Repost from WSJ: Plan to Save Russia's Tokobank
Collapses, Hurting Bank Sector
By CHRISTOPHER RHOADS
Staff Reporter of THE WALL STREET JOURNAL
July 7, 1998
FRANKFURT -- A plan to resuscitate Tokobank -- one of Russia's largest and most troubled banks -- collapsed, heightening fears of deeper ills in the country's financial industry. The bank will probably be liquidated.
For Western lenders with significant exposure to the bank -- in all about $340 million -- the development will probably result in losses and undermine faith in the sector, analysts said.
"It is an important turn of events," said Nick Page, analyst with Paribas SA in London. "Foreign creditors thought they had a firm hand behind the bank. The failure of them to pull through is bad for sentiment, and obviously bad for creditors who are owed money."
It became clear on Friday that Tokobank wasn't going to make it when the Bank of Moscow, which had agreed to take a majority stake in Tokobank for about $150 million, changed its mind after completing a review of its books. The Bank of Moscow concluded that an investment of closer to $500 million would be necessary to get Tokobank back on its feet, a commitment Bank of Moscow was unwilling to make, according to bank officials.
Stake of 9.6% to Be Sold
Bank of Moscow's reversal prompted the European Bank for Reconstruction and Development to decide to sell its 9.6% stake in the bank. The EBRD confirmed Monday that it had informed Tokobank that it intends to exercise its put option to sell the stake. The EBRD bought an 11% shareholding in the bank in 1994 for $35 million, which was later reduced. "The EBRD withdrawing its investment is the final straw really," Mr. Page said.
After a series of management changes and continued losses, Tokobank, which had about $1.5 billion of assets in the mid-1990s, was seized by the Russian central bank in early May. The central bank held Tokobank under administration until July 1, at which time Bank of Moscow hoped to have a healthy lender to rescue Tokobank. Following Friday's developments, the bank goes back into the hands of the central bank, which will probably begin liquidation proceedings, analysts said.
Western lenders, namely the large European universal banks, had watched developments closely. In all, foreign banks have more than $72 billion of outstanding loans to the country, with nearly half of that controlled by such German banks as Deutsche Bank AG, Dresdner Bank AG and Commerzbank AG, as well as the state-owned banks, or landesbanks. About 60% of this capital is in the hands of the Russian bank sector, making any signs of weakening particularly worrisome. Most of these German lenders, as well as some Polish banks and others, participated in a syndicated loan for Tokobank in 1997.
'We Are Extremely Concerned'
"You could say that we are extremely concerned," said a German bank official who works in the Russian market. "The capital structure of much of the Russian bank sector is not of the nature that it can withstand similar shocks of the past months."
Some analysts suggested that the failure isn't so serious in the context of the longer-term health of the industry. Saving weak banks with strong banks, which the government hopes a program announced at the end of June will encourage, could prolong the sector's malaise, some analysts said. "I was very surprised that the Bank of Moscow wanted to get involved in the first place," said Rick Deutsch, an analyst with Merrill Lynch & Co. in London. "There's not much of an upside, and now they've seen that for themselves."
Mr. Deutsch and others expect further consolidation, both through failures and mergers. More than 2,500 banks existed in the mid-1990s, a number that has dropped to fewer than 1,600.
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