Wednesday, May. 15, 2002. Page 1
Bank's Fall Offers Investors a LessonBy Victoria Lavrentieva
By all appearances, Investment Banking Corporation was the West's fair-haired poster child of fiscal responsibility in the often rough-and-tumble world of Russian banking.
It was among the first banks to have its books audited to international accounting standards, and it assisted the EU's Tacis on a project to introduce IAS to the Russian banking system.
It was the first bank to be assigned a corporate governance rating by Standard & Poor's.
And it boasted two prominent Americans on its board of directors, a former U.S. Eximbank vice president and a former American Chamber of Commerce in Russia president.
But all that did nothing to save the country's 52th largest bank from collapsing in the biggest banking bankruptcy since the 1998 financial crisis.
The path that led to IBC's abrupt demise serves as a cautionary tale that the banking sector remains fragile and that investors need to continue to look beyond the window-dressing to determine a Russian company's true worth.
"Many Russian companies are now trying to improve corporate governance and increase transparency," said Alexander Ikonnikov, head of the Investor Protection Association. "But caring only about image is not enough since a company should, above all, have a clear development strategy and know which goals it is trying to achieve."
The Central Bank revoked IBC's license on April 30, a week to the day after it slapped external management on the bank. Central Bank chief Sergei Ignatyev acknowledged on April 23 that IBC's state of affairs had caught the Central Bank off-guard.
IBC was founded in 1994 by a handful of private investors to mainly service the needs of Russia's seventh largest oil company, Rosneft. The relationship helped IBC become the country's No. 52 bank as of Jan. 1, 2002, with more than 6 billion rubles ($200 million) in assets.
But what was the key to its success in the beginning was also the factor that led to its collapse.
The bank started to experience problems at the end of last year when Rosneft took its assets and decided against buying a controlling stake in IBC.
A decision in December by the State Customs Committee to stop sending payments through the bank only added to IBC's difficulties.
"This case is just another example of the trend that big corporations don't need pocket banks any longer," said Mikhail Matovnikov, deputy director of the Interfax Rating Agency.
Recognizing that its dependence on Rosneft was its weak point, IBC had for years been trying to develop other businesses. For example, it was an active member of the DeltaCredit lending program, run by the U.S. government-backed U.S.-Russia Investment Fund.
DeltaCredit officials declined to comment about the bank's failure for this story. They earlier said they had transferred all $5 million in outstanding mortgage and car loans from IBC to its own books in mid-March.
The bank's CEO Anton Melnikov, who formerly worked for Rossiisky Kredit, one of the largest Russian banks before the 1998 crisis, resigned two weeks before IBC lost its license. Those, who know him describe him as Western-style manager who did his best to promote the bank both at home and abroad.
To the Westerner, IBC was developing as a well-managed bank that cared a great deal about its image. It took pride in pointing out that PricewaterhouseCoopers had been auditing its books to IAS for four years and that it was the first bank to be assigned a corporate governance rating by Standard & Poor's, in March 2001.
The agency downgraded the rating in April, shortly before the Central Bank stepped in.
"The lower score was driven largely by a lower assessment of the company's transparency and information disclosure, particularly its relative lack of transparency during the current public scrutiny of its financial position," said Standard & Poor's corporate governance analyst Yulia Kochetygova.
"The company has not publicly addressed questions regarding its liquidity and solvency," she said.
The presence of two reputable foreigners on its board also did not improve IBC's transparency, although it did help the bank win new partners in the West.
The board members were Scott Blacklin, former president of the American Chamber of Commerce in Russia, and Thomas Moran, former U.S. Eximbank vice president for the NIS and Central Europe.
Their connections helped IBC become in January the 16th Russian bank to participate in Eximbank's Russia lending program, three short months before the bankruptcy.
They also got IBC into the USAID's small-lending program in February.
An Eximbank official said Tuesday that there were a number of other factors other than Moran's lobbying that led the bank to pick IBC.
The official, who spoke on condition of anonymity, added that Eximbank had been aware that IBC was facing difficulties but had decided to move ahead with the project because the amount involved -- $700,000 -- was not high.
"The bankruptcy highlights the need for further reform in the banking sector," the official said by telephone from Washington.
"We, of course, will take into account this case, but this is not a systemic failure, so this won't have a negative affect on Eximbank activities in Russia in the future."
Blacklin declined to comment, and Moran could not be reached for comment. Kochetygova said they had not been aware of IBC's problems until Standard & Poor's had called them to inquire about the bank's activities.
"We can talk about real independent directors only if they take part in the management process and control the decision process," she said, commenting on Blacklin's and Moran's participation on the board.
Richard Hainsworth, banking analyst with Renaissance Capital, said IBC had belonged to a group of banks with a better reputation abroad than in Russia. "They had a very good PR like, for example, Alfa Bank and Probiznesbank," he said.
He said that the problem that led to IBC's downfall is common at many Russian banks -- an overly large concentration on a single borrower or lender.
Matovnikov agreed, saying: "The system risks of the Russian banking sector still remain quite high and in most part lie on the liabilities side. There are still many rather large banks that in fact have no future and no client base."
Any bank with similarly weak credit policies, a lack of control over managerial decisions and a nontransparent ownership structure could also meet IBC's fate, Kochetygova said.
A bankruptcy committee is currently sifting through IBC's books to see which assets are recoverable and who are the creditors.
As of March 1, IBC had 348 million rubles ($10 million) in private deposit accounts, according to Interfax. Total debt to nonresidents' accounts accounted for 9.2 percent of the bank's obligations, or 275 million rubles ($8.8 million).
"The bank assets [worth about $200 million] should be enough to cover the debts, but no one knows the quality of these assets and what their real value is," Matovnikov said.