Chris Bocsi / Bloomberg

Russian banks have a different problem. All subordinated instruments issued by them before March 1 will be gradually - 10% annually - excluded from the calculation of equity capital. This should supposedly increase the banks' needs for capital replacement. Of the country's 10 largest banks - VTB 24 , Gazprombank, Bank of Moscow, Alfa-Bank and Raiffeisenbank - the capital adequacy (H1) is below 12% with the minimum permissible level being 10%. In the banking system as a whole, the capital adequacy as of July 1 was 13.5%.

Now Russian banks are waiting for a new indicator on hybrid instruments, and until then they are replenishing their capital in other ways. MKB wants to convert old subordinations into shares (for $100-150 million), Gazprombank is considering the possibility of reissuing or converting “perpetual” bonds for $1 billion, which do not meet Basel requirements, into senior capital. A number of banks are conducting regular additional issues (Tatfondbank, Nomos-bank, Promsvyazbank ).

Earned capital 870.9

billion rubles is the absolute increase in capital in the banking sector in 2012. More than half of the increase (53.1%) was due to profit, and a quarter was due to subordinated loans. The share of subordinated loans in banks' capital increased in 2012 from 5 to 25%.

Until recently, one of the most popular ways for banks to replenish capital was subordinated loans, but the Financial Stability Board ruled that the Basel III standard will allow these funds to be included in capital only if they are converted into shares when capital adequacy falls below 2%. And although the date of the transition to Basel III has not been determined (see inset), banks have begun to place subordinated bonds instead of loans. But even here, there has not been much supply, notes Raiffeisenbank analyst Denis Poryvai.

Despite the low capital reserves, especially among European banks, the total volume of transactions on public debt markets in the first half of the year was $2 billion, compared to $7.5 billion in the first half of 2012, he calculated. Half of this was at Sberbank, and taking into account the subordinated bonds of the Moscow Credit Bank (MCB), 3/4 of the subordinated bonds placed this year were loans from Russian banks.

European banks have no time for Eurobonds - they need to increase Tier 1 capital first, explains Poryvai: subordinated debt is taken into account in Tier 2 capital, which cannot exceed half of Tier 1 capital.

At first, bankers waited for the market leader, Sberbank, to enter the market and set a benchmark for the rest with its placement. "We are waiting for Sberbank to see its profitability," said a top manager of a bank from the top twenty.

The first subordinated Eurobonds that meet the requirements of Basel III were placed by MKB, which attracted $500 million at 8.75% for a term of 5.5 years (the premium to its senior bonds was 250 basis points).

Sberbank placed 10-year subordinated Eurobonds worth $1 billion in May at a rate of 5.25% per annum, the premium to the bank's senior issue was 60 bp.

After that, only one placement took place. Following Sber, Russian Standard tried to enter the market, but the first attempt failed, and the bank postponed the placement for two months. In July, it placed 10-year subordinated Eurobonds for $200 million at 11.5% per annum.

According to the new Basel III standards, not all subordinated bonds can be included in Tier II capital, but only those that provide for loss absorption. This can be a write-off of the bonds' face value or their conversion into ordinary shares.

The fact that other Russian banks did not enter the subordinated loan market after Sberbank is probably explained by the fact that in the spring investors did not yet understand how to evaluate new hybrid debts, and Sberbank was placed quite cheaply, Poryvai reasons. But Russian Standard was placed the second time and not very well, the analyst gives an example. "Investors still do not understand how to evaluate the new instrument, and not only for Russian debts, but also in the whole world there is little activity in subordinated loans," he continues. In the second half of the year, European banks will enter the market and subordination premiums for Russian banks may increase, Poryvai concludes.

According to the Central Bank, last year the capital of the banking system increased by 870.9 billion rubles (1.7 times more than in 2011) - mainly not due to investments by shareholders (see table), but thanks to capitalization of profits and subordinated loans.

Basel is a hindrance to Eurobonds