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Economics

INTERVIEW

HERBERT MOOS

Dependence on Foreign Cash Must Go

CAN THE HEAD OF ONE OF RUSSIA’S LARGEST BANKS ACHIEVE TRANSPARENCY?

The financial crisis highlighted the financial sector’s dependence on foreign investors. RN spoke to the CFO of one of Russia’s largest banks about this phenomenon.

VICTOR KUZMIN

RUSSIA NOW

What lessons has Russia’s banking system learned from the crisis?

Lesson No. 1 is the need to develop domestic capital mar- kets to reduce dependence on foreign investors. When the cri- sis broke, banks in Russia most- ly provided loans to the real economic sector. Usually, their assets were simple loans. As the economic crisis deepened, risk was rising, with loan loss provisions growing much fast- er than income, which led to negative financial results and in turn reduced capital ade- quacy. Many Russian corporations

and banks have placed equity and bonds on Western markets, which also exacerbated the neg- ative effects from the crisis. Rus- sia was not seen by Western in- vestors as their core market, and when they had to rationalize their capital investment strate- gies they simply withdrew. Another problem is major con- centration within Russia’s bank- ing system. A group of 20 to 30 leading banks comprises most of the banking market. Mean- while, we see that the govern- ment wants to diversify the mar- ket to create an adequate base of strong and reliable banks. We can see efforts by financial reg- ulators and other authorities to invite foreign banks into this pro- cess, but there are few strong players yet.

VTB sought government sup-

port to survive the crisis. Why?

In the early 2000s, VTB was

just a niche player focusing on foreign trade, with a balance sheet of less than $5 billion— a far cry from today’s $120 billion. The bank could not have achieved this by simply expanding its deposit busi- ness. In the pre-crisis years, VTB

had been building its balance sheet, especially its loan port- folio and its share of the corpo- rate market and retail lending, and borrowed internationally to finance this growth. Given that Western investors were affected by the crisis and lost much of their appetite for risk, foreign borrowing became the main

Russia is not seen by Western investors as one of the world’s major investment markets.

The government wants to diversify the market to create an adequate base of strong and reliable banks.

headache during the crisis. When the crisis came, VTB’s debt stood at more than $10 billion—the highest among Rus- sian banks. The government stepped in with assistance, and with government funding we stabilized our markets and an- nounced a bond buyback pro- gram, thus demonstrating to the market that VTB Group has

EXPERT

The Future of Banking in Russia

Mark

Rubinstein

IFC METROPOL

sis compared to many emerg- ing and most developed

R

ussia’s banking sector suffered much less from the world’s finan- cial and economic cri-

significant liquidity and that we remain confident of our finan- cial situation.

QUOTES

Does VTB Bank now plan to re- form?

We are now building a new

strategy aimed at turning our investment into an integrated universal bank. Russia’s banking sector needs a new player, com- bining three fundamental ele- ments: corporate banking, in- vestment banking and retail. At this point, no existing bank has succeeded with this type of in- tegration. We are developing a system of capital allocation for all products, which will allow us to control the financial state of each of our businesses. We examined the internation-

al experience of such solutions. Unfortunately, most attempts have been futile. In Britain, Bar- clays seems to be the only happy exception, along with Deutsche Bank in continental Europe. Such examples are very rare, howev- er, and we understand that we are facing a challenging task.

VTB has already had a negative IPO experience. How will the re- form affect the bank’s capital- ization?

When we went for our IPO

back in May 2007, the share price was below 14 kopecks. Naturally, it sank deeper due to the crisis, and we trade at about 7 kopecks now. We want to raise the stock price to 15 kopecks over the next three years. Our goal is to make VTB a

strong commercial agent capa- ble of competing with such global giants as Deutsche Bank, Barclays, and JP Morgan. When the next crisis comes, forcing foreign players out of Russia, VTB will remain, and it will be able to offer loans to domestic

percent of total assets. During the crisis, only 18 banks sank to the bottom, none of them crucial for the stability of the banking sys- tem as a whole or any large mar- ket segment. With almost 1,000 banks op-

markets.Largely, this was due to a significantly lower leverage level and low international wholesale funding exposure level. At the beginning of 2008, the ratio of assets to equity stood at just eight for Russian banks, compared to 38 for European banks and 31 for American banks. Foreign bor- rowings accounted for just 20

erating in Russia, the penetration of banking services remains very low compared to both developed and emerging markets. Mort- gage loans are a mere 3 percent of GDP, compared to more than 50 percent in developed econo- mies. Russia’s aggregate banking sector assets account for some 70-75 percent of GDP, which is also very low. At the same time,

Investment

" "

Herbert Moos feels the pinch of the banking sector’s over-reliance on foreign investors.

producers. It is for this reason that VTB Group was chosen to issue Russia’s sovereign bonds. The main lesson we learned

from that IPO was the need to understand who our strategic investors are. Our new strategy includes not just road shows, but also quarterly meetings with investors where we speak about our progress in implementing our short- and long-term tar- gets, providing a full picture of the bank’s situation and pros- pects. We will also make our fi- nancial reporting more trans- parent, enhancing quality and speeding up delivery.

Will Russian companies change their dividend policy and coop- erate with minority sharehold- ers after the crisis?

I think yes. For example, VTB

has created a special consulta- tive committee aimed at solicit- ing feedback from our minority shareholders. We hold regular meetings with the representa-

the Russian banking sector is one of the world’s most advanced in terms of corporate governance. Regulation requirements and cap- ital adequacy norms are among the strictest in the world. Meanwhile, about 80 percent

of the market is controlled by the 30 largest Russian banks, and only one of these banks, VTB, provides a full range of financial services, from commercial to investment banking. During the crisis, VTB received significant support from the government, using govern- ment funding to finance devel- opment, including its investment banking business. As a result, VTB

tives of this committee. The com- mittee, which has a separate of- fice, now allows each minority shareholder to come in and dis- cuss his or her concerns. We are also working to improve relations with minority shareholders rep- resented by institutional inves- tors. We hold regular individual and group meetings to discuss our strategy and progress. VTB is rethinking its dividend

policy, too. With our bank, this is a special case. Our new pol- icy in this area will be aimed at maintaining certainty and sta- bility of our dividend flow. Some investors are focused

on share price appreciation, and our “Road to 15” program will boost our stock price. Others are focused on dividends, and we hope to please these inves- tors, too. Among issues to be considered at the shareholder meeting is the distribution of a quarter of the bank’s annual rev- enue to shareholders in the form of dividends.

now has an investment banking business on par with internation- al IB peers. This is an important factor for our banking system as a whole. Though supporting this market is an expensive undertak- ing for the government, the bank- ing sector benefits from the ap- pearance of a player capable of offering a full range of investment banking services, including cor- porate restructuring, access to debt and equity capital markets, M&A, investment consulting ser- vices—in other words, all the ser- vices that Russian banks previous- ly sought from JP Morgan, Morgan Stanley or Deutsche

RN DOSSIER

Herbert Moos

Herbert Moos was born in 1972. In 1993, he graduated from the Kiev State Economic University with honors. In 2002, he completed studies at the London Business School as a Master of Finance. Mr. Moos joined VTB Bank in October 2009. In November 2009, he was appointed dep- uty chairman of the Manage- ment Board. He is also a member of Su- pervisory Council of VTB 24 (CJSC), chairman of the Board of Directors of VTB Factoring Ltd., member of the Boards of Directors of OJSC VTB Leasing, CJSC VTB Capi- tal, CJSC Holding VTB Capi- tal and CJSC VTB Asset Man- agement.

VTB has sucessfully un- dergone a transforma- tion from a retail bank

to a leading Russian invest- ment bank. Our new clients are already significantly contribut- ing to VTB’s growth."

VTB PRESIDENT AND CHAIRMAN OF THE

BOARD ANDREI KOSTIN

In lending to medium- sized businesses, VTB is most interested in

companies with a firm financial footing that have overcome the crisis. To help such clients, our bank has reduced mini- mum deposit requirements, increased loan payback times and expanded our list of strate- gic sectors and lowered rates. We’ve now returned to pre- crisis requirements for lending to medium-sized businesses."

VTB SENIOR VICE PRESIDENT

ANDREI KISELEV

FACTS AND FIGURES

Banks Sense End of Crisis

For the first time since the start of the economic crisis, Russian banks have started in- vesting their reserves back in- to the market. On April 1, the total amount of reserves for covering possible losses of all credit organizations totaled 2.1 trillion rubles (approx. $70 bil- lion), which was down 5.1 bil- lion rubles ($170 million) from a month earlier.

VTB in Brief

According to The Banker mag- azine, VTB Group took 70th place in 2008 among the world’s largest banks. 85.5 per- cent of its shares are owned by the Russian government. VTB’s long-term credit rating, according to Moody’s Interna- tional Ratings Agency, is Baa1 (“stable”). In 2009, the value of assets was $119 billion.

03

VTB Credit Port- folio Structure

Bank. For the Russian market, this is a significant step forward: do- mestic companies are recovering from the crisis, showing strong interest in international coopera- tion, which means that signifi- cant expansion can be expected in the IPO market, for example. Russia’s banking system is fore-

cast to grow by 10-15 percent in 2010. For VTB, with its compet- itive advantages, we expect 13-18 percent. At this point, it is hard to say how the banking system capitalization will increase this year. VTB’s stock price has jumped by 10 percent since the start of the year, while its main rival Sber-

bank, which has the biggest pool of assets, has seen its stock price fall by five percent as of the time of this publication. We now fore- cast that VTB’s stock price is like- ly to continue outpacing Sber- bank as well as outperforming the market as a whole. Earlier, signif- icant restructuring costs kept VTB’s stock price lower, but now that the restructuring process has been completed we’re seeing demand for the stock and the price rising. Toward the end of the year, the stock price may well rise from the current level of around $4.75 per GDR to above $7, a potential up- side in excess of 50 percent.

Telecommunications Russia expects to see an explosion in broadband Internet access

From Moscow to the Regions

The government’s policy of bringing high-speed Internet to the regions is likely to affect not only the most remote regions of the country, but the entire Internet market.

BEN ARIS

RUSSIA NOW

In a country as big as Russia, which spans 10 time zones, long-distance communications is part of millions of people’s work routines. The telecoms reform launched

at the start of last decade is large- ly completed and is arguably Russia’s most modern industry. However, even in the capital, Moscow, there are still over 1.8 million outdated analogue tele- phone exchanges. Still, the pri- vate sector has been stepping up to the mark with investments as they claim their stakes in this fast growing industry.

In Moscow, one can access the Internet practically anywhere.

Comstar is Russia’s largest

broadband operator, and has started digitizing Moscow’s tele- phone system in an ambitious $400 million project using IMS technology—an Internet Proto- col base multimedia technolo-

gy that manages a high-speed fiber optic telecoms network. By 2013, there will be no ana- logue exchanges left in Mos- cow.

“Introducing innovative IMS technology will enable us to take

a fresh look at service provision, and it will be a prototype for the future, when the main ser- vice will be the provision of broadband access and a multi- tude of services based on that,” said Comstar’s CEO Sergei Pri- dantsev. IMS was originally developed

for mobile phones (and lead- ing Russian mobile phone com- pany Moscow Tele Systems re- cently took control of Comstar), but the advantage of using it to run a fixed line network is that once a home is hooked up to a cable, it is automatically enabled to access the Internet, too, over the same network. And Internet usage is already exploding in Russia, with the number of Russians online up by about a third every year for the last three years to reach 59 million (out of a population of 142 million) by the end of last year.

From next to nothing five

years ago, Russian Communi- cations and Mass Media Min- ister Igor Shchyogolev said in May that the country’s broad- band Internet penetration rate was at 26 percent as of the end of 2009. As part of the Kremlin’s drive

to modernize the country, the government launched an initia- tive to bring cheap broadband to all homes, and hopes to in- crease the penetration of broad- band to 60 percent in the next five years. “The development of the Rus-

sian telecommunications indus- try requires the expansion of fast speed and affordable broad- band Internet access services across the country using vari- ous technologies,” Shchyogolev told Itar-Tass last week. “Russia is generally five years

behind the West in its broad- band development, due to the

historical undersupply of broad- band networks. Increased broadband speeds dramatical- ly affect user experience online, resulting in a substantial rise in the amount of time spent on- line and volumes of potential ad space to be sold to advertis- ers,” said Anastasia Obukhova, a telecoms analyst with VTB Capital.

European companies in-

creased their online spend ten- fold over the last decade to 20 percent as broadband penetra- tion rose from single digits to between 60-80 percent over the same period. The early movers are now rac-

ing to stake out their share of this fast-moving market while it is still up for grabs. Comstar already covers Moscow and 81 other Russian cities, Pridantsev said the company aims to ex- pand operations to cover a total of 200 cities with populations over 100,000 people, and has already been moving fast into the regions. The company controls 29

percent of the broadband mar- ket in Moscow but only 4 per- cent in the regions, analysts said,

but is buying up regional assets to extend its reach into the hin- terland. At the start of this year, the company added yet anoth- er regional operator when it paid $8m to buy regional broad- band player, Tenzor Telecom, based in the Yaroslavl region. Comstar’s broadband reach

into the regions is growing even faster in the regions than for the country as a whole. The company’s regional broadband base was up by 44 percent year- on-year in 2009, said Konstan- tin Chernyshev, an analyst at Uralsib in Moscow. Chernyshev said that by the

end of 2010, Comstar’s total broadband base will increase by a quarter again to 1.5m house- holds, including 560,000 house- holds in the regions, making it one of the fastest growing com- panies in the country. “The company provides the

best exposure to the fast-grow- ing broadband market in Rus- sia—particularly as its focus is not on the highly penetrated Moscow market, but on the re- gions where the company has a greater scope for develop- ment,” Chernyshev said.

DMITRY ROGULIN_ITAR-TASS

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