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A.Kostin: “If Russia wants to develop, we need more liquidity”

 
18.01.2012

CNBC HOST: 10 years ago VTB controlled around $6,3 billion worth of assets, fast forward to today, and Russia's second largest bank by assets now controls assets worth around $200 billion. Where's the growth coming from? Joining us exclusively is Andrey Kostin, CEO and the Chairman of VTB. Welcome to the program, sir.

Where is the growth coming from?

ANDREY KOSTIN: From the Russian economy mainly, but not only. We are present at nearly 20 countries, that's all emerging markets, or mainly emerging markets, countries like Ukraine, or China, or Vietnam, but there's some in Europe as well, including our VTB Capital bank in London, which is the investment banking branch of our group.

CNBC HOST: Yes. Let me just tell viewers in case they are not aware of it: you are around 76% owned by the government, right?

ANDREY KOSTIN: Yes, we had two placements. We had a placement, we are listed at London Stock Exchange, we had a placement, IPO, in 2007, when we raised more than $8 billion, then we had another placement last year, when we raised $3,3 billion by selling shares to international investors.

CNBC HOST: I know that you said in the past, or at least you are quoted as saying in the past that you were disappointed with the IPO initially, and that you are now working towards getting the share price up to levels of where it was back in 2007, by 2013? That's a pretty tight target.

ANDREY KOSTIN: I am not disappointed with the IPO, because the IPO was quite successful, we struck a very high price, and in 2007 we were 10 times oversubscribed, and last year we were twice oversubscribed. We were disappointed with the market, of course, because market does not take into account the performance of the bank, of the management, of the bank itself. We tripled our net profit in these 4 years, but our price is only half of what we had in 2007.

CNBC HOST 2: You were talking a moment ago about your exposure to emerging markets and the world outside of Russia. All of these economies, in particular Russia, actually, are quite close to what's going on in the Eurozone. What do you think, as an outsider, of the Eurozone banking crisis, and how do you think that'll affect you over the coming months?

ANDREY KOSTIN: Well, we had an experience in 2008, when the international, or American, or European crisis affected Russian banking sector, but it did not affect us directly, as we were not exposed to any subprime loans or any investment in other instruments. We were affected through our clients. When the global recession affected Russian export-oriented companies, they experienced difficulty in repaying their debts, Russian development market was suppressed, Russian industry was in very bad shape. So the same probably is true in regard to the recent European crisis, I mean, we don't have in our portfolio a big stake in, or a purchase of Italian government or Greek government bonds, but if there's recession in Europe, if there is slowdown in China, if there's zero growth in America, and Russian economy is affected, we feel problems.

CNBC HOST: We also recently saw a hostile takeover of Bank of Moscow. It's a very long story and quite complicated…

ANDREY KOSTIN: … And it's not quite accurate, because it was not a hostile takeover, we bought on an extremely friendly basis, the majority stake. But the management, the former management of the bank, which controlled the bank without being shareholders actually, took a very hostile approach to this.

CNBC HOST: But I guess there was a lot of criticism in terms of how it was handled, that you found this hole of money that was needed in the bank, and that led to emergency funds being needed for the bank, to the tune of something in the region of $14 billion. These were state-backed loans and they ended up receiving before you then took over the entity. I mean, some people would say that group such as yourself, is just an extension of the government.

ANDREY KOSTIN: No, it's not the case, we took our own decision to buy this bank. Unfortunately, the way it was done, it was done because of the position of the management of the bank, which made it impossible to have open tender and other procedures, which are normal for this case, and then yes, when we found this hole, which, just this week the Russian agency for saving deposits, who is responsible for restructuring of bad banks, announced that effectively Bank of Moscow was bankrupt in 2008. So we were in some sort of a rescue team in this case, and because it was not our fault, that this kind of problem existed, it was, frankly speaking, it was bad supervision on the part of the Central Bank, and also of course, political coverage of Mr. Luzhkov, who helped this bank to continue its activities in spite of the problems. We received support from the Central Bank, it's a 10-year loan, which will be repaid.

CNBC HOST: I read a Wall Street Journal article a while back, where you were quite skeptical, and I was a bit surprised about your stance, for you were quite skeptical on whether or not a Russian bank could succeed outside of Russia. I just wanted to ask you about that, do you think, you are present outside of Russia as well, but why is it difficult to you, looking from the outside in, for Russian banks to succeed outside?

ANDREY KOSTIN:  Well, you see, first of all I have to say, of course, that there is more opportunity for us in Russia, because foreign banks, or European banks, for example, experiencing certain problems now, they are trying to reduce, I mean, they are reducing their balance sheets, they are less aggressive in Russia, for example. But on the other hand, if you take Europe, for example, Europe has a very developed, a very competitive market, and for any outsider, particularly in Russia, trying to be successful here is quite an ambitious task. So we think that our strength should come from the markets which we understand better, which we work, like Ukraine, for example, Belorussia, they are very similar to Russian market, and that's why we expect to be a leading bank in these countries. But as far as Europe is concerned, we are more focusing on Russian investment or investment from Russia, or like our bank in London, it is our investment bank, which again employs good people from leading institutions in the City of London, but still working with Russian companies or with foreign companies, who'd like to invest in Russia and do business with Russia.

CNBC HOST 2: You said a moment ago that Europe was a very competitive area and difficult to get into, and I guess, you take the same view on the US. So I suppose, having heard about Russia, what's your take on Asia? Is it possible for Russian banks to start making roads into Asia?

ANDREY KOSTIN: We do have a number of branches in Asia. We are operating in India, in China, we recently opened in Hong Kong, we have our offices in Singapore and in Vietnam. In certain countries, like Vietnam for example, we are doing retail business, we feel there is a lot of opportunity on the growing market. China, of course, you know only too well, quite a difficult market, so again we are focusing mainly on bilateral relationships between Russia and China, which is quite big. So yes, we are putting a stake on the new markets, and we see, particularly in the time of uncertainties in Europe, that Asia represents a good case for growth in investment and in banking as well.

CNBC HOST: And how frozen is the Russian interbank lending market? Just curious, because we haven't talked about it, and we talk a lot about the European market being frozen.

ANDREY KOSTIN: It is not frozen, but recently you mentioned my interview with Wall Street Journal Europe, I mentioned that we experience shortage of liquidity, it's not at the extent we had in 2008, for example, but if Russia wants to develop, and as it is planned that Russian banking sector will grow 15 to 20% this year, we need more liquidity, as international markets effectively are not working for us today.

CNBC HOST: So you are saying there is a plan for Russian banking market to grow 15 to 20% this year? How?

ANDREY KOSTIN: … to grow 15 to 20%. Because we expect at least 3,5% GDP growth, and this gives the opportunity for banks to lend more money and Russian banks still have a good capital ratio, so they are in a position to lend more money, unlike maybe West-European banks, but we don't have as much liquidity for a number of reasons, because of the surplus of Russian budget, because the Central Bank does not provide more liquidity into the system, and because international markets effectively cut off, and we can't borrow money from the international markets. So we think that the major origin for this will be the Russian government and the Russian Central Bank, providing more liquidity into the system.

CNBC HOST: Andrey, good seeing you again, it's been awhile since we've seen each other, good having you in the studio again.

ANDREY KOSTIN: Thank you. 


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