Weak Interest Shown in Auction for Funds

The country's biggest banks borrowed less than analysts expected in a special auction held by the Finance Ministry on Thursday to inject money into the banking system.

Banks received 23.6 billion rubles ($1.6 billion) at an average interest rate of 7.31 percent, the ministry said on its web site. That was 8 percent of the maximum 300 billion rubles in government funds offered to ensure banks have the money to pay about $21 billion in value-added taxes due next week. Banks must repay the funds on May 14, the ministry said.

The results "show that this instrument is not currently in demand with banks, which is evidence that there is no deficit of liquidity," Pyotr Kazakevich, deputy director of the ministry's international financial relations department, said in an e-mailed statement.

Natalya Orlova, a banking analyst with Alfa Bank, said Wednesday that she expected banks to apply for 100 billion to 150 billion rubles at the auction.

"This is a very small amount," Orlova said Thursday. "Either the banks that had access to the auction don't have a problem" or there will be a surge in demand at next week's auction, which comes after 500 billion rubles in value-added tax payments are due, she said.

In a note to investors, Trust Investment Bank said the demand at next week's auction could "increase considerably."

"Despite fairly low placement volumes, the mere fact that the auction has been held is significant. Next week's auction will most likely be more than welcome," the bank said.

"Everyone was expecting far more to be taken," said Gordon Latimir, the head of financial services at PricewaterhouseCoopers in Moscow.

The auction comes after the European Central Bank and the Bank of England boosted liquidity in the interbank market following the collapse of the U.S. subprime mortgage market. Russia will hold a series of auctions offering as much as 600 billion rubles, Deputy Finance Minister Dmitry Pankin said Monday.

Interfax cited a source in the Central Bank as saying five to 10 banks participated in the auction, with the second to be held on April 24.

Finance Minister Alexei Kudrin said an auction would be held every week for two to three weeks and as required after that, Interfax reported Tuesday.

Lenders enrolling with the Central Bank to participate in the auctions need to have capital of at least 5 billion rubles, a suitable credit rating and be part of the deposit insurance system, according to the auction terms posted on the ministry's web site.

Casualties in Russia from the subprime fallout are likely to be found among smaller banks, as the bigger ones protectively hoard funds, Latimir said.

"The smaller banks are probably the ones that have suffered the most or been squeezed the most," he said.

While Latimir said he saw no "crisis," the credit squeeze could lead to consolidation among smaller lenders and would slow the growth of bigger banks.

"Certainly there will be less growth this year than the dramatic growth we've seen in recent years," he said.