Otkritie bank nearly went bust in 2017 as part of the so-called Garden Ring bank crisis. It was eventually taken over by the Central Bank of Russia (CBR), which has put the bank back on its feet. Today it is the sixth-largest banking group in Russia by total assets and one of the top three fastest growing financial institutions in the country. The rescue is complete.

A comprehensive overhaul of the bank’s business and model resulted in Otkritie’s assets rising by an average rate of 22% in the last three years, twice as fast as its larger state-owned rivals, and made it one of the top three fastest growing financial institutions in Russia. And in the first nine months of this year it posted  a 1.9-fold year-on-year jump in net profit to RUB58.7bn ($0.8bn), with the return on tangible equity (ROTE) up at 19.1% from 10.9% for the same period a year earlier.  

Russia’s banks have been booming and Otkritie back on its feet. Wholly owned by the CBR, it hopes to sell it off or float the first packet to 15-20% of its shares as early as the first half next year, market conditions permitting.  

Near death experience

The Garden Ring crisis, so named as it affected half a dozen large commercial banks that mostly have their offices inside the Garden Ring road that encircles central Moscow, started with the collapse of Financial Corporate Otkritie and takeover by the CBR at the end of August 2017 after months of speculation and led to a RUB1.1 trillion ($16bn) bailout. It was quickly followed by the takeover of Binbank, another large commercial bank, which got caught in the flak and ran to the regulator on September 20 the same year.

But the antecedents of the mini-meltdown, that at one point looked like it might threaten the stability of Russia’s entire financial system, go back to a new rule introduced that required Russian banks to have the local equivalent of a triple A rating from the domestic Analytical Credit Rating Agency (ACRA) if they wanted to hold the deposits of state-owned enterprises (SOEs). ACRA downgraded Otkritie and several of its peers in April that year. The SOEs had to withdraw their money and that made the other depositors nervous, who began to withdraw their money too and the whole thing threatened to snowball into a classic bank run.

In the following months there was a mad scramble to shore up the bank’s liquidity and several turned to the CBR for help. Loans on the interbank market froze up as rumours of a “black list” circulated and volumes on the repo market soared, where banks can temporarily trade in any bonds they hold for cash. But the valiant efforts by management to rescue the struggling bank came to nought and in order to prevent a systemic meltdown the CBR decided to step at the end of the summer.

Some confusion remains to this day as to what actually happened. Dmitry Mints, whose family was formerly a shareholder in Otkritie and whose O1 real estate company remained a big customer of the bank in 2017, told bne IntelliNews in an exclusive interview that the CBR had acted very aggressively and had to some extent precipitated the crisis.

Financial rehab

At the start of 2017 the CBR had already set up the Banking Sector Consolidation Fund (BSCF), a special vehicle that allowed the central bank to be in the unusual position where it is both the banking sector regulator and own banks. The advantage of this setup is there is no need for an expensive bail-out, as the CBR backing should be enough to reassure depositors the bank won’t collapse and put an end to the bank run. The plan from the beginning was to allow Otkritie to recover and then to eventually sell it again.

“The Bank of Russia put Otkritie into the consolidation fund along with several of its other holdings, including Lukoil Garant pension fund, Rosgosstrakh insurance company and RGS Bank, a small car loans specialist,” says Dmitry Levin, the deputy CEO of Otkritie, who was appointed by the CBR after it took over.

The next year the Baltic Leasing company and Life Insurance company were also added. Finally, in 2019 Otkritie was merged with BIN bank on July 2, 2018 and from the next day the combined assets exited the rehabilitation programme and began to function as a regular bank.

In the first nine months of 2021, the bank doubled net income y/y to RUB58.7bn – the highest in Otkritie’s recent history. At the same time, asset quality remained among the highest on the market, with non-performing loans (NPLs) at less than 3% of the total portfolio.  

“Today we are a normal bank. At the same time, the CBR had created a so-called “bad bank” on the basis of Trust Bank [which also failed during the crisis] and put all the bad debt from the rehabilitation programme into that,” says Levin. “The CBR also took PromSvyazBank [which also failed] and used that to create a bank that specialises in the defence industry.”

Nevertheless, Otkritie remains directly and 100% owned by the CBR. Three of the central bank’s employees sit on Otkritie board of directors, as well as the Deputy Minister of Finance, but to that the bank has added five independent directors and the CBR maintains Chinese walls between the management of the bank and the department that regulates the banking sector. Mikhail Zadornov, a well-known banker and former Finance Minister, is the CEO and heads the board.

Zadornov is best known for taking over the state-owned behemoth VTB’s retail arm, VTB-24, and building it up into one of Russia’s leading retail banks. Levin also has 30 years of experience and is the former CEO of Russky Standart Bank that pioneered the unsecured retail lending in Russia that caused a revolution in the way Russian banking is done in the noughties.

New business model

The business model was restructured. Previously Otkritie had focused on term deposits, but under the new model Otkritie has been targeting various niche businesses and focusing on becoming a leader in each, sometimes using its subsidiaries to become a leader in a very specific niche.

Levin said one of the first changes was to zero in on both the retail and corporate current accounts business, which provide the main source of funding for the bank’s business. Today 44% of all the bank’s liabilities are current accounts.

Other businesses that Otkritie has made its own are issuing credit cards and payroll programmes for companies, and the bank is especially strong in catering to small and medium-sized enterprises (SMEs).

“We hold a 10% market share of the SME business, together with our subsidiary online bank Tochka,” says Levin. “Our group has about 530,000 accounts that hold half a trillion rubles ($6.8bn). We are also active in escrow accounts. The law was changed for developers collecting pre-paid apartment sales. Developers used to collect the payments and use the money to build the apartments. Now they have to raise financing for developments and the buyers’ money is held in escrow while that is going on, so if the project fails they won’t lose their money. We have about RUB150bn in escrow accounts, which makes us the fourth-biggest player on the real estate development financing market”.

The strategy was updated earlier this year where Otkritie will leverage its digital business model and increase cross sales between units as well as by adding more third-party partners, which can be quickly integrated through its OpenAPI.  

Levin says this should help the bank hit its annual net income target of at least RUB100bn by 2023 and become a market leader in terms of return on equity (RoE) of at least 15% by 2023, Zadornov said in September interview.

Otkritie remains a universal bank and Levin says that the business is now mostly evenly divided between retail and corporate banking, while less attention is spent on the term deposits business.

“We changed the model to decrease the speculative rates on term deposits, especially in retail, and pay more attention to retail and corporate accounts. As of 30 September we had total liabilities of around RUB2.2 trillion ($27.1bn).”

The bank funds almost all its business from these liabilities and only issues about RUB30bn-RUB40bn a year on the local bond market, and then mainly to build out a curve with bond investors that is available should management want to increase borrowing using bonds in the future.

“We have a healthy loans-deposit ratio of 89%,” says Levin. “The balance sheet is liquid and the obligations side is also healthy. For the first nine months of this year the net interest rate margin was at a comfortable 4.8%.”

The bank’s capital adequacy ratio (CAR) – the share of cash a bank keeps on call to meet withdrawals – is also healthy at 14.5%, which is well above the mandatory minimum, but not quite the 20% emerging market banks often like to have to deal with economic shocks.

Ratings and privatisation

The bank has returned to fast growth since the problems it had with ratings in 2017, and now they have rapidly improved as a result.

The bank has four sets of ratings in all – two domestic and two international. Otkritie’s ratings from ACRA have been increased seven notches to AA, while the other Russian ratings agency Expert has increased them three notches. Otkritie is also rated by Moody’s, which has increased its rating three notches to Ba2, and Fitch has upgraded the bank to BB+.

The CBR’s plan from the start has been to sell all the banks it took over in 2017 and with the strong profits Otkritie is now earning that is possible. As bne IntelliNews has reported, Russia has been enjoying an IPO boom in the last 18 months, although after geopolitical tensions reappeared in October the market sold off and the IPO window may be closing now.

“The CBR’s goal has always been to reduce the share of state-owned banks in the system and privatise our bank,” says Levin. “It will be sold either by IPO or to a strategic investor. The CBR has said that both options are acceptable.”

As bne IntelliNews has reported, the pandemic had a very muted effect on the Russian bank sector, which saw profits grow in 2020 and currently are enjoying their most profitable year since Russia’s economy slowed to zero in 2013. The state-owned banking giant Sber (formerly known as Sberbank) earned RUB1.4 trillion in the first nine months of this year by itself, whereas in 2016 the entire sector earned just under RUB1 trillion for the full year. This year the sector should earn about double that.

Levin says there are three things driving the current strong bank sector results. The first is new businesses are flourishing, such as lending and factoring that are adding to bottom lines. The second is the cost of risk is falling and is now low. Banks have invested heavily in their models and data management to further improve the quality of their business and that has been paying off.

Finally, banks have been a big winner from the pandemic in the sense that it was a strong catalyst for the technological transformation that was already under way. Otkritie has invested over $1bn into IT in the last three years and now 95% of its interactions with customers are online and its Tochka bank that specialises in the SME business has no branches at all.

Even the number of branches at Otkritie – and it has traditionally been one of Russia’s strongest retail banks – has been falling from 750 branches in 2018 to 480 as of September 2021 and is expected to further decrease to 400 by the end of 2022, says Levin.