Thursday, 18 September 2008

Gazprom steps in to save KIT Finance

Financial News Online

Jason Corcoran in Moscow

18 September 2008

Energy giant Gazprom's pension fund manager Leader is close to buying up troubled Russian brokerage KIT Finance as the government drew up a "red list" of 15 banks requiring urgent capital injections.

In a statement late on Wednesday night, KIT said it was in the final stages of selling a controlling stake to Leader Asset Management with credit support from state-controlled banks Gazprombank and VTB.

The rescue of KIT comes as Moscow's stock markets were suspended for the second day in a row and as the state pledged $60bn (€41.9bn) to save banks as a spreading liquidity crisis threatened to push the sector into insolvency.

Minister for Finance Alexei Kudrin told Russian media several banks were have difficulties with meeting their obligations and were now holding talks with strategic investors.

KIT, a second tier investment bank, was forced to look for a buyer or 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.

A statement from KIT said: "These timely measures to support the Russian financial system were taken by the Government and the Central Bank of the Russian Federation in order to provide stability to KIT Finance s operations as an important participant in the market."

Following an emergency Government meeting yesterday, the Finance Ministry promised 1.5 trillion roubles ($60bn) would be made available to bail out local banks.

According to a report in today's Kommersant, the Russian Central Bank has drawn up "red list" of the 15 banks that are experiencing the most serious problems with obligations to counter parties and are in need of urgent financial assistance.

The Central Bank responded to the crisis by cutting its reserve requirements by 400 basis points, which is expected to inject 300bn roubles ($12bn) into the banking system as of today. Deputy chairman Konstantin Korishenko put the total amount that the bank could make available through repo auctions and the auctions of unspent government funds at $118bn.

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 Capital, 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 their own liabilities with some of their counteragents.

Discussions over KIT's future came as Russia RTS and MICEX stock exchanges both halted trading at about 12:10 yesterday as the Ministry of Finance rushed to provide loans to the country's banking system.

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%.

Financial stocks were worst hit with VTB spiralling down by 28% while most blue chips, such as Rosneft, Novatek, Gazprom, AFI, Surgutneftegaz, fell by about 20%.

Traders said rumours of banking bankruptcies were rife and they were trying to reassure international investors.

One Moscow trader: "Investors are ringing us and we are trying to keep them calm. All we can do now is focus on the GDR prices of Russian stocks in New York and London until the local markets get running again."

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 such as 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 it was allowing them to hold federal budget funds on deposit for terms of three months and more.

A government press release described the banks as "linchpins able to provide liquidity in the banking system," said 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, totalling 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 fiver mortgage lender and also has a joint asset management venture with Beneleux bank Fortis. It was planning an IPO at the end of this year, or the start of next year.

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