The withdrawal of license of Tatfondbank set a precedent in the banking market: the regulator refused to support a large quasi-government bank. After more than three months of active negotiations with the Government of Tatarstan for the salvation of one of the two largest banks in the region the Central Bank took up extreme measures and withdrew its license. The market took this as a signal about the risks of falling confidence in the regional banks.

The Bank of Russia on March 3 after the revocation of the license of Tatfondbank, for the first time disclosed details of the talks with the government and creditors. As said the first deputy chairman Dmitry Tulin, the regulator in May 2016 was aware of the difficult financial situation of Tatfondbank. «Since May last year, we realized that the situation in the bank was troubling: its capital has been lost, at any time the loss of liquidity might have occurred," he explained. According to him, from that moment the Central Bank held talks with the management of the bank and its shareholders, including the government of Tatarstan. "There were assurances that the shareholders of the bank would not leave it in trouble, but nevertheless the result of these talks proved unsatisfactory," said the first deputy chairman of the Central Bank.

Sudden withdrawal

RBC sources familiar with the situation in the bank say that the top management of Tatfondbank suddenly refused to perform obligations to improve the situation in the bank, in particular, to fulfill an order of the Central Bank to create additional reserves in the amount of 40 billion rubles in November last year. Later, the Central Bank recorded the withdrawal of assets from the bank, which, however, was stopped after the regulator asked the Prosecutor General's Office.

Deputy Chairman of the Central Bank Olga Polyakova on March 3 confirmed that the withdrawal of assets had place. She said that before the introduction of temporary administration in December last year the size of the "hole" in the bank's assets was estimated at 43 billion rubles. The bank significantly underestimated the credit risk; it had technical assets on the balance. By February 1, the hole in the capital of Tatfondbank increased to 97 billion rubles. Rehabilitation of the bank, according to the estimates of the regulator could cost at least 220-230 billion rubles. "Economic expediency, taking into account the size of the hole, taking into account the volume of the necessary funding, of course, was non-existing," said the deputy chairman of the Central Bank.

Failed support

In the process of negotiations on the bailout, the rehabilitation through bail-in was discussed; a mechanism providing for the conversion of debt to creditors in the capital.

According to the Bank of Russia estimates, to use the bail-in Tatfondbank would need to enlist the support of investors in the amount of at least 60-70 billion rubles. However, consent to participate in the mechanism of bail-in writing was confirmed by only two entities, and the total liabilities of the bank to them was a little more than 5 billion rubles.

There was little eagerness to save Tatfondbank for a number of reasons. Thus, the attracted potential investors gave a much more pessimistic assessment of the bank's problems than those of the Central Bank. For example, the size of the hole they are estimated at 120 billion rubles against the Bank of Russia's figure of 97 billion rubles.

At the same time, both the Central Bank and investors agreed on one thing: Tatfondbank's problems are the captive business model, which has been focused primarily on lending to final beneficiaries' business. According to the Central Bank estimates, 65% of the bank's loan portfolio accounted for loans related to the owner's business. "This has brought the bank to the deadlock," said Polyakov.

New risks

Tatfondbank is the second bank in terms of assets in Tatarstan (the first is Ak Bars). In the Russian banking sector, the bank had 42th place. At the end of the Q3 of 2016 the volume of public funds exceeded 76 billion rubles.

The withdrawal of the license of Tatfondbank will adversely affect the stability of the banking sector of Tatarstan, according to the opinion of the interviewed experts of international rating agencies Moody's and Fitch.

According to banking analyst Maria Malyukova at Moody's, the consequence will be a drop in customer confidence in the banks of the republic, since 40% of the shares pf Tatfondbank were owned by the companies associated with Tatarstan.

According to Fitch senior director Alexander Danilov, revocation of the license may result in some outflow of funds from the Tatarstan banks or overflow to large federal banks. "The situation with the revocation of the license of Tatfondbank is sensitive to regional banks," adds analyst of Standard & Poor's Sergey Voronenko. "Central Bank gives a signal about the need to pay more attention to asset quality and liquidity management. "

Group assets

Experts explain the concern by the fact that despite the high dependence of Tatfondbank from the region, there was no one to support its. "Tatfondbank demonstrated main conclusion that is necessary for the regions: they can no longer provide real support to local banks," the senior manager of the bank from the top ten in terms of assets told RBC.

Tatfondbank's largest shareholder is the Republic of Tatarstan, which controls 45% of the capital. Thus the Tatfondbank group, which, in addition to itself, consists of five banks (IntechBank, Sovetsky, Teamer Bank, Tatagrobank and Radiotekhbank), according to RBC estimates, accounted for 20% of assets in the region. For comparison, the share of the largest bank Ak Bars accounts for 46% of assets in the region, while the share of state bodies of Tatarstan and the subordinate organizations in the bank is 80%.

Ghost of Peresvet

Experts remind that the deterioration of the situation with the banks in the region last year was triggered by the situation around Peresvet Bank; it caused a chain reaction on the closure of the limits of the so-called exchange transactions on bonds with troubled banks. The consequences of the situation with Peresvet are still reflected in the banking sector of Tatarstan.

After the introduction of the interim administration in Tatfondbank in December last year, Fitch reviewed the ratings of Ak Bars. "This was done in order to assess how the situation with Tatfondbank can affect the ability and willingness of the authorities of the region and its affiliates to support Ak Bars," recalled Fitch senior director Alexander Danilov.

According to him, Ak Bars is more significant for Tatarstan authorities than Tatfondbank, because of the greater share of the market and the social importance. However, Fitch is waiting for evidence of the bank support by its shareholders.

Until that happens, the Central Bank has hastened to calm the market. It not only described the situation in the banking sector of the republic as controlled by the regulator, but also verbally supported the banks in the region, moving away from the traditional practice not to comment on the existing banks. "We analyzed the information attacks on the reference bank of the republic and we understand that, most likely, it was a manifestation of unfair competition," said Tulin.

In addition, the first deputy chairman of the Central Bank announced its intention to support the two banks from the Tatfondbank group. As he explained the decision, "the credit organizations rehabilitated by Tatfondbank (Sovetsky and Teamer Bank) showed greater stability than itself."

Captive banks

Tatarstan banking system, having 18 banks, is dominated by groups of banks concentrated mainly around the largest banks in the region, Ak Bars, Tatfondbank and Avers. In all of these banks, the government has significant interests or practical control, through participation in the capital of the state entitites: "Svyazinvestneftekhim", "Kazanorgsintez" and others. In Tatfondbank, for example, the government of Tatarstan directly owns 8.9% of shares. 7.5% shares are owned by "Mortgage Agency of the Republic of Tatarstan", under the Ministry of Construction, Architecture and Housing of Tatarstan. Tatfondbank itself, according to the Central Bank, owns 29.85% of shares Radiotekhbank.

The credit system of Tatarstan is closely associated with the production and construction projects of the republic, by participating in the financing of oil production, oil refining, chemical industry, engineering, energy, alcoholic beverages production, construction and development. Almost every major investment project in Tatarstan is funded with the assistance of loans by the largest banks in the republic. At the same time the financing of projects of various regional programs is almost inevitably loans issued by banks associated with the borrowers.