By Douglas Busvine
MOSCOW (Reuters) - Bank of Moscow received the largest bailout in Russian banking history Friday after a hostile takeover bid by VTB revealed a gaping hole in the books of Russia's fifth-largest bank.
The $14 billion (8 billion pounds) rescue package was bigger than expected, and followed a central bank review Bank of Moscow's books that found bad loans totalling $9 billion, or nearly a third of its assets.
Finance Minister Alexei Kudrin accused former Bank of Moscow executives, headed by Andrei Borodin, of mismanagement and called for investigations both in Russia and abroad.
"We hope that law-enforcement agencies will launch an investigation, and expect foreign investigators also to launch probes," he told reporters in Ulan Ude, near the border with Mongolia.
Borodin, a protege of former Moscow mayor Yuri Luzhkov, has fled Russia and is wanted on an international arrest warrant. He issued a statement saying he was shocked by the size of the bailout and called VTB's takeover of Bank of Moscow political.
"This latest announcement by the central bank that it will provide financial aid to VTB to help deal with alleged and non-disclosed problem loans at Bank of Moscow only further supports this conclusion," read the statement, issued in London.
Under the bailout, the central bank will fund a loan of 295 billion roubles (6.6 billion pounds) to Bank of Moscow via Russia's Deposit Insurance Agency (DIA) at a concessionary rate of 0.51 percent for 10 years.
State-controlled VTB, Russia's second-largest bank, will contribute 100 billion roubles to recapitalise Bank of Moscow, an amount in line with earlier expectations.
MARKETS REASSURED, ALARMED
Analysts said the scale of Bank of Moscow's problem loans -- 60 percent of which the head of the DIA said were "completely bad" -- was alarming.
"Overall, the situation doesn't look very good," said Leonid Slipchenko, banking analyst at UralSib in Moscow. "VTB is a public company traded in London. What's going on, and what should investors expect going forward?"
The equity injection will take VTB's stake to the 75 percent threshold required by law to qualify for state aid. It will be paid for by VTB and conducted through two affiliated structures to meet legal requirements for the bailout loan to be disbursed.
VTB shares gained in Moscow by 0.7 percent, underperforming market leader Sberbank, which rose 3.7 percent. Shares in Bank of Moscow were up 0.9 percent in volatile trade.
Bank of Moscow's Eurobonds rallied after earlier being sold off on concerns that its failure to present its 2010 accounts at its annual shareholders meeting last Monday could trigger redemption clauses on $2.5 billion in Eurobonds.
Analysts said bond investors were betting that yields on Bank of Moscow bonds would fall, and their prices rise, to converge with returns on VTB paper as Russia's second-largest bank moves to consolidate control.
Bank of Moscow's 2015 dollar Eurobond yields around 5.4 percent, compared with about 4.2 percent on VTB's bonds of similar maturity.
"The central bank's action is very positive for bondholders but puts equity investors at risk," commented Chris Weafer, strategist at ING in Moscow.
"A default by a high-profile bank such as Bank of Moscow ... would have had seriously negative consequences for the whole sovereign and corporate debt market."
TAKEOVER GONE WRONG
VTB paid $3.5 billion for a 46.5 percent stake owned by the City of Moscow and a blocking minority stake in an insurer that owns a further 17 percent earlier this year.
That made it possible to oust management loyal to Luzhkov, who was fired last year by President Dmitry Medvedev, but VTB failed to win direct ownership control after Borodin and allies sold a 20 percent stake to businessman Vitaly Yusufov.
Once VTB had secured operational control of Bank of Moscow, it found around 250 billion roubles in related-party lending to real-estate projects that may be hard to recover.
Borodin has insisted that the loans are adequately backed by collateral.
The problematic nature of the takeover was a setback for VTB CEO Andrei Kostin, whose bank received a $6.4 billion bailout and an injection of hybrid capital in the form of subordinated loans from the state during the recent financial crisis.
It also marks a drastic failure of oversight by banking regulators and an embarrassment for Kudrin, who served as the supervisory board chairman of VTB until stepping down recently.
"The bailout was expected and showed the Russian authorities' determination to support systemically important banks," said Okan Akin, emerging debt strategist at RBS.
"But the size of the bail-out is about half of Bank of Moscow's total assets. Now investors will start questioning whether this is a one-off event or a systemic issue stemming from deficiencies in banking supervision."
(Additional reporting by Darya Korsunskaya in Ulan Ude, Oksana Kobzeva in Moscow and Carolyn Cohn in London; Editing by Jessica Bachman and Will Waterman)
($1=27.84 Rouble)
