It’s alive!

Once one of Russia’s leading non-state banks, Otkritie (meaning “Discovery” in Russian) has passed away, gone to Heaven (to the Russian Central Bank), and is now resuscitating. Otkritie comes back to life and is ready to leave the controlling group of the Central Bank of Russia (CBR). A first public offer is on the table.

If that happened, they would be listed on the Moscow Stock Exchange. It would be a huge suddenly, I am convinced of it.

The Russian Central Bank bought Otkritie in 2017. At the time, it was the country’s 8th largest lender. At the time, the bank hit a wall after years of using an aggressive M&A strategy, acquiring insurance company Rosgosstrakh and National Bank Trust. Otkritia’s balance sheet nearly tripled between 2015 and 2017. The Central Bank, headed by Elvira Nabiullina, feared that private sector banks would bite more than they could chew and lead to a banking crisis in Russia. She was one of the main architects of sweeping dozens of private banks and bringing them under the direction of the CBR for years to clean them up.

The move to state control of Otkritie Bank increased the state’s role in Russia’s banking sector to levels not seen since the days of the Soviet Union. Now we are going the other way again.

Otkritie was born in the post-Gorbachev years in Moscow. It was forged from the implosion of the Soviet system, when many Russian entrepreneurs – most with political connections – began to quickly gain capital and build new business empires from scratch or from the ashes of what was previously under state control.

There was only one state bank in Russia before Gorbachev, with a few subsidiaries that served the entire Soviet economy. It was not until the 2000s that nearly a thousand private financial organizations began to develop across the country. Otkritie was one of the most important, thanks in large part to its banking orientation in Moscow at the time.

The Asian Tiger Crisis, the 2008 housing crisis that led to the collapse of the mortgage-backed derivatives market in the United States and Europe, all had their own impacts on Russian banks which often borrowed from of American and European lenders in dollars and euros.

The Russian banking system became unstable less than a decade after its inception, and many banks collapsed, lost (or stole) their customers’ money.

It was then that Nabiullina intervened. It took over the Central Bank in 2012 and set itself the primary objective of cleaning up the private banking sector and changing its management model. Otkritie was arguably the most famous of the big banks to be captured first.

“We have to eliminate these zombie banks and we will do it, one by one,” said Ksenia Yudaeva, an MIT graduate and first vice-governor of the Russian central bank at the time. Most of these banks weren’t listed on the stock exchange, so they didn’t have a major impact on the market other than helping money flow to Sberbank, which is arguably the best-run large bank. but controlled by the state, in Russia.

Over the past five years, Sberbank’s dollar share price has risen 38.6%, while ETF VanEck Russia (RSX) has risen 30%.

The CBR ruthlessly withdrew licenses and shut down small regional banks and large banks over a five-year period ending around 2017. Otkritie was the largest to be acquired, then considered a bank “too big to fail” in Moscow.

At the time, thanks to its aggressive M&A program, Otkritie had over $ 50 billion in assets, which is a lot of rubles.

When it became known that CBR was planning to take it over, customers started withdrawing funds from the bank and it started to crumble. In typical Russian fashion, its owners fled the country.

Vadim Belyaev and his partner, Senator and real estate mogul Boris Mints, are the main men of Otkritia. They started it around 2006. In 2013, the bank was widely seen as a vehicle for Anatoly Chubais, a well-connected Russian businessman and considered Boris Yeltsin’s right-hand man when it came to chatting with him. the International Monetary Fund in the 1990s to reform the Russian regime. economy. Chubais later became a shareholder in Otkritia, a fact confirmed by a brief announcement in 2013 announcing that Chubais was selling his position to Belyaev and the then bank manager, a man named Ruben Aganbegyan.

Ben Aris of BNE IntelliNews, writing about the bank takeover in 2017, said Chubais was the main character behind the famous privatization of Russian equity loans during the Yeltsin years. In particular, it allowed the oligarch Boris Berezovsky to repair the privatization of telecommunications giant Svyazinvest. He was seen as close to the well-connected commercial / political powers of Moscow and received an advance of $ 100,000 from famous billionaire Vladimir Potanin in the 1990s to write about the privatization of Russia after the Soviet Union.

Some commentators have speculated that one of the reasons the CBR was slow to take control of Otkritia is that Nabiullina worked as Chubais’ deputy on the Economic Reform Committee in the 1990s and did not want to lose his friendship. Aris’s view is that “the CBR has been remarkably generous with Otkritie” and has given him sufficient funding in their bailout.

It’s unclear if any of these players will still be part of Otkritie, other than, perhaps, as a shareholder. A new management team has been hired.

The situation with Otkritie is sometimes compared to the US government’s decision to take an almost 40% stake in Citigroup to infuse it with capital when the US subprime crisis hit in 2009.

CBR went much further, taking full control of Otkritie in the summer of 2017. It took about two years to clean it up.

Nabiullina was credited with keeping the Russian banking system alive. Not only did Otkritie survive, but the bank is said to be in much better shape and ready to leave the CBR nest.

The CBR has cleared the bank’s balance sheet by consolidating all bad assets in a “bad bank” trust and has so far recovered 221 billion rubles out of 482 billion rubles in assets.

Otkritie is alive and well. Russian investors often see it as one of the most transparent banks, no longer a black box, and follows Russian regulations. Although the company is actively investing in technology and IT infrastructure, it has been resurrected as a traditional banking business with an extensive network of offices in all regions of Russia, focused on commercial and retail lending and savings.

Otkritie has successfully maintained its asset management and securities brokerage business with a focus on retail clients. This part of the activity now represents an important part of the company’s income.

According to the latest figures from the CBR, Otkritie nearly doubled its net profit to 58.7 billion rubles ($ 832 million) in the first nine months of 2021. The net interest margin increased by 4. 8% vs. 3.9% in 2020. Otkritie is set for a record profit record since going through the CBR bootcamp.

The next step is for CBR to reduce its stake.

In 2019, Nabiullina, once considered the world’s leading central banker by Euro Money magazine, said the end goal was always to make Otkritie public. It was supposed to happen last year. Then a pandemic struck. Hell broke loose. We know the exercise.

Assuming it sticks to its stated goal and the banking insiders I have heard of are convinced it will, one of Russia’s fastest growing banks is on the verge of go public, probably within a year. Its stock offerings will likely be similar to what happened with Citigroup when the United States reduced its stake until nothing was left.

Citi stock has almost doubled since the financial crisis. If the Otkritie IPO happens and the bank can fend for itself, it will likely see a similar outcome for investors – only maybe wilder as this is an emerging market and Russia is the wildest of all.