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A. Kostin: “We had 13 acquisitions in our history, and all of them were successful”

 
22.07.2011

Anna Edwards

Let’s move on. Russia’s second biggest lender VTB has agreed to raise its stake in the bailed out Bank of Moscow to more than 75%. The move is seen as critical to unlocking the Central Bank’s loan. Some shareholders in VTB are reportedly still unhappy though with the overall idea of the purchase. Joining us now is Andrey Kostin, the CEO of VTB. Andrey, thank you very much for coming in. Let’s focus in on this purchase then of Bank of Moscow. You’ve committed to increase your stake, but all of this comes at a time where after having taken an initial stake, you find a big hole in the balance sheet at this business. Do you regret having gone into this deal? Do you think you needed more information before you did?

Andrey Kostin

Andrey Kostin We probably did but I don’t regret it because I still believe that Bank of Moscow presents a very good banking asset and you know that the government and Central bank provided a very adequate package for financial assistance. I think like Europe wouldn’t afford to bankrupt Greece, the Russian government and the Russian Central Bank couldn’t afford to bankrupt Bank of Moscow because it’s fifth largest the bank it’s quite important for the Russian banking sector, Russian economy. So at the end of the day by concentrating nearly a 100%, by the end of this year, that’s our plan, we’ll be paying approximately 1.5 books value for this new bank, which we will clean up. So taking into account the position of Bank of Moscow and to the Moscow economy, which is one of the largest in Russia, you know, the budget of Moscow is nearly as large as the budget of New York and now going between $40 to $50 billion, so I think it’s still a good asset.

Anna Edwards

But you found an 8.9 billion US $ hole in the balance sheet of Bank of Moscow. The man who previously led the bankers, I understand

Andrey Kostin

He’s in London yes.

Anna Edwards

Is he?

Andrey Kostin

Yes.

Anna Edwards

He’s certainly not in Russia anymore.

Andrey Kostin

No.

Anna Edwards

No. He’s persona non grata.

Andrey Kostin

Unfortunately the case has opened in Russia

Anna Edwards

And he’s wanted.

Andrey Kostin

and criminal charges brought against him by the Russian police.

Anna Edwards

Right. So I mean this has turned out to be quite a controversial deal and some of your big shareholders, or some of your shareholders are unhappy about the deal and worried about what kind of consequences there will be. Can you assure them that there will definitely be no more need to raise capital on your part?

Andrey Kostin

Yeah, we’re on the roadshow. We spend 2 days in New York and now 2 days in London actually, trying to convince our shareholders and up till now I think that we were quite successful. We’re showing them there’s adequate Central Bank support. It will not affect VTB position at all. VTB in the first quarter showed record results and reviewed our net profit for the whole year. It’s now we’re moved from 88 billion to 100 billion roubles for this year and we showed that even this year the Bank of Moscow provides slight profit of around $100 million, so I think we’ll manage the situation.

Carolin Schober

Yeah, Andrey, I want to pick up on that because you say it won’t have an impact on your earnings, on your financial position but then Moody’s has downgraded its outlook for your company to negative following that acquisition. What about financing costs though going forward?

Andrey Kostin

Well you know of course Moody’s I think had not very much choice. Though international rating agencies provide a very high rating for Bank of Moscow just a year ago, for example, but you know we very thoroughly calculated the package of assistance and if you compare this with the assistance provided for European or American banks, you see in this case the government is not buying any shares from VTB or any other shareholder, they just provide the long term cheap loan which will give us we’ll immediately buy Russian T-bills with this money and we have for 10 years a profit adequate to cover all the problems of the Bank of Moscow. So I think it was a very efficient scheme and I mean there was a difficult decision and the final decision of course was not an easy one, but unfortunately when the situation when the management was very hostile, the management can effectively without owing both controlling the bank and we have what we have. But I think at the end of the day that’s maybe a sad story with happy ending.

Steve Sedgwick

Jon.

Jon Moulton

It sounds like you’ve had quite a hard time on this one. 1.5 times book for a bank that needed an enormous amount of rescuing, presumably still has the potential for further adverse surprises, doesn’t sound very attractive, but it looks like you’re actually in a situation where you’ve got enough support from the government to survive through it.

Andrey Kostin

Absolutely.

Jon Moulton

That’s literally the situation you’re in, isn’t it?

Andrey Kostin

I mean we, you know our policy of VTB was always to expand both through organic growth and through acquisition. We had 13 acquisitions in our history at least when I was a chairman for the last 9 years, and all of them were successful. And the first and most difficult case, of course, the Bank of Moscow. So you know it happens, but

Jon Moulton

1 in 14 isn’t such a bad failure rate.

Steve Sedgwick

Would private equity like that kind of failure rate?

Jon Moulton

It’d love it.

Steve Sedgwick

What’s your hit record over the years, Jon? You must get the tally somewhere.

Jon Moulton

Actually it’s quite funny. The more stable the company, the more money I lose. When I do turnarounds I don’t lose anything. When I do stable companies I tend to be too optimistic.

Steve Sedgwick

It sounds like the European banking sector before 2008. Let me ask you, Andrey, some broader questions now. Big issues coming up. We have parliamentary elections in December. We have the key presidential elections coming up in March. How much is everyone on tenterhooks especially ahead of the latter of those two i.e. no one really knows what’s going on in terms of whether it’s Putin, whether it’s Medvedev, or even I mean the outside possibility of a third challenger for the presidential election?

Andrey Kostin

I don’t believe in any third candidate, but there’s still intrigue and Mr Medvedev just a couple of days ago speaking in Germany said that this intrigue would continue for some time, but not hopefully for very long. It created a certain nervousness but basically I think Russian business community is not very nervous. I mean they know both candidates, they understand what the policy could be and I don’t see too much concern about this across the Russian businessmen. But foreign investors definitely they may be raise more question, they may be more concerned but another concern is of course the pre-election year always can mean a lot of budgetary spending. But in this case I mean the

Steve Sedgwick

Jon, I was in St Petersburg, chatting to Andrey amongst other people as well, and there was an international community who were very, very enthusiastic, but I’m very aware that was a community that was already investing in Russia. Viewed from the outside as well, do you think Russia is doing enough? Mr Medvedev is doing enough to reform the country, to actually attract people like yourself?

Jon Moulton

Well it’s certainly getting more attractive steadily. It doesn’t seem to be quite as dangerous a place to invest in as it was, but it’s still certainly in private equity terms, a pretty difficult place to operate. Rule of law isn’t quite what you’d hope for, standards of accounting aren’t what you’d hope for, but it’s getting better. Is that fair?

Andrey Kostin

It’s more optimistic view than Mr Medvedev has on Russian investment climate, so I mean it’s a Russian government understands the problem. They’re trying to improve it and I think that they’re very serious about this. I mean they definitely will expect more changes.

Steve Sedgwick

Andrey, I do want to ask your experience as well, draw upon your experience as a banker as well and just like we’ve had the stress tests of course within the last week or so. Now we’ve got yet another Eurozone peripheral bailout as well. Is Europe getting itself back on track or are there just too many obstacles? Are we ignoring the desire, the need for growth?

Andrey Kostin

Well the situation is still very unstable of course. We have the situation in Europe, we have the situation in the United States, that’s mainly explain why the Russian business also on hold. You know, they’re not investing because of the parliamentary election, they’re not investing much because of uncertainties in the world market. They don’t know what the demand will be tomorrow, what the Greek economic growth will be tomorrow. So I think there’s still some time before we see a steady economic growth and more calm markets.

Jon Moulton

Quite a slightly amusing statement I mean actually the way that the Bank of Moscow deal’s been bailed out by the Russian government is really quite a good analogue to how you bail out Greece, isn’t it? Something what something like $30 billion has been lent at 9% below market rates and then re-invested back into the state’s own assets, that I think is called quantitative easing, so it’s actually increased the money supply and bailed you out.

Steve Sedgwick

We’ve got to leave it there.

Jon Moulton

Thank you.

Steve Sedgwick

Jon, thank you very much indeed. Andrey, it’s always a pleasure seeing you.

Andrey Kostin

Thank you very much.

Steve Sedgwick

Thank you so much indeed for joining us in London. Good luck on the rest of your roadshow.

Andrey Kostin

Thank you.

Steve Sedgwick

Andrey Kostin, the CEO of VTB.


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