Wednesday, 17 September 2008

Analysts fear contagion as first Russian broker fails

Financial News Online

Jason Corcorcan in Moscow

17 September 2008

Russian brokerage KIT is holding talks with strategic investors after defaulting on its debt as analysts suggested a number of small to medium-sized bank are facing similar difficulties refinancing on the repo market.

KIT, a second tier investment bank, was forced to look for a buyer after it defaulted on a repo deal. Investment banking sources said a buyer had been found and announcement would be made by close of play today.

A KIT spokeswoman declined to comment and said a statement would be made at 5pm Moscow time.

Analysts said KIT's problems were contagious and the state would have to intervene quickly to restore liquidity and confidence in the market.

David Nangle, director of financial research at Renaissance Capita, said: "There are other banks and boutiques with exposure to repos whereby their clients are not repaying back their debt in time. There is a risk that there are more KITs in the system unless this can be contained."

Under repo agreements, KIT advances credit to clients with stock being offered collateral. A number of clients failed to meet their liabilities which resulted in KIT not meeting its own liabilities with some of its counteragents.

Discussions over KIT's future came as Russia RTS and MICEX stock exchanges both halted trading at about 12.10 in Russia as the Ministry of Finance rushed to provide loans to the country's banking system. It was the second time in two days the exchanges had halted trading.

Trading was stopped on the dollar-denominated RTS on the orders of a government agency after sliding 6.39% in the first two hours. The index has shorn 57% since May, while the Micex was also halted after falling 3%.

The financial sector was the worst hit, led by state-run savings bank Sberbank which plummeted 17%.

Moscow traders said rumours of banking bankruptacies were rife and they were trying to reassure international investors by telephone.

One trader: "Investors are ringing us and we are trying to keep them calm. All we can do now is focus on where GDR prices in New York and London are going."

Ivan Ivanchenko, head of investment strategic at VTB, dismissed reports in the Russian press that the state-controlled back was stepping in to acquire KIT.

He said: "We are holding a lot of cash on our balance sheet and we feel comfortable in this position. That's not to say we are buying KIT but we don't exclude an acquisition at a later stage.

Ivanchenko said confidence in the market had evaporated yesterday and small brokers had unwound all their positions.

Analysts agreed that the leading state banks and top-tier investment banks like Troika Dialog and Renaissance were well capitalised and would not be affected.

With KIT Finance in trouble, and liquidity drying up, Finance Minister Kudrin is depending on VTB and its fellow state banks Sberbank Gazprombank to shore up the system.

Kudrin says Russia's three biggest banks, of which Sberbank and VTB are state-controlled, should be able to support the country's medium and smaller banks by virtue of their broader access to budget funds.

In a statement to state press agency Intefax, Kudrin said: "Essentially we're counting on them as core banks to be able to lend to small and medium banks."

To strengthen the three largest banks, the Finance Ministry said today it was allowing them to hold federal budget funds on deposit for terms of three months and more.

A government press release today described the banks "linchpins able to provide liquidity in the banking system." Budget funds available to the banks has been increased to 754.2bn rubles (€20bn) for Sberbank, 268.5bn rubles for VTB and 103.9bn rubles for Gazprombank, totaling 1.1266 trillion rubles.

KIT has grown rapidly in the past 18 months due to success of its mergers and acquisitions team in the utility sector.

The bank, which has its origins in St Petersburg, was previously a top five mortgage lender and also has a joint asset management venture with Beneleux bank Fortis. It was planning an initial public offering at the end of this year, or start of next year.

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