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. Last Updated: 07/27/2016

DeltaCredit to Buy Local J.P. Morgan Bank

The U.S.-Russia Investment Fund said Wednesday that it has reached an agreement to buy J.P. Morgan & Co.'s Russian subsidiary for an undisclosed sum.

The acquisition of ZAO J.P. Morgan Bank will enable the fund's mortgage-lending arm, DeltaCredit, to raise more financing, lower mortgage rates and issue its own mortgage bonds and ruble-denominated mortgages, said James Cook, senior vice president of the fund and president of DeltaCredit, at a news conference Wednesday.

"This [the bank purchase] is really the key to issue mortgage-backed bonds and securities," he said. "Russia doesn't have to depend on foreign investors to build a mortgage market."

The new entity is to be known as CB DeltaCredit and is to continue specializing in mortgage lending, said Cook.

No financial details of the value of the bank purchase were revealed at the news conference, but Alexei Rodzyanko, president of ZAO J.P. Morgan Bank, said the deal involved the bank's license and some capital.

The sale is subject to regulatory approval from the Central Bank and the Anti-Monopoly Ministry and should be completed by the end of the year, he said, adding that initial indications were that approval would be largely a formality.

Cook said DeltaCredit had been intending to acquire the status of a commercial bank for some time and the opportunity to buy J.P. Morgan Bank had been timely. After J.P. Morgan & Co. merged with Chase Manhattan Corp. early this year, the merged group, which operates in Russia as J.P. Morgan Bank International, was left with two Russian licenses when it needed only one.

The U.S.-Russia Investment Fund, which was set up with capital of $440 million from the U.S. Congress in 1995 to promote the development of a free-market economy in Russia, began offering mortgages in 1998. DeltaBank, which lends to small businesses, and DeltaLeasing, which lends to small and medium-sized firms needing finance to lease equipment, also belong to the fund.

David Jones, president of the fund, said the purchase would not end U.S. government support for DeltaCredit's program.

"Mortgages are very popular with the U.S. government. They have given us all the money to date and will continue to fund us," he said. "But the demand for mortgages in Russia will grow and grow very fast, and it will be completely impossible for one source, even the U.S. government, to fund it entirely."

DeltaCredit, which has been pioneering mortgage products in Russia, issues mortgages in dollars, and the average current interest rate is 15 percent per annum. The program has approved $24 million in loans for about 1,000 borrowers and is processing applications for another $43 million for about 1,400 borrowers.

Richard Hainsworth, chief executive of bank-rating agency RusRating, said that in Russia's bank license market, buyers are not always aware of what assets and liabilities come with a purchased bank.

"DeltaCredit will be happy because it is obtaining an entity from a known source and therefore can be fairly sure that it's not getting an entity with anything under the carpet," said Hainsworth.

Kim Iskyan, banking analyst with the Renaissance Capital brokerage, said in a telephone interview that buying another bank's license was a sensible move and saved DeltaCredit having to go through a protracted and bureaucratic licensing process.

There was a lot of liquidity around with consumer retail spending growing more than 30 percent per year, and this was a sign that the mortgage market could also be growing, he said.

However, investing in mortgages was risky because of the sector's dependence on the economic environment. "The first thing that goes when the market turns down is the ability of consumers to make good on their bills," said Iskyan.