumped RUB 350 bn into the system. The Ministry of Finance said it is ready to provide Sberbank, VTB and Gazprombank with RUB 1.5 bn of three month deposits. Liquidity lines with the CBR. According the Central Bank, the bank’s liabilities towards CBR under REPO transactions amount currently to RUB 370 bn. Suspension of trading at MICEX. Although it technically suspends banks from REPO lending, we believe this measure is even positive, as it is designed to stop the wave of margin calls that crashed the prices on Russian assets during the last several days. What is the likely outcome? Although all these measures in sum are positive for the banking liquidity, we believe that the government has to face another even more important issue: liquidity redistribution. Currently smaller banks as well as brokers (which obviously lack any deposit base) face the heaviest liquidity constraints. The situation on the interbank REPO market looks like a stalemate. It seems that key liquidity providers possess a large volume of assets, which they got as a pledge under REPO deals. If MICEX re-opens, these institutions will be again forced to sell collaterals into the falling markets as it seems that their smaller counterparties will be unable to meet their obligations. Clearly, the Russian banking system became a hostage of liquidity deficit, which emerged among the weakest so called third tier banks (we mean here institutions outside of top 50). In our view, the outcome will ultimately depend on whether the CBR and the Ministry of Finance in cooperation with the largest Russian banks will be able to find an appropriate solution, which will allow stabilising the REPO market and re-starting trading on the secondary market. According to Reuters, the Ministry of Finance has said today that it will lend RUB 60 bn through Sberbank, VTB and Gazprombank to stock market participants, which should especially support brokerage companies in our view. We believe that further support measures with an ultimate focus on smaller banks might be forthcoming. In our view, there is some probability that the banks, which hold large amounts of collaterals under REPO deals, will agree among themselves not to sell these assets for a certain period of time. However, one thing is now clear: the Russian interbank market proved once again its susceptibility to chaotic, panic-driven liquidity shortages. In our view, it will take some time, perhaps even months, to restore the confidence among the market players.