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Andrey Kostin: «Banks should reduce their risk appetite and desire to grow very fast»


Andrey Kostin talks with Bloomberg TV channel about the Eurozone crisis, Russian banking industry forecast and VTB share sale

HOST: Well, with us is Chairman of VTB Andrey Kostin. Thank you so much for coming on City Central. Mr. Kostin, let me ask you this: despite what we heard from your earnings last week, are we still going to see that Tier 1 capital ratio of 10% for 2012 for your bank?

ANDREY KOSTIN: Yes, from the beginning of this year our Tier 1 capital increased from 9 to 9,6%, now our target is to achieve 10%, which is much higher than even the prospects for Basel 3. And I think it is a reasonable platform for us to continue the growth, may be without large acquisitions, but still, for organic growth I think that'll be enough.

HOST: And this is although we may see further weakening of the rouble, because this has been a headache for your bank?

ANDREY KOSTIN: Well, I believe that rouble will be stabilized, I believe that Russian Central Bank has large hard currency reserves, the third largest in the world, more than $500 bln. So when necessary, the Central Bank can intervene to stabilize rouble. We expect fluctuation of rouble, but within a certain corridor, and I am not very much concerned about a drastic fall of the rouble.

HOST: How dependent is your bank on refinancing from the Central Bank for the next couple of quarters?

ANDREY KOSTIN: Well, not very much at the moment, but of course the Central Bank has a special program, if and when things go much worse, and I think all the instruments, which were used in 2008-2009, could be again used for funding Russian banks. And we are talking about trillions of roubles, that's a possibility. We are now much more experienced.

HOST: Mr. Kostin, it will be a possibility if rouble touches what level? What is the critical level that you see actually as a banker? What level is going to cause struggle?

ANDREY KOSTIN: I don't think it's very much related to the rouble, I think it's more related to liquidity squeeze, which we might or might not have. But Russian banking sector is much less dependent on, for example, external funding nowadays. So for us, of course, what's happening in Europe is important, but to a much lesser extent than it was in 2007-2008. Most of the Russian banks reoriented to be funded from the local sources, so I think the situation in the Russian banking sector will stay quite stable. There is no direct exposure to what's happening in Europe, and unless there is a global recession or a substantial recession in Europe, maybe some other parts of the world, drastic fall of oil and other raw material prices, I think Russian banking sector should be OK.

HOST: Now, 30% of your profit in terms of the net income, the operating income, actually came from currency trades in the 1st quarter, is this something that's going to be more difficult to achieve going forward?

ANDREY KOSTIN: Well, I think we are trying to increase the more stable sources of income, like commission and fees income, like interest income, and for example, our retail business is now growing quite fast, it gives us already at least one third of our net profit. So, I think we will try to either reduce the risk and operate only on behalf of our clients, or to concentrate on less risky operations, because we still believe that the situation will be very volatile for the rest of this year. And I think the banks should avoid risks, should minimize the risk and conduct a more conservative policy.

HOST: What are the chances today of an actual interbank freezing that will have a big impact on VTB? You've been trying to sell, for example, some notes, you've been trying to sell RUR 200 billion in 3-year notes, is that changing or is that still your plan?

ANDREY KOSTIN: I think the demand is still all right, I mean we still manage to get funding from abroad, as well as from domestic sources by issuing bonds or by issuing Eurobonds. So at the moment, I think, the situation is much more difficult for equities, because the equity market is a nightmare. The price of VTB shares fell substantially, but before that, in 2 days, they grew 10%. It's a very speculative market; it completely does not reflect the situation within the company, it's much more important.

HOST: So this is what investors being scared, when you talk about volatility and speculation?

ANDREY KOSTIN: Absolutely, they don't care very much, frankly speaking, at least may be they do care, but they are acting more based on the outside information, what's happening in Europe, what's happening in America, rather than what's happening in Russia or what's happening within the bank. So it has very limited effect, your good results or bad results. Mainly the whole atmosphere is negative for making investment in equity, negative for making investments, let's say, in emerging markets or BRICS countries, or there are more positive signs and there is more enthusiasm, very little depends on us, much more depends on the global situation on the markets.

HOST: Russia was also preparing to sell possibly some stake in Sberbank and also VTB. Does this current environment mean that it will hold off selling that until we see a more rosy or certainly a little more of a clear picture of what's going with the banking industry?

ANDREY KOSTIN: The government has a very ambitious plan for selling stakes in Russian state-owned companies, including VTB. For example, in 2011-2013, in 3 years we should expect that 35% of VTB would be sold. We already managed to sell 10% last year, we are the only state-owned company which managed to do it in a very volatile environment. But as Mr. Putin has recently mentioned for Russian government the privatization has more structural rather than fiscal importance. So it means that probably the Russian government might be very flexible in the pricing. On the other hand the answer is yes, the present market conditions are not favoring this. So I would personally think it will be extremely difficult to sell such large stakes in banks or even in other companies. So, I think we should look at the market, we should not go and privatize at any price.

HOST: Very interesting. Mr. Kostin, thank you so much for now, Andrey Kostinis staying with us, we will ask him how the situation in Europe is also impacting businesses and what he is hoping will come out of tonight's EBA meeting.

HOST: Well, still with us is Chairman of Russia’s VTB Bank Andrey Kostin. Mr. Kostin, before the break you were telling me in no uncertain terms that actually this is not the right time possibly to sell stakes, because of the market conditions, because we are facing some unprecedented, you know, investors being scared, because of what we are seeing in the global economy, especially in Europe. What is it going to take for the situation to stabilize?

ANDREY KOSTIN: Well, it’s difficult to say, of course, when. There is always a window of opportunity. Within one year you might have some slot time, when we can privatize, for example. But if we talk about Europe, I personally expect there will be quite a long and protracted period of a very difficult time for euro. I don’t see any easy solution. On one hand people do criticize their governments, they say that governments are doing too little too late. But on the other hand, what they are doing now was impossible 5 years ago – unthinkable of spending hundreds of billions of euros of taxpayers’ money to support different institutions or economy, it would be absolutely out of the question. I think they made a lot of progress in trying to rescue the European integrity and the European economy, but still, I think the problems are very deep. And I am not talking about Greece, also, if you look at Spain, the fiscal problems, the problems of debt are so immense in certain countries that I am afraid it could be a chain reaction, one country after another, which their leaders should tackle.

HOST: But are we talking 4-5 years, or are we talking longer?

ANDREY KOSTIN: I think longer. Two or three years we will need in order to at least frame the decision and to find the solutions for a number of quite difficult problems. It’s not the end of the world, of course. Even the departure of Greece from EU is not the end of the world. Life will continue and Europe will continue, but still, I think that the markets will be very fragile and frightened, and I think there will be not very much optimism about the future.

HOST: What does it mean for banks in general? We’ll talk a little bit more about what’s going to happen to Barclays, but I want to take your thoughts on the banking sector in this kind of environment. Are we going to see banks, smaller banks possibly, not existing in one or two years?

ANDREY KOSTIN: Not necessarily, I mean, small banks sometimes survive better than the big ones, as was shown by the crisis in America or even Europe. And on the other hand, again, in Russia, for example, I feel there are too many banks, and if some of them disappear, I don’t think there will be a very big deal for the Russian economy or Russian banking sector. Banks should, first of all, reduce their risk appetite, they should reduce, in Russia particularly, their desire to grow very fast. Well, let’s take VTB, we grew 35 times in 10 years, I am afraid…

HOST: That’s huge.

ANDREY KOSTIN: I am afraid now we are talking about much more moderate growth, still quite strong this year with expectation of around 15% growth of loan book of the Russian banking sector. But it’s not, of course, 80% or 50% which we showed.

HOST: Mr. Kostin, when you say bank should curb their appetite, is it the banks that need to self-regulate or is it someone saying «Guys, you need to watch out, because a lot is at risk»?

ANDREY KOSTIN: Both. Of course, banks will always be on the other side of the wall with regulators. Well, I was talking once with the governor of our Central Bank, of course, as a part of the joke, he said that to him the best capital adequacy was 100%. So definitely, regulators have a different opinion on banking risks. We have to earn money, we have to show performance to our shareholders, and of course, we have to take some risk, but there should be good compromise between regulators and banks. And I think in Russia we found it. From the 1st of July they introduced new regulations, which are stricter than before, which impose more burden on banks but are acceptable for us, and we feel we still might lose may be 1% of our capital adequacy, but it’s OK, you know. So I think it’s important to improve regulation.

HOST: Well, joining us is Bernhard Speyer, he is head of banking, financial markets, regulations at Deutsche Bank Research, and VTB Chairman Andrey Kostin is still with us. Bernhard, talk to me a little bit about who you think is the best person for actually supervising banks in this current banking union, is it the European Banking Association, or is it the European Central Bank?

BERNHARD SPEYER: We would very much feel that it is the European Banking Authority for the simple reason that if you put central banks up to charge of banking supervision, there is always a danger of M&A being compromised, there is always a danger of their independence being compromised and there is a danger of being a contradiction between the two aims and objectives, that is preserving financial stability on the one hand and preserving the monetary stability on the other hand.

HOST: Now, Andrey Kostin, you were telling me that you are actually not completely against regulation at all, it's always going to be a game of ping-pong between central banks and between the bankers, but you believe regulation, if well thought-out, is something that we need more of?

ANDREY KOSTIN: Well, we need better regulation, not necessarily more severe. And I think there is a very fragile borderline between these, because if you push too much, you can get into further trouble. I have recently mentioned that European bankers remind me of people sentenced to death, just waiting for execution, because their expectation of much more severe regulation really might create a lot of problems for the banking development or giving loans to enterprises in Europe. So, I think, there should be more qualitative regulations, I think there are probably enough regulations already, but their quality should be improved, and it definitely should be done on the global scale rather than on country-to-country.

HOST: How do you improve the quality of regulation, you need to involve bankers more? I mean, essentially they don't want to be forced to do something that will cut profits?

BERNHARD SPEYER: I think the most important thing really here in Europe is to make sure that the level of supervision is commensurate with the level of market integration. Clearly, we haven't done that, we've retained supervision in the national hands while we had a single financial market, and that clearly was arrested before disaster. So, where we really need to make an improvement is in fostering pan-European supervision, including peer review, very strict guidelines and really making sure that we have a single rule book that all adhere to.

HOST: Do we need bonus caps, and would bonus cap in CRD4 be actually passed through in Brussels?

BERNHARD SPEYER: I don't think, I mean if you really look at the history of financial crisis, you had problems in institutions that paid millions in money and you had problems in institutions that were small and paying comparatively low wages. Really it is all about installing the right risk culture, and this is also what we saw at Barclays. It wasn't a problem that there weren’t rules for what was happening, it wasn't a problem that there was insufficient supervision, but really apparently there was a lack of consciousness in the culture of the institution.

HOST: Well, how difficult is it, Andrey Kostin, to change this culture, because it's something that's embedded in the way that we do business in general, so how do you get rid of that without regulating more?

ANDREY KOSTIN: I think bankers learned their lesson from the crisis. It was very bad for the image of banks, and this case is also quite negative for the image of the entire banking sector. I think bankers would like to provide a better service to their clients and to show better culture. That's something which we expect to be seen. But also I'd like to mention that for regulators it's also important to close loopholes which exist in regulations. For example, we talk about shadow banking, that's a big area, which is not regulated, which also should be dealt with. So I am quite optimistic of improving the regulations and behavior and culture, at least what we see in Russia, with very many exceptions, but still there is quite a positive development.

HOST: On Barclays, do we need to split the bank in two, and how do you recover from a scandal like this?

ANDREY KOSTIN: Well, being chairman of a universal bank, I am not in support of splitting something. I think that is not necessarily the solution.

HOST: Do we need to split?

BERNHARD SPEYER: I agree to Andrey's point, I mean, again we've seen, when you look at the financial crisis, we've seen crisis in institutions that were pure investment banks, we've seen crisis in pure High Street banks, we've seen crisis in universal banks. So apparently, each model is to the same extent susceptible to problems, it comes down again to management risk culture and strong supervision.

HOST: But in this instance, how do you actually give the confidence to boost that investors need for banks, for example, the EBA did an exercise to try and bolster this capital raising, is that an exercise that worked?

BERNHARD SPEYER: It has to some extent. You know, it certainly has put a lot of transparency on what banks have on their books, it was there for everybody to see, to make their own calculations, even if they thought that the benchmarks that were set by EBA for that exercise were not sufficient so everybody could do that. We've also seen that apparently some of the results were questions, but again, I think that was not due to a failure of EBA, but the fact that the whole show was actually run by national supervisors, which brings us back to the previous point. What we really need to establish is some supervision at the EU level to take out the incentives for people to cook their books.

HOST: And you'd be happy to be more regulated, as long as it was better regulation, you think that would not hurt, but how do you define that?

ANDREY KOSTIN: I am afraid, whether we like it or not, that is going to happen.

HOST: It will happen. What's your biggest concern, over-regulation?

ANDREY KOSTIN: Yes, I mean the major concern is when particularly the stock market is bad and you expect to provide good results, like VTB in Q1 produced 15% ROE, any pressure on your business definitely makes it more expensive and less profitable. It leads to worse results, and you should show your shareholders that you are performing quite well.

BERNHARD SPEYER: If I could just add a point to that. You know, I think after every scandal there is a natural temptation to do something and often it is institutional change or new regulation, however, I think we need to be careful not to oversee that we actually have done a lot of change in the regulation. And we need to give financial markets some time to actually have that new financial regulation bed down and become translated to new routines. We've hardly been able to pass all that proposals that were devised by G-20 leaders over the past 3 years, and I think we should be careful not to add on top of that, and add new nervousness and also stretch bank resources in implementing all that.

HOST: But how do you deal with the Barclays scandal? People feel they've been cheated, people feel that they are completely out of touch with reality, so how do you fix something like that?

BERNHARD SPEYER: Well, first of all, I think there is a case for a very thorough investigation on what happened, secondly, who got hurt, and the extent to which, on who actually these burdens have fallen, which is not entirely clear. So that's the first step. The second step, we need to establish whether that was a single institution incident or whether other institutions were involved as well, if the latter, we clearly have to extend the first steps to those institutions. And then, I think, if you look at that particular scandal, we would be well advised to target that at the root cause, which is obviously the calculation of the LIBOR, rather than anything else. And if we go to that, I think, we've done probably a lot to tackle the root cause of that particular problem.

HOST: All right, thank you so much to you both, Bernhard Speyer there, head of banking, financial markets, regulations department at Deutsche Bank Researh, and VTBChairman Andrey Kostin. Thank you so much for your time.

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