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By John Helmer, Moscow

Russian banks have been reflecting ponds for their owners since they began twenty years ago; wishing-wells too. That explains why Commerzbank accepted less than $200 million for its 14.4% shareholding in Promsvyazbank earlier this year, fixing the valuation of the bank at $1.4 billion; and why the bank owners, Alexei and Dmitry Ananiev, imagine that London investors should pay $500 million for a 25% stake; that’s a very wishful 50% premium.

You can tell how handsome they are (above Alexei, below Dmitry), but do the Ananiev brothers qualify for such a premium?

Troika Dialog, a branch of Sberbank, evidently doesn’t think so, but in a September 5 report, it was being polite to express the recommendation to the market in conditional mode. “While the market reality does not bode well for the IPO of a second-tier Russian bank (most of the existing shares are trading at fairly depressed levels, and Nomos Bank’s story was quite disappointing), Promsvyazbank, experiencing a shortage of capital, would probably like to be in standby mode, ready to launch. We believe a successful IPO from the bank would be positive for the credit, but only if part of the proceeds will be invested in the bank and the rest used by key shareholders to repay related-party loans.”

When the Moscow and London spokesmen for the Ananiev brothers and the bank were asked yesterday what market valuation they are recommending for the asset, how much money they hope to raise from the share sale, and what they intend to do with the proceeds, they answer, respectively, with “no comment” and a promise to answer that hasn’t materialized yet. They refuse to provide a copy of the London prospectus drafted by the underwriters, HSBC, JP Morgan and Renaissance Capital.

Instead, they have issued a general press release claiming “PSB intends to use the proceeds from the offering to strengthen its capital position, in particular its Tier 1 and N1 ratios, to support ongoing development and successfully deliver on its retail and SME expansion strategy”. This would be more believable if it were accompanied by some arithmetic. For the bank has told the Financial Times and other promotional media that it plans to sell a 25% shareholding at a full-asset valuation of $2 billion for proceeds of $500 million. Are Messrs Ananiev intending to hand all $500 million to the bank’s treasury, or will they help themselves to part?

The markets understand that if Russian asset-holders take a chunk of the cash from an IPO, they (a) need the cash; and (b) they aren’t as confident for the future of their asset as they want new share buyers to think. When the two combine, either the IPO doesn’t materialize and is pulled for a reason that is always announced as market volatility. Or else the underwriters support the initial fixing of the share price, and then the market triggers a subsequent collapse. Answering the proceeds question with ambiguity, or acknowledging the cash grab, have made bad omens for several Russian IPOs in the London market in the recent past.

There has been much ado about the religiosity of the Ananievs, which has also been a feature of Uralsib Bank’s owner, Nikolai Tsvetkov. It is an invitation to invest in the probity of the bank owner. That was the case too for Mezhprombank owner Sergei Pugachev, until his asset collapsed into a billion-dollar bankruptcy, and he made off with the cash. Next to God, Caesar — and the connections to him have been treated as a reputational asset supporting the BBB rating assigned by RusRating to Promsvayzbank. “Promsvyaz benefits from… its principal shareholders command [of] significant political and lobbying influence at the federal level.”
Note the plural.

According to Daria Litvina, spokesmen for the Ananiev holding Promsvyaz Capital, Dmitry Ananiev, who is the senator representing the Yamal-Nenets constituency in the Federation Council, “is not engaged in business and left all the controls before he started working in the Federation Council.” By lobbying influence, RusRating was referring in part to Dmitry’s chairmanship of the Federation Council Committee on Financial Markets and Currency Circulation since 2007, the year after he stepped down from the bank board. Another source of political influence comes from the links between Dmitry and Alexei Ananiev and Yevgeny Ananiev, who ran MAPO Bank in the 1990s as a money-box for the state arms trade, and also for officials and kin close to then President Boris Yeltsin. The current CEO of Promsvyazbank, Artem Konstandian (Konstandyan) , started his banking career at MAPO.

There is only one mention of the Ananiev name (spelled Ananyev) in the bank’s audited financial reports. This identifies the brothers as equal co-owners of the 88.25% stake in the bank held by Promsvyaz Capital B.V. of the Netherlands, which is in turn owned by Peters international N.V. (Netherlands). In the auditor’s note 44 for the year 2011, it is reported that the bank has loaned “entities under common control” Rb10.7 billion. In the most recent financial report for the first half of this year, this loan exposure has jumped to Rb11.1 billion, an increase of 37%. This is presumably as big a business for Dmitry as for Alexei. The bank’s Moscow and London spokesmen refuse to provide a calculation of the proportion of the bank’s total loan book currently in the hands of “related parties”. For one of Russia’s leading experts on the domestic banks, Promsvyazbank “is an untransparent institution with a high concentration of risks of all kind, including political ones. The brothers are too close to the authorities. From a governance viewpoint, investors should not expect too much.”

There are one and a half theories of why the Ananievs are attempting to sell Promsvyazbank shares right now, when the Russian economy is decelerating, the prospects for Russia’s tradeable commodity income are dwindling, and when the stock prices of their Russian peer banks have been plummeting. The first, according to one of the world’s leading bank experts on Russia, they must be short of cash. That expert says of others in the wealth bracket of the Ananievs, if not in their exact position: they are facing margin calls “every day from early morning to late at night.” There may be value in their assets, the source acknowledges, but there is no liquidity. That means a shortage of cash to service bank repayment demands – and no new loans.

The second theory is half of the first. This is that the bank badly needs an international market share price to buttress new borrowings and a capital injection which no strategic investor, or foreign bank, has been willing to front up, notwithstanding the invitations from the Ananievs to do so. In 2008, they attempted to sell a 25% bloc of shares for $1 billion but were obliged to withdraw the offer. They tried again with the same offer target early this year, according to indirect evidence reported by Torrey Clark in Bloomberg on March 29. “Promsvyazbank will probably seek to raise about $1 billion in the IPO, which may take place this year, said Artem Konstandian, the bank’s president, in an interview in the Russian capital last week. Promsvyazbank first may sell an equity stake to a partner, which might delay its listing in London and Moscow, Konstandian said March 21.”

Note that the “partner” has now vanished, and the $1 billion target fed to Bloomberg cut in half.

Last November Fitch Ratings issued a report, warning that “ the bank’s capital position remains weak, loan impairment continues to be recognised and asset concentrations are high.”

Six months later in May, the Moody’s rating agency warned there were serious risks in Promsvyazbank’s capital shortage and its “high single-name concentration of the bank’s loan book and customer deposits”. It refrained from directly linking the two but the implication is that the Ananievs have been treating the bank’s loan book in the old-fashioned money-box fashion of the MAPO days. Here is the Moody’s rating report conclusion: “The outlook on PSB’s global scale ratings is negative reflecting our increasing concerns regarding the bank’s capital level that remains one of the lowest compared to similarly rated Russia-based peers.” Read the full rating report here.

According to an independent Russian bank specialist, the Moody’s report is “credible. It also gives all necessary hints for a smart investor to beware. For instance, ‘high single-name concentration in loans’ might mean high dependence on a few clients who are quite likely to be related parties, despite the formally disclosed low level of related party lending. The story is all too familiar — Mezhprombank, GLOBEX-Bank, MDM, etc. No privately-held bank would risk lending large amounts to absolutely unrelated parties over whom it has no leverage. Even the large SOBs stopped doing that. So this high concentration might eventually turn into a large non-performing portfolio as these parties ‘suddenly’ run into financial difficulties after the old owners wash off their hands. Likewise, most profitable large clients might at some point migrate elsewhere if the Ananievs take a step back.”

Litvina and the bank’s spokesman in London were asked what proportion of the current loan book is to related parties. The former responded: “we have much lower regulations on related parties.” The latter has not responded yet. According to Moody’s, “As at YE2011, the aggregate share of 10 largest customer credit exposures amounted to 18% of the bank’s gross loan book or 136% of its Tier 1 capital.” The bank’s most recent presentation presents two different breakdowns of the loan book, omitting the related party exposure but claiming “loans to VIP clients” amount to 4.4% of the retail portfolio (see slide 7). The involvement of the Ananievs in speculative real estate, land and construction ventures is broken up into several parts in Slide 5, but they aggregate to 24.7%.

That is too high, warns Fitch. “Reported asset quality indicators have improved due to slower creation of NPLs[non-performing loans] and significant loan write offs and sales. However, the portfolio is concentrated, reflecting the bank’s corporate focus, and concentration risks are particularly significant relative to the low equity base. Construction and real estate lending (end-2010: equal to 1.7x core capital) is also significant, while reported related-party lending (22% of capital at end-H111) is close to the covenanted maximum level of 25%.”

“In view of significant impairment and concentrations, Fitch considers capital a rating weakness. PSB’s regulatory capitalisation has always been tight, and at end-October 2011 the ratio was 10.3%, only slightly above the 10% statutory minimum… Upside potential for the ratings is currently limited given capital and asset quality weaknesses. Downward pressure could arise if there is a renewed downturn in the Russian economy, resulting in significant further deterioration in asset quality and hence pressure on the bank’s capital.”

The independent Russian expert again: “if the bank was unable to display higher capital adequacy even now that it was run by politically influential guys and was being prepared for an IPO, that means that the shortage of capital is more serious, certainly below the minimal level of capital adequacy (10%) if properly accounted. Why? That we don’t know. There might be accumulated losses from unsuccessful lending projects, well hidden in the balance sheet. These losses will come out early or later.”

“Interestingly, bank owners prefer to float the bank instead of selling it to a strategic investor. All Russian tycoons hate and despise corporate governance with disclosure, boards, committees, investors, etc. Then why bother? Perhaps because strategic investors do not want to buy at all, or offer a low multiple. In sum: Another bunch of shares whose price will dip soon after IPO to never recover.”

The refusal of Promsvyazbank to disclose how much, or how little, the Ananievs paid to buy back Commerzbank’s stake is another sign of fearfulness of a post-IPO share price dip. There has been speculation that Commerzbank got no more than it paid for the stake six years ago; that was about $88 million. The high end of the speculation about that transaction price is €150 million (at the time $195 million), according to a Commerzbank source cited by Bloomberg. If the low value is truer, then 100% of Promsvyazbank is worth no more than $611 million, and an IPO of 25% would raise just $153 million. At that level, the Ananievs would be signalling desperation.

The promotion of the share at the Financial Times has ignored the risk and offered the Ananievs instead as a brand of icecream. “One person involved in the offering said that while Promsvyazbank might not generate the same headline figures as Sberbank, it offered a more vanilla way to tap into the Russian banking sector, which is expected to grow by as much as 20 per cent this year. ‘In some markets you are looking for a sexy and a great story. But I think Russian banking is growing so fast that a little boring is good,’ the person said. ‘You don’t need the high risk volatility.’ ”

But volatility is precisely what has been damaging Promsvyazbank’s Russian peer bank valuations. The usual macro-economic and balance-sheet factors have clearly been weighing, but there is a specific name-recognition factor at work too. Since RusRating rates Promsvyazbank, Nomos, Uralsib and Vozrozhdenie with near-identical BBB ratings, the difference in market reputation appears to depend on who the owner or control shareholder of each bank is, and how exposed his business appears to be cyclical downturns, defaults, and margin calls.

Just as Promsvyazbank is understood as an Ananiev property, Nomos Bank has been viewed as the property of Alexander Nesis and his ICT allies, plus Alexander Mamut. Uralsib Bank is Nikolai Tsvetkov’s plaything in more ways than one. Vozrozhdenie is owned by Dmitry Orlov and Otar Margania, while Bank St Petersburg is associated with Alexander Saveliev.

Here’s the chart of the Nomos share float, between April 2011, when it fetched $17.50 per GDR on the LSE, and then peaked just above $20 two months later. It hit bottom last month at $10, marking a post-IPO decline over the past eighteen months of 43%.

In Russian IPO history, Nomos may have been unlucky to run into a commodity cycle downturn and the sell-off of Russian stock value which always accompanies that. But its performance is far worse than the 19% decline of the Moscow stock exchange Micex index over the same interval.

On the other hand, many of its peer group among Russia’s state and commercial banks have attracted more negative sentiment and larger discounts. Leading the Russian banks downward, as confidence in the domestic economy has evaporated, state-controlled VTB is down 63%; Bank St Petersburg, down 64%; UralSib bank, down 55%; and Vozrozhdenie Bank, down 44%. The standout is state-guaranteed Sberbank, which has also declined over the same year and a half, but which is down by only 19%. Rosbank has done even better – its decline has been only 13%. Rosbank’s principal owner is Societe Generale, with Vladimir Potanin a minority stakeholder.

The message in these runes is that unless the Kremlin or a global bank is ready to hold a Russian bank owner’s hands, minority shareholders are wagering unwisely on an increase in the value of Russian bank shares, at least in the present economic conditions. If HSBC and JP Morgan are getting that message as they flog the Ananiev property around the City of London, the message will be unmistakeable shortly.

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