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A.Kostin: “Our task now is to integrate very effectively the acquired businesses into the Group”


In what ways has your strategy changed over the past year? And do you anticipate any further strategic changes in 2012?

Several important events have occurred since VTB approved the strategy for 2010-2013 last year. We have acquired controlling stakes in Trascreditbank and in Bank of Moscow, and the world economies are now facing another round of crisis. Still, I would say the fundamentals that underpin the strategy remain largely the same. The Road to 15 is a strategy designed to deliver effective growth through enhancing efficiency and increasing recurring returns for the Group along all the business lines and in all the countries where we have a presence. This approach has become all the more important in 2011 with the crisis looming large.

We might have to correct our forecast on achieving the capitalisation goal now that financial markets are depressed, but efficiency remains the corner stone of our development over the next two years.

So far the progress made in delivering the strategy is impressive. Not only are the financial and quality goals being met, but net profit in the first half of 2011 was 53.6bn RUR with Return on Equity (ROE) at 18.1%. Corporate investment banking and retail banking posted a solid pre-tax profit of 51.2bn RUR and 20.2bn RUR respectively for the period, and operating income before provisions was up 45% year-on-year to 153bn RUR. Net fee and commission income grew strongly, up by 52% to 17.9bn RUR. VTB Capital was also number one in M&A deals completed, according to mergermarket’s rankings for the first six months of 2011. In less than a year we have launched a transaction banking division with a new team, new cash management and our transaction products; updated our on-line banking services and launched a dedicated sales stimulation programme. We have also optimised the lending process which is the key client service process in any bank. As a result, time to decision for medium clients has been reduced by 30% to 40%, and for large clients by 50% to 70%.

Our motivation system was critically upgraded to correspond to the new process and an integrated credit department was created, based on the best operational practice.

In addition, a number of large-scale, efficiency-accretive projects were finalised. VTB North-West was fully integrated; a CIB business line was created; and our regional business strategy was revised.

We have also implemented a new group governance model that corresponds better with our plans to become a global bank. As for the acquisitions, they fit perfectly into VTB’s strategy. The rationale behind the Bank of Moscow acquisition was to strengthen VTB’s presence in the Moscow region and the Group’s positions in retail through access to a large client base. It also brought involvement in unique large scale projects in Moscow and expanded VTB’s base of corporate clients significantly, enabling us to realise synergies from cross-sales opportunities.

The acquisition of Transcreditbank was designed to substantially increase the group’s ROE, develop a long- term partnership with Russian Railways and other companies in the industry, expand the network by 290 branches and develop cross-sales opportunities.

Alongside our “Road to 15” strategy, our task now is to integrate very effectively the acquired businesses into the Group.

Your strategy envisages development of the integrated Group-wide risk management system as well as further implementation of Capital-at-Risk concept for decision-making purposes and continues transition to Basel. How is your approach to managing enterprise-level risk changing?

We are currently implementing a new governance concept which aims to increase the level of business integration through the creation of global business units, and to develop a strong corporate centre through the integration of those key control functions, risks and finance.

Previously, risks were managed at the entity level, with each group member corporate centre setting general standards and managing large exposures relevant for several subsidiaries. Within the new group-wide system we have separate resources dedicated to group risk management. A Group CRO was appointed in September and group risk units created, covering all types of group level risk, and particularly focused on analysts, analytics, methodologies and portfolio level exposures, and managing large exposures by exception. A new Group Risk Committee will be tasked with defining group risk appetite, improving portfolio measures of risk and setting the entity level committee’s approval limits.

I think we are on the right track now. Our new risk management system aims to remove the inefficiencies we have identified in the previous model.

One of several group risk committees is mainly composed of board members and will meet quarterly and take key strategic decisions regarding the group’s risk appetites. Thus, although it won’t affect our day-to-day activities, it will allow us to see the big picture in group risk management and to take strategic decisions properly and in due time. This approach is not unique for this function, however, and we are implementing similar management models for other key control and support functions across all geographies for finance, operations and IT. A strong corporate centre together with the global business units, corporate, investment banking and retail, will help us to create the basis for the future growth. Across all geographies, CIB is now responsible for corporate clients and retail, while VTB24 is responsible for business with individuals and SME clients.

This shift from strategic controller model to global bank is necessary in order to deliver the group’s strategy.

Innovation and modernisation...Your “Road to 15” strategy addresses this matter through the launch of an innovations factory in order to enhance efficiency in your retail business. How’s that working?

This year VTB24 has launched a number of innovative products and services, largely related to alternative customer service channels.

For example, the launch of a mobile banking application for Apple and Android platforms allows our clients to securely access information on their accounts and make utility and mobile payments, transfer money between VTB24 accounts and to other banks, open deposits, buy currency and precious metals and even locate the closest ATM using a geo-location plug-in.

We are planning to deliver similar applications for the Symbian and Windows mobile platforms soon. VTB24 continues to expand the list of Telebank partners: mobile operators, housing and utility services providers, government bodies, payment systems and even charity organisations. Moreover, VTB24 ATMs are actively being used as an alternative distribution channel: they address our customers by name and propose customised pre-approved products to them.

You regard human capital development as a key priority. Are you confident with you talent strategy for the next 3 years?

We do regard human capital development as one of the group’s key priorities. Indeed, among all the tools available for a CEO, people are the most complex, flexible and intellect-driven to manage. The hand selection of the right people for relevant functions, the formation of results-oriented teams capable of addressing new challenges, and their professional and managerial development are all top priorities for any CEO.

The VTB Group’s dynamic development, new projects, new businesses, permanently changing environment and presence in an increasing number of countries all create rich soil in which to discover and grow human talents.

Employees, their capabilities and skills grow along with the expertise they get while implementing complex projects in a highly competitive environment. The successful delivery of the Group strategy assumes both the pro-active development of the top managers, middle managers and key personnel already in the group, and the hiring of talent in the global labour market. Such a combination has proved its true effectiveness over the years.

The active rotation and promotion of top managers within the group secures the best performance capabilities and shapes a corporate culture which is open to the best international practices. This allows us to quickly and successfully match proven managerial partners to new assets. Our experience highlights that mixed teams consisted of acting VTB managers and the new ones are very efficient. As a result we see sustainability, secure dynamics and better team vision.

This rule applies both to top and middle level management when we do need world-class experts to develop, say, new businesses or drastically improve performance in a particular area. We look at people with work experience in leading global financial institutions. We are very proud that a number of renowned top managers from the UK, US, Germany and India have joined our team in recent years.

Further development of human capital is another major talent resource for us. To meet this objective we have developed a multi-level, in-house training system catering for both full-time and distance learning.

Annually, this system involves around 2,000 employees. VTB’s corporate university was established six years ago. Since then it has become a promotion springboard for many middle-level managers. In 2011 we also launched training programmes for top managers, compliant with global practices and linked to the London School of Economics, Harvard University and Columbia University. So I’m confident that, given the VTB Group’s dynamic development of and high demand for talented people, every skilful individual will certainly find his place within the organisation. Our system of personnel training, development and retention aims to meet this challenging objective and is constantly being improved.

We see such skills as strategic vision, quality of decision making and high performance efficiency as absolutely vital for group strategic success. All these skills evolve from relevant experience, a working record with leading global companies, broad education, and the ability to learn more and quicker than competitors. And in addition to these qualities, of course, given the group’s vibrant growth, any recruit should be a bit of workaholic in order to work for us.

In our strategy we take into consideration the availability of skilful professionals within the group and in the local and international markets. As a rule we take into account the length of the search process as well as the period required for new managers to adjust to our business dynamics. If we are short of time, we probe the talent pool within the group, as we did for the Bank of Moscow team-building. In my opinion, any CEO’s key focal points are to always have the right people in the right place at the right time and to secure beforehand candidates to replace top managers in case of need.

The Group’s priority is to shape strong professional, high-performing teams and the rotation of personnel can be a useful tool in this. Indeed, moving personnel across borders is important since corporate culture, value systems, quality, efficiency and expertise migrate with people. Within the group, personnel relocation is gradually becoming more significant. Today VTB offices in Dubai, Singapore, and Hong-Kong already have truly international teams. And people from Ukraine, Belorussia, India, Italy, Great Britain, Finland, France, Hungary and the Baltic countries work at the Moscow VTB Group headquarters. It is difficult to identify which particular functions and skills are moving most often, given the geographic diversity of VTB. In some countries we have constant shortages of risk managers or retail experts, for example, or local finance experts with relevant expertise. Sometimes the solution is to relocate people from other offices.

What is your view on global economy?

The global economy is gradually entering an utterly new phase with a slower pace of growth, restricted access to capital as well as serious regulatory reform and redistribution of economic weight among key global economies. I think forecasts on a global slowdown are likely to materialise. VTB Capital analysts expect global GDP growth of about 2% in 2012 with developed markets showing less than 1% on average and emerging markets 6%-8%. Sovereign debt risk remains a key theme for the developed markets. I wouldn’t talk about full scale recession yet but there are some signs, especially the lack of political robustness in finding a solution to the Eurozone crisis. What Europe desperately needs today is to restore confidence. One of the possible solutions there seems to be the idea of fiscal compact which has been proposed recently.

Of course, like any other major economy, the Russian economy is affected by changes, both positive and negative, in the global business environment. For VTB Group, Russia remains the core market and the 2012 outlook for the mainstays of Russian exports, oil and basic commodities, stays firmly positive. Today our country is much better prepared for a hypothetical downturn than it was three years ago. Russian GDP growth in 2011 is expected to be over 4% and the forecast for 2012 is at least the same or better. The state budget remains balanced and corporate debt reasonably low. Political risk is another issue often talked about in respect of Russia but I think this is a bit exaggerated. Judging by the results of the Duma elections held in early December, predictability and continuity of economic policy is highly likely to continue after the presidential elections. Thus we’ll hardly see any serious deterioration in the domestic business environment and I’m very confident about VTB Group prospects in the local market.

Growth risks for an institution of our scale are directly linked to the overall economic situation in Russia. A scenario in which a hypothetical sharp economic slowdown triggers a contraction in demand for credit seems far from being realistic given the current domestic fundamentals.

In terms of funding we are also very well positioned at the moment since VTB is predominantly a domestically funded institution. And the reality is that the authorities in Russia are very supportive of the banking system and there is a sufficient amount of back-up liquidity facilities to absorb any economic shock. From a longer-term perspective, potential asset quality damage stemming from the Eurozone crisis must be considered. However no major Russian bank has any significant direct exposure to the peripheral European sovereigns, and the oil and commodities prices seem to be very resilient as they are supported by the Chinese demand, better than expected US economic data and the continuing political unrest in the Middle East.

The financial and economic crisis of 2007–2008 has created a considerable debt burden for many of the major economies and presents a considerable challenge for policy-makers. Obviously, shifting debt around doesn’t resolve the underlying problem. The debt burden ought to be reduced via austerity measures, restructuring part of the debt, recapitalisation of the banking system and tighter budget controls within the Eurozone. This would require a careful balancing act in order to avoid damaging the prospects for economic growth. Liberal fiscal policy and tighter budget discipline should help control credit risks in the economy. The Eurozone crisis is a key example of the potential risks to the global economy arising from escalating government debt. But poor fiscal positions are not limited just to the Eurozone; the US and Japan also have significant budget and debt problems. As for the financial sector, undercapitalisation of the banking system could create a liquidity trap. This is a very important issue that decision-makers should focus on as soon as possible.

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