Steve Sedgwick: Let’s get out to Andrey Kostin, who is the CEO of VTB Bank. Andrey, thank you very much indeed for joining us today. So tell us about the growth story in Russia. You are trying to grow incredibly aggressively, get up to the same kind of size eventually perhaps as Sberbank, but other banks, European banks, are finding it very difficult to gain a foothold, certainly in retail operations. Why is it that you can grow the business so much but others are failing?
Andrey Kostin: First of all, I’d like to say that we have a different kind of strategy than Sberbank so we should not necessarily repeat their way. For example, we are the number one bank in Russia in investment banking and we have much more extensive and large operations outside Russia than Sberbank. But you’re quite right. Since 2006, we started to develop a retail network from scratch and now we have more than 10%, around 11% probably, on loans in retail business, and with the new acquisitions, probably up to 15/16% of the market. I think there’s a huge potential in the retail market, but I agree that foreign banks should face the competition of Russian banks, first of all, Sberbank and VTB in this area.
Steve Sedgwick: How important is it for you, and I know you’ve spoken to Geoff previously at Davos about this and asked in the studio about the role of the Russian state and actually getting down that stake that the Russian state has. How important is it to have a larger free flow of this stock?
Andrey Kostin: We definitely operate completely in the same environment as any commercial bank, and the ideological approach of the Russian Government is to diminish the stake of the Russian Government; that’s why in February we sold another 10% to the national investors of VTB. So the Government provided substantial support during the crisis, but it was not only for state-owned banks, it was for the banking sector in general. So I think the role is diminishing. First of all, the Government would like to see a lesser role for the Government in all sectors of the Russian economy, including banking. So we see not much difference in actually our environment of operations for state-owned banks or commercial private banks.
Steve Sedgwick: Your non-performing loans are moving in the right direction. They were almost 10% previously, now just under 9% as well, but that’s still really high, especially when I see the problems Spanish banks still only having non-performing loans officially of around about the 5% level. Why have you got such a high amount of non-performing loans still?
Andrey Kostin: The Russian economy was badly affected by the world economic crisis, and the problem of the Russian banks was not the so-called toxic assets in some derivative markets; it’s particularly loans to Russian industry. So the changes are there because in 2010, for most Russian banks it was a profitable year in comparison with 2009, and the profit they made was basically because of diminishing the NPLs. So this year the profit will grow even further. I can tell you a simple example of VTB. In 2009 we had $2 billion loss. Last year we had $1.7 billion profit and this year, our plan is around $2.73 billion net profit for 2011.
Bob Janjuah: What sort of margins are you charging on regular consumer loans relative to perhaps the very thin margins we know used to be the case in mainland Europe?
Andrey Kostin: Our margin on loans overall last year was around 5%. This year we expect that it might be between 4.5-5%, slightly lower. The situation is not so easy because there is a big pressure of competition and there’s not enough liquidity in the Russian banking sector, there’s a relatively weak demand for new loans. So the pressure is there but I still believe that the margin will not go below 4.5%.
Bob Janjuah: Compared to the Spanish banking sector, that’s a significantly bigger margin I think.
Andrey Kostin: It is, yes.
Anna Edwards: One of the things that surprised me when we heard from some of these big European banks that Steve was referring to and their decision to pull out of Russia, was that they were saying they’d focus on the commercial customer, which seemed to make sense, but also that they were cutting back on their private banking businesses, and we hear so much about rich private Russian individuals coming to London and buying up various assets. Can you tell us about how your private banking business is doing? Is that an area that’s growing very strongly for you?
Andrey Kostin: No, private banking is not so strong for Russian banks. Most of the Russian wealthy people prefer to have a private banking somewhere outside Russia. Still, things are changing and for VTB as well, and we are trying to use our international network for this as well, but I would say that it’s growing business but it’s still by far not the core of the major line of business for Russian banks.
Geoff Cutmore: I’ve got a question that relates to the future really. You’ve talked about the improvement in the non-performing loan book, but here we have a market that has turned negative it seems on the commodities, short term. The Russian stockmarket is very geared to that trade. In fact, the whole Russian economy seems to be priced effectively off what the energy price does. Are you concerned at all that if this becomes a trend for the rest of the year, your NPLs could rise as other parts of the economy suffer?
Andrey Kostin: Yes and no. On the one hand, of course, we still have oil at the price which is $100 or whatever, this is very acceptable for Russia. With this kind of price level, Russia might have a surplus budget this year of around maybe 1-1.1%. It’s always this way – if oil is okay, then the Russian economy is okay. We want to change this actually. It doesn’t mean that we want to have the Russian economy as not okay when oil is okay, but we definitely want to modernize and diversify our economy. But you are quite right. Russian markets do very much depend on commodities. There’s a great concern about this. There’s still actually the sense of instability and uncertainty in Russia. That’s why most of the Russian leading companies are not investing in new projects, making no new investments. That’s why there’s a weak demand on banking loans.
Bob Janjuah: Just two points away from Russia, I think high commodity price is actually a bigger problem for the consumer in the West. Oil is a tax on our consumer, not quite the case in Russia. I think the other point in terms of the stockmarket, I think somebody had told me – I can’t prove this – that if you strip out the CRB related sectors from the FTSE, from the trough in March ’09, the FTSE’s only up 9%. So we are at least as exposed in terms of our equity markets to commodity prices than almost some of the countries you’d expect to be.
Geoff Cutmore: A question for you Bob. Obviously Russia at the moment fits into the emerging market trade effectively as an asset allocation category. I was looking at the fund flow data from last week, $253 million was registered by funds for the week ending May 11th, as against $1.2 billion for the week before. Despite what appears to be concern around a commodities bubble and Europe and debt in the United States, emerging markets don’t seem to be able to enjoy the benefit of other people’s problems at this stage. They don’t seem to be able to get away from infection from other asset classes.
Bob Janjuah: I think there’s a short term story and there’s a secular story. I think on a secular basis, the way we look at the world, it’s not so much emerging versus developed. It’s strong balance sheet countries versus weak balance sheet countries. I think the secular story for places like Brazil, Russia, China, Australia, which is not an EM, sort of adds up. I tend to be more concerned about the balance sheet impaired economies that are closer to home. I think short term, what we have to realise as a market, the drivers for the last two years have been EM growth on the one hand and access to liquidity creation on the other hand. I think they’re both tied together in the commodity spectrum. I think you’re going to get some Vol. Emerging markets will suffer. I think if our view on the world is right, for me, at some point over the next six to twelve months, we’re going to create a fantastic buying opportunity on a secular basis for places like Russia. So I think the long term trends are relatively clear.
Geoff Cutmore: I think we kicked off pretty close to the M&A story and what makes you different from Sberbank. For an international audience that’s watching our programme this morning, how do they differentiate between you as opposed to Sberbank if they’re building a portfolio? Because you both, in essence, seem to be quite closely correlated just to the performance of the Russian market and the emerging MSCI. So why do I pick you Andrey over the competitor?
Andrey Kostin: We had different starting positions with Sberbank. Sberbank is still having about 50% of the consumer deposits in Russia. They’re a bank with 20,000 branches all around Russia. Less than ten years ago, we represented only 10% of the assets of Sberbank, now we are around 60%. So yes, our strategy is developing organically, together with acquisitions. I think all the best stories in world banking, they are through acquisitions and Santander or Citigroup, before the crisis probably. So we see, of course, a lot of opportunities. We are the only Russian bank which made four large acquisitions inside Russia, and all together more than ten acquisitions all around the world. I think we will continue to do this, even when we feel we see a good opportunity for this.
Steve Sedgwick: It’s been a pleasure talking with you. Thanks so much once again, Andrey Kostin, the CEO of VTB Bank.