An Audit by the Central Bank of Russia has revealed the Bank of Moscow will need to create additional 212 billion roubles in new provisions by the end of 2011.

­According to the Central Bank of Russia the Bank of Moscow should have created reserves of 99.5 billion roubles to secure all risks, which, however, would mean, that the bank significantly increases its H6 indicator, 82.9% compared to the possible maximum of 25%, Kommersant says on Tuesday. The indicator shows the ratio of risks associated with one lender to its equity capital.

Among the debtors classified by the CBR as highly risky is Europroject Investments Global ltd, belonging to Vitaly Yusufov, a son of a former energy minister Igor Yusufov.  The $1.1billion provided to Yusufov by the Bank of Moscow is believed to have been used to purchase a 19.9% stake in the capital of Bank of Moscow.

This loan was classified as risky mainly because it wasn’t used in accordance with its stated purpose, which was "forming cash flow for bank guarantee" and wasn’t properly collateralized, according to Troika Dialog analysts, Andrew Keeley and  Olga Veselova, who noted the results of the regulator’s audit weren’t surprising

“The results of the Central Bank's audit largely confirm earlier-announced estimates of the scale of problems at Bank of Moscow: the head of the Deposit Insurance Agency Alexandr Тurbanov said that the volume of doubtful loans is R250 bln and problem loans R150 bln; Bank of Moscow Chairman Mikhail Kuzovlev estimated the volume of loans related to ex-management at R366 bln; VTB 24 Head Mikhail Zadornov guided the need for new provisions at R250 bln.”

The due date for a loan to Europroject Investments Global ltd hasn’t come, so currently it remains risky, not toxic. Kommersant also says that the talks with VTB, which wants to buy the stake from Europroject Investments Global ltd are now being under way.

Unicredit analysts are expecting the VTB capital injection for Bank of Moscow, announced last week, and in conjunction with support from the Central Bank of Russia and the Deposit Insurance Agency to come this year.

“Given that BoM had capital of RUB 107bn on June 1, it should have negative capital after this provisioning. Therefore, we believe that the expected RUB 100bn capital injection by VTB must come this year.”

Egor Fedorov, Senior Credit Analyst at ING Wholesale Banking, in Moscow says the discoveries by the central bank have implications for the whole system, particularly given the emergency measures to boost liquidity at the depths of the 2008-2009 financial crisis. 

“We should pay attention to every bank loan or credit portfolio, with no certain compliance procedures and nobody knowing how state banks approve credits to corporate businesses. Another supportive notion is that during the crisis Banks were given a list of approved enterprises by the Government with a stable level of credibility which eased the procedure. Nevertheless, low transparency of the loan book, despite high levels of transparency at VTB and Sberbank, enabled banks and credit institutions to avoid tough regulations and an increase in bad debts.”