Over the year, MDM increased its reserve expenses more than fivefold – to 6.3 billion rubles, while net interest income from “live loans” is decreasing / A. Gordeev / Vedomosti

MDM Bank, bought in June by Mikhail Gutseriev and Mikhail Shishkhanov, is breaking new records for loan losses. The share of corporate loans with signs of impairment has reached almost 61% of the bank's entire corporate portfolio. In absolute terms, this is 85.7 billion rubles - in January-June alone, the volume of such loans increased by 25%, according to MDM Bank's consolidated reporting for the first half of the year.

"A share of 61% is a very high figure even against the backdrop of the deteriorating situation in the banking sector," notes S&P analyst Anastasia Turdyeva. But MDM Bank has not been able to boast of asset quality for a long time now - at the end of 2014, it had 47% of potentially impaired loans. The volume of MDM's corporate portfolio is stagnating - by July it amounted to 141 billion rubles, the net portfolio - minus reserves - has decreased by 6% over the past six months to 107 billion.

Impaired loans include not only loans from defaulting clients, but also loans from borrowers whose financial condition or collateral is of concern to the bank. MDM Bank has fewer problem loans, for which payments have not been made for over 90 days, notes Turdyeva: "This is 14%, or 20.7 billion rubles." Reserves for the corporate portfolio cover problem loans by more than 140%, the analyst points out. But, according to S&P estimates, another 10-15% are potentially problematic - these are restructured loans and loans to borrowers experiencing serious financial difficulties. "We expected that the bank would be forced to increase loss reserves for these loans by the end of the year, and this is happening now," says Turdyeva.

Over the year, MDM increased its reserve expenses more than fivefold – to 6.3 billion rubles, while net interest income from “live loans” is decreasing – more than twice over the year (to 2.4 billion rubles).

If such rates of reserve growth continue, this will put pressure on capital, Turdyeva admits, noting that S&P will “monitor the dynamics of the bank’s reserves.”

Loss-making half-year

MDM Bank showed a loss of 4.6 billion rubles in January-June 2015 against a profit of 738 million rubles a year earlier

This year, MDM Bank is receiving assistance from both old and new shareholders. In June, the previous shareholder Sergey Popov recapitalized the bank by $56 million, as indicated in IFRS. In July, the new shareholders presented a subordinated loan of $76.6 million. "The Russian financial statements as of the beginning of August already reflected the $56 million received by the bank, and taking into account the funds of the new shareholders, by September the bank's capital will be replenished, according to our estimates, by a total of 7.6 billion rubles," notes Karina Artemyeva, an analyst at the National Rating Agency.

However, most of the new capital has already been spent on covering loan losses (6.3 billion rubles). MDM is applying for money from the state – its limit in the capitalization program through OFZ is up to 9 billion rubles, a person close to the regulator and two familiar MDM shareholders claimed.

The dynamics of the bank's asset quality "reflects general market and sector trends in the current economic downturn," says MDM Bank CFO Oleg Andriyankin.

According to Turdyeva, MDM Bank's losses are caused by old loans issued before the last crisis. "While many banks were able to clean up their balance sheets after the 2008-2009 crisis, MDM Bank failed to do so," the analyst believes.

“The growth of corporate loans with signs of impairment is primarily associated with the restructuring of a small number of large loans (including foreign currency loans) issued after the first crisis,” Andriyankin asserts, noting that the need for restructuring arose among clients “as a result of the deterioration of the general economic situation.”

For the new owners, this state of MDM Bank was not a surprise. "Before concluding the deal, a detailed analysis of all assets of MDM Bank and its loan portfolio was conducted - in particular, all possible risks were taken into account," says Shishkhanov. The funds provided to MDM Bank as part of the additional capitalization program are sufficient to cover all problem assets, he assured.

"The price has its own structural aspects that are not discussed publicly," Shishkhanov told Vedomosti earlier. According to him, the entire perimeter of MDM Bank's business is involved in the deal, including real estate on its balance sheet. In October 2014, the bank transferred real estate with a total area of 700,000 square meters for 18 billion rubles to a special holding company, in which it intended to offer control to investors.

The briefcase is worn out