Patrick Jenkins: Russian bank VTB has grown extraordinarily in the past eight years or so, with the balance sheet of $120 bln., thirty times what it was. But with that growth came a swathe of non-performing loans and several years of steep losses. Last year, however, the bank, which is majority owned by the Russian government, returned to profit and is now on a modernization drive. In February a 10% stake was privatized and sold to international investors – a key step in the Kremlin’s broader privatization agenda. Joining me today to discuss both VTB’s future and the evolution of the Russian economy is Andrey Kostin, VTB’s Chief Executive. Mr. Kostin, welcome, thank you for joining us. As I mentioned there, we had in February a key step in both your modernization and that of the Russian economy, this 10% placement of a stake in VTB. For you, as the Chief Executive of this bank, how key is that move, how important is it for you to be privatized?
Andrey Kostin: Well, of course in 2007, when we placed our IPO, it was a drastic change, a drastic move of VTB. When VTB was 100% owned by the government, then all of a sudden we appeared on international arena, we listed our shares in London, in Moscow, and of course, that turned a new page in the history of VTB. This placement this year was quite important because it was a first step in the program of wide-range privatization of government assets in Russia and it went very successfully, and we are quite happy about this. The important thing that the government effectively wants to sell more, and we expect that in the next three years we will privatize up to 50% minus one share, and ideologically the government is ready to go beyond this and actually to privatize the majority stake. So, partly joking and partly serious, I once mentioned in our “Russia Calling” conference in Moscow with the President Mr.Putin that we are, VTB is probably in the most difficult position, because on the one hand we have the majority shareholder, who is government, but the price of the shares is defined by international investors somewhere in New York or London, but we also have about 150 000 Russian retail investors, whose point of view we also have to take into consideration.
Patrick Jenkins: That’s true, but I suppose from the international investor point of view it’s key to their future, to the prospect of the share price how quickly you clean up the old VTB, if you like, the kind of lending that may be generated a lot of losses you saw in the bad years of the financial crisis.
Andrey Kostin: I would not say it is the old VTB, it’s basically a result of the crisis. As you know, during the crisis Russian banking sector was badly affected, not by the toxic assets in the subprime market, but mainly by toxic assets in the Russian real economy. And of course, we still have to clear up these consequences of this, it is happening, I mean the level of NPLs is reducing. It allows...
Patrick Jenkins: This is the non-performing loan ratio? What is that figure now?
Andrey Kostin: For the group it is now, I think, about 8,6 %, when it was nearly 10% straight after the crisis.
Patrick Jenkins: And where do you want to get that down to, realistically, over the next year or so?
Andrey Kostin: Well, before the crisis we had it below 2%, so definitely my target is to come back to this figure, but I think it will take another 2 or 3 years probably, particularly as we have also some loans which we’ve been converting into equity. We have now to deal with what we call “non-core” businesses, but it’ll take some time. But our target is not write-off, our target is actually that those loans are to be repaid, or a substantial part of this.
Patrick Jenkins: I wanted to talk to you about the competitive landscape in Russia. We’ve had quite a few changes, really. Most recently, we’ve had a couple of UK banks, Barclay’s and HSBC signalling that they want to withdraw from the retail banking market. Is that something that is potentially interesting for you, to pick up these small networks of branches, or is it too small for you to care about?
Andrey Kostin: We ourselves started our retail projects quite recently, only 5 years ago, but we now gain the share of the market depending on the major products, but up to 14%. It was quite a fast development, our retail network already represents about 25% of our net income. And we see a lot of potential in this, because the Russian market is still very much under-penetrated by retail business.
Patrick Jenkins: So to buy assets from a bank like HSBC or Barclay’s, is that attractive?
Andrey Kostin: No, we are the only Russian bank which made a lot of acquisitions, including Russia. Just this year we made two large acquisitions...
Patrick Jenkins: This is Bank of Moscow and Transcreditbank?
Andrey Kostin: So I think that you can’t cope with half a dozen acquisitions at the same time. So we are focusing on large acquisitions. It of course includes a lot of things which you have to adjust, you know, starting from IT program and finishing with corporate governance, and many other things.
Patrick Jenkins: You mentioned Bank of Moscow there, it was an interesting acquisition and quite a messy one in some ways. There was a bit of a backlash from some of the management there and a battle, certainly, to end up acquiring that business. Are you convinced that there won’t be more negative ramifications for that, because there are stories locally in Russia that the former chief executive of that business maybe had some business dealings, that might have caused problems with the book of business that you’ve inherited.
Andrey Kostin: Well, I think on one hand it’s a very good acquisition, because it’s the fifth largest bank in Russia, you can hardly find some other objects for acquisition like this. But you are right, I mean we found also that there are some problems with corporate governance of the previous management. They spent some of the loans to meet their own demands, developing their own businesses, but I am quite sure we will sort it out, I mean, we now are in talks with the management, we want to return the assets. If they are not performing well, I think we’ll have to streamline the businesses.
Patrick Jenkins: And overall, does that deal, and indeed the Transcreditbank acquisition, does that do anything to change your profit expectations for the year, because I think you had certainly set an aspiration of 15% return on equity going forward?
Andrey Kostin: Yeah, I think Transcreditbank is quite successful, the return on equity is around 20%, it’s actually higher than VTB. As you know, VTB returned to profit in 2009, we had $2 billion loss, last year we had nearly $2 billion profit. This year we expect probably the profit to be around $3 billion, and our forecast for the year 2013 is that with this kind of capital VTB should earn at least $5 billion.
Patrick Jenkins: What about growth outside Russia? As you say, you’ve grown by acqusition quite rapidly inside Russia, but there may be assets to acquire, particularly in Eastern Europe, for example, as some more troubled, stretched banks from Western Europe sell their Eastern European assets. May be, Irish banks, maybe Portuguese banks, Italian banks in areas like the Ukraine, for example?
Andrey Kostin: We don’t see, we don’t have in our strategy this kind of ideas, and you mentioned the unsuccessful performance of some British banks in Russia. When you go to a new territory, it’s always a risk, and you also should judge it very thoroughly. You have local competitors, you should undertsand what advantage you have working in this region. We are already represented in 20 countries, some of them for us are quite natural, markets like Ukraine, for example, some like China are much much more difficult markets. So, I don’t see how VTB might be extremely successful in Western or Eastern Europe at the moment, so our focus is in Russia first, then CIS countries second, they are close, there is a lot of possibilities that will create a united or a territory from a financial point of view, or a center...
Patrick Jenkins: So you would see Ukraine, I mean there are assets that may well come up for sale in the Ukraine, from the Italian banks?
Andrey Kostin: We did buy, no, we started our operation, interesting, in 2005 , by two Presidents, Mr.Putin and Mr. Yushenko, opened our bank, then we acquired a bank, so we made one acquisition in the Ukraine, not very large, but still which allows us to operate all through the territories of Ukraine. My strategy is very simple. I think all the best stories abot international banking, they showed us that you should have acquisitions. If you talk about Santander, if you talk about Citigroup, how it was created, it’s all a lot of acquisitions, so from this point of view we already made more than ten acquisitions all around the world, we’ll be developing organically, but if and when we see a good opportunity, we’ll be buying. Russia, of course, is our first target. If other markets, which are important for us, we also might consider this.
Patrick Jenkins: And what about the economic outlook for Russia broadly, compared with, let’s say, the Eurozone?
Andrey Kostin: Well, as you know, last year we had about 4% GDP growth, this year it might be 4,5%, according to our own economists in VTB. We expect that the budget, for example, will have surplus rather than deficit this year, maybe 1,1%. So, from this point of view Russian economy is doing reasonably well, we expect that by the next year we’ll restore our economy on the before crisis level, which is quite good, but we should go further. As I said, to build up economy, only based on a $100 oil price is not enough, we should do more, and that’s why I mean the Russian leadership is very serious about modernization, but a lot should be done in order to achieve these results.
Patrick Jenkins: A final word on today’s big news story, the IMF’s managing director Dominique Strauss-Kahn being arrested in the US. Should it be an emerging markets person leading the IMF as opposed to traditional Eurozone?
Andrey Kostin: Well, I think that personal professional skills and ability to manage this organization is much more important than which country this person comes from.
Patrick Jenkins: Mr. Kostin, thank you very much.
Andrey Kostin: Thank you