In Translation: Death of a Bank

Tatfondbank’s demise shows even a state-backed institution can fail. Article by Svetlana Petrova for Vedomosti. 

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Protesters gather outside a Tatfondbank branch in January. (Photo: Maksim Bogodvid, RIA News)

Kazan’s Tatfondbank had everything for success: a long history (the bank was founded in 1994), a good reputation, ranked second for market share in Tatarstan (and forty-second overall in Russia), a major shareholder in the state, respectable international ratings, and International Financial Reporting Standards (IFRS) status with an international audit. This past November, the bank even managed to place $60 million in Eurobonds.

It turned out, however, that Tatfondbank was actually in deep distress, and the consequences of its subsequent collapse have been unprecedented. Many of the bank’s senior managers are behind bars and have had their personal property and that of their relatives seized, and the head of the National Bank of Tatarstan as well as the Republic’s Prime Minister have resigned. All this happened within a month of the bank’s license being withdrawn, spurring angry deposit holders to take to the streets.

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Protesters in Kazan. (Photo: Yegor Aleyev, TASS)

The protests started with small pickets by bank clients on the periphery of Kazan at the beginning of January this year, after around 2,000 people were told they would not be able to claim deposit insurance payouts. After this, their savings were transferred to a trust managed by a subsidiary investment company of Tatfondbank Finance. When the Central Bank announced Tatfondbank’s license withdrawal on March 3rd, depositors crashed President of Tatarstan Rustam Minnikhanov’s vkontakte page. The pickets grew into spontaneous protest actions (most visibly on March 4th near the Cabinet of Ministers of Tatarstan) and then into organized gatherings. Initially, the demonstrators only put forward an economic demand: pay back depositors from either the bank or the local budget. But they moved on to political demands, calling for the resignations of the Prime Minister of Tatarstan Ildar Khalikov, the republic’s government, and even President Minnikhanov himself.

There is a simple explanation for why the people’s anger was aimed at the republic’s leadership. The government of Tatarstan owned around 40% of Tatfondbank, while Prime Minister Khalikov served as head of the bank’s board of directors for almost three years.  On 15 December, 2016, the Central Bank took temporary control of the bank and ceased its operations. The local authorities called on people not to panic, and the bank’s clients trusted in the clean-up. On 27 February, the head of Tatarstan’s press service announced that one of the strongest financial-industrial groups in the republic—TAIF—was to take part in the bank’s clean-up as a strategic investor, stating “the relevant appeal from TAIF and its partners for possible variations of support for the bank was directed to the Central Bank of Russia”. But over the four days from 3 March on, the Central Bank announced the withdrawal of Tatfondbank and Intekhbank’s licenses, both of which were under the control of the Tatarstan State Council Deputy Robert Musin. The leadership of the Central Bank revealed falsifications of financial statements, a debt hole worth 97 billion rubles ($1.7 billion – nearly half of Tatfondbank’s deposits), and a flawed model crediting the business of a key beneficiary and administrator of the bank – Musin himself. He was arrested later that evening and indicted for fraud involving over 3 billion rubles in Central Bank credit.

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Robert Musin. (Photo: Yegor Aleyev, TASS)

Everything Went Offshore

“We chose a bank that had a branched network good enough to be stable and more or less strong,” says Ilya Novikov, managing director of Raiden, a small property management company and client of Tatfondbank. He added that it was convenient for residents to pay their rent and utilities because the bank had many branches and didn’t take a commission. “Plus, the head of the board of directors is the Prime Minister of Tatarstan, and half the money in the bank was state-money,” says Novikov. “The last thing we expected was that Tatfondbank would fail.”

Novikov recalls that there were warning signs. For example, at the end of November, right in front of him, a bank employee talked a client out of moving millions from a rated account to a personal account, paying interest up to 10%. “It caught my eye, but nothing foretold of any problems,” recalls Novikov. Everything went on as before “until the first ten days of December, when our payments were frozen”. A Vedomosti source says “they explained everything away as temporary technical problems, but after a couple of days, Tatfondbank closed its doors. Even after the introduction of an interim administration and a moratorium on operations, the employees of Tatfondbank explained that it was temporary, that everything was stabilizing – that we just have to wait for the leadership and the Central Bank’s decision. I believed in good things,” Novikov says. “Even till March 3rd, no one was talking bankruptcy. And the leadership of the republic said talks were moving forward with the Central Bank, everything will be fine, everything will work again.” Now his company will, in the best case scenario, get a small percentage of its assets back. Novikov is upset.

On March 3rd, First Deputy of the Central Bank Dmitry Tulin and Deputy Chairman of the Central Bank’s board Olga Polyakova told reporters that when employees at their head office started examining Tatfondbank, they immediately spotted problems that their local colleagues had not. It became clear in May 2016 that the bank was already in a very difficult financial situation. A captive business model, focused on lending to businesses of Tatfondbank’s beneficiaries, led the bank to a dead end. On its balance sheet, the Central Bank found technical assets and loans to a key owner of the bank (which Vedomosti later found to be Musin) comprised about 65% of the lending portfolio. Additionally, the bulk of borrowers were in a state of bankruptcy.

The last thing we expected was that Tatfondbank would fail.

Of particularly note, Tatfondbank credited 29 companies, including LLC Consumer Electronics, New Electronics, and Smart Electronics which are part of the DOMO group (which Vedomosti has linked to Musin), a representative of the regulator explained. “Their activity is characterized by a significant volume of operations, completed mainly within the group, which is one of the telltale signs of shell company operations,” he told Vedomosti. The financial means provided to Tatfondbank through completed loan agreements with the aforementioned companies were then transferred to an offshore holding, of which Musin was the ultimate beneficiary. Most of these lenders were bankrupt. The Central Bank sent this information to security organs, the representative of the regulator said.

A Balance out of Balance

97 billion rubles in the hole, Tatfondbank was second-most in debt behind the behemoth Vneshprombank, at 215 billion rubles ($3.85 billion). But this is merely a conservative estimate by the Central Bank, and the loss figures may grow. At the end of November, the leadership of Tatfondbank asserted that it wasn’t possible to save the bank with its own resources, said Olga Polyakova. After that, management started withdrawing assets, exacerbating the situation. She laments that liquidity in the form of shares was written off the bank’s balance sheet, transferred, and sold; liquidity that could have provided operational income.

On December 13th, 2016, a meeting of Tatfondbank’s board of directors was called with a single item on the agenda: measures for the financial recovery of Tatfondbank. The bank didn’t say what the meeting accomplished. Before the meeting, it was known that Tatarstan would not give money to bail the bank out, so it instead resulted in a petition to the Central Bank for implementation of bailout measures —“the provision of assistance by the help of other entities for the bank in the shortest possible time” – since independent executive bodies had failed to, according to a member of Tatfondbank’s leadership.

On December 15th, the bank’s management transitioned to a caretaker administration overseen by the Deposit Insurance Agency (DIA), and on March 3rd, administration management moved to the Central Bank. Neither the DIA nor the Central Bank answered Vedomosti’s queries about the meeting of the board of directors.

According to calculations by the Central Bank and DIA, Tatfondbank needed 220-230 billion rubles to rehabilitate itself, while a conversion of debt into shares (bail-in) should have covered 60-70 billion rubles in obligations to customers. However, according to Dmitry Tulin, the bail-in only managed some 5 billion.

Why didn’t TAIF, the key player in the bailout, raise more? Simple: it had no plans to.

Dmitry Nemanov, head of TAIF’s press service advised that all questions be addressed to a “primary source of information” about the preparedness of his company to participate in the rehabilitation of Tatfondbank: “we’ve never declared that TAIF is prepared to invest in a bailout or how much”.

The TAIF Group wasn’t a major creditor of Tatfondbank and the intention of Tatarstan’s authorities to secure a financial recovery package for the bank met with no result. “There was no official confirmation of TAIF’s interest in participating in Tatfondbank’s bailout from TAIF to the Bank of Russia,” said a representative of the Central Bank.

No Help from the Republic

Even in August of 2014, according to Khalikov, who headed the bank’s board of directors at the time, it was clear that Tatfondbank’s situation was complicated. He says Tatarstan had no right to shy away from Tatfondbank’s problems and abandon the bank without trying to save it. “But the questions remain: why did the Central Bank delay the decision? Why didn’t they inform us why major international auditors approved the statements? And why did international ratings agencies give high ratings to Tatfondbank each year?”

Tatfondbank’s ratings were actually quite low a year before the default, says Moody’s analyst Maria Malyukova. The bank’s credit rating was Caa1, which indicates a high probability of default without outside support (about 30%). “This assessment reflected the weak financial standing of the bank: its unprofitable financial results, high volatility of liquidity and funding, weak credit quality of assets, including high concentrations on individual clients and lending to related parties, as well as investments in non-core banking assets,” Malyukova lists.

Why didn’t TAIF, the key player in the bailout, raise more? Simple: it had no plans to.

Since 2014, the bank had been unprofitable “mainly from low interest rates, a high reserve ratio, as well as volatile results on the financial market and one-off expenses for the bailout of BTA-Kazan and the Soviet Bank,” she says. On April 1st of 2016, losses reached a Tatfondbank record of 3.4 billion rubles. The bank’s accounts show that it periodically violated the H6 standard, the maximum amount of risk per borrower or group of related borrowers.

At the same time, Moody’s was “betting on a factor of moderate external support” from Tatarstan. The final deposit rating of the bank was B3, with a negative outlook which Malyukova says “also reflects high risks with a probability of default at 15%”.

“Our opinion about the moderate probability of external support came from the 40% ownership by companies connected to the Republic of Tatarstan (that figure grew from 28% over the past two years, including through capital injections), a significant share of the bank in Tatarstan’s market (36% in deposits, 20% in assets), and the fact that chairman of the board of directors was Prime Minister Khalikov,” she explains.

The deterioration of the economic situation in Russia since 2014, the devaluation of the ruble, and the spiking of the Central Bank’s key rate to 17% in December of 2014 all undermined Tatfondbank. In February of 2015, Tatfondbank’s board of directors approved the “Plan of Recovery of the Financial Strength of Tatfondbank for 2015”. A year later, in 2016, it had failed to work.

By 2016, the bank’s margin had recovered a little after a gradual drop in the refinancing rate. There had been capital injections, but profits before allocations to reserves were still low (.7% of assets). The quality of assets left much to be desired. “The bank’s liquidity remained low and volatile due to a highly concentrated depositors,” Malyukova says. “This fact, as well as the problems of the Peresvet Bank, whose securities were pledged by Tatfondbank through repo agreements, ultimately led to the fall of the bank,” the Moody’s analyst summarizes.

Billions for the Turnaround Manager

On February 20th, 2017, the Central Bank on behalf of the DIA placed Kazan-based Timer Bank (formerly BTA-Kazan) and Petersburg-based Soviet Bank under administration to prevent their bankruptcy. This was exceptional, as both banks were in the process of reorganization. They had been entrusted to Musin’s entities: Timer Bank from May of 2014 was bailed out by New Petrochemicals along with the DIA, and the Soviet Bank from March of 2016 by Tatfondbank. For their recovery, the DIA has already provided10-year loans at 0.51% APR for 20.65 billion rubles. The two banks fell under the operational control of Tatfondbank, upon which, as a result, the resources of the DIA and they themselves depended.

In June 2014, the DIA allocated a 9.9 billion ruble loan to the reorganizing Timer Bank, Tatfondbank gave another 1.2 billion rubles in the form of an interbank loan, and Musin’s New Petrochemicals loaned 1.8 billion rubles, according to Timer’s annual report for 2014. From this financial aid of 12.9 billion rubles, 4.4 billion immediately went to pay off Timer’s debts to clients. The rest ended up in Tatfondbank through a scheme involving the interbank loan. Of that, 6 billion rubles were invested in Tatfondbank’s bonds (above market price), and a further 1.5 billion rubles went into shares of the Tatfondbank Rent Investment Fund. According to the Tatarstan e-newspaper Business Online, which had access to the Central Bank’s materials from the Timer verification, the Tatfondbank Rent Investment Fund was a mutual fund of Tatfondbank.

The Soviet Bank situation was similar. The former owners had been waging a legal battle against reorganization for a year. They lost the appeal of the transfer of 99.99% of the bank’s shares to Tatfondbank, but were able to challenge the legality of interbank crediting during the reorganization of Soviet Bank in two instances. Per a lawsuit filed by Alexander Teplyakov, who owned a 17% stake of the Petersburg bank (now a minority shareholder with a stake less than 0.01%), the St. Petersburg Arbitration Court and then the appellate court invalidated the interbank lending transaction and required Tatfondbank to return the debt together with interest to Soviet Bank —15.2 billion rubles.

The court pointed out that this was a major deal (more than 25% of Soviet Bank’s assets) with interest that went against legal requirements. It was not approved by a shareholder meeting, the transaction was non-market, interest was not paid, the borrower carried out “stably unprofitable activity”, and the placement of the interbank loan in Tatfondbank did not have a positive effect for the reorganization of the creditor-bank; i.e. its financial performance had deteriorated. Soviet Bank has filed an appeal, scheduled to be heard on April 25th.

“The money allocated to heal the [Soviet] bank went to save the turnaround manager itself, Tatfondbank,” says Alla Gerasimova, a representative of the former owners and now minority shareholders of Soviet Bank. “According to the report at the end of the year, in addition to the 15 billion rubles from the interbank loan, Soviet Bank became the “lucky owner” of 3.5 billion rubles worth of Tatfondbank bonds.” The official disclosure of information in November of 2016 also shows that the reorganized Timer Bank and Soviet Bank were under the guarantees of an interbank loan that Tatfondbank had issued to Intekhbank. “As the deposits of Soviet Bank’s customers grew, so did the credit going to Tatfondbank (1.28 billion rubles) and Intekhbank (330 million rubles),” Gerasimova says. But Soviet Bank could have saved itself, she laments.

In August 2015, the head of the Soviet Bank’s board of directors, Stanislav Mitrushin, sent a letter and a plan of measures for financial recovery to the Central Bank and its main committee (which Vedomosti has seen). According to Gerasimova, Soviet Bank received no response from the Central Bank between August and October of 2015 and requests for a meeting went unanswered. In October, the DIA put the bank under temporary administration. On March 10th, 2016—before Soviet Bank received a loan for reorganization and Tatfondbank became its majority shareholder—with official approval from the DIA, Soviet Bank credited Tatfondbank and issued it a first tranche of 3 billion rubles (more than 7% of total assets on 1 March), according to court documents. Here the caretaker administration violated bankruptcy law, since it failed to convene a shareholder meeting before issuing loans in excess of 5% of the book value of assets. According to Gerasimova, this is a violation even when the credit institution’s powers are suspended.

Indeed, the formally indicated rule of bankruptcy was violated and the courts established this in two instances, agrees Oleg Permyakov, a senior lawyer of the Goltsblat BLP dispute resolution practice. However, he believes that Soviet Bank can win the appeal if it can prove that the actions of the caretaker administration served the interests of the bank and its creditors.

A representative of the DIA denies that the caretaker administration broke the law. The policy of secure and placing Soviet Bank funds from March 4th, when the Central Bank approved Tatfondbank as the administrator of the reorganization, was actually determined by a new investor, and he says that on 10 March, Soviet Bank “placed free funds from a new investor under market conditions.”


Translated by Nick Trickett. Edited by Marita Petherbridge and Aaron Schwartzbaum.

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