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H. Moos: “We expect that overall Bank of Moscow will be generating approximately 20% of return on equity”


KIRYL SUKHOTSKI: Russia’s second biggest bank, VTB, has posted today a record 1Q net profit of $928 million, but the future remains somewhat unclear. Earlier this year VTB acquirted Russia’s fifth biggest lender, Bank of Moscow, but the owner of this bank fled to London and VTB discovered a gaping hole of $12 billion in the balance sheet. So, there are questions to VTB’s CFO Herbert Moos. Herbert, thank you for joining us. The most disturbing question of all is why have you bought it?

Herbert MoosHERBERT MOOS: Bank of Moscow represents a unique opportunity. It’s its size, as you’ve just mentioned, fifth largest bank in Russia. So, it was not available before, it’s only became available since the change of the mayor of Moscow. We decided to act on it, I think it’s a great growth opportunity. Moscow is the largest city, Bank of Moscow has the largest Muscovite client base, it’s about 7 million clients, has the largest corporate client base, so from our perspective it’s a natural extension of our franchise.

KIRYL SUKHOTSKI: But why haven’t you perform due diligence?

HERBERT MOOS: We have performed due diligence and we have reviewed all loan files. Subsequent to us gaining control, we recognized that the information we’ve been delivered was falsified, and because of that, obviously, we instigated further inspections by the Central Bank, and, as you know, we’ve now reached an agreement with the Central Bank that the Central Bank will be providing us a 10-year subsidized loan, which will allow us to create a P&L effect to offset necessary reserves. So from the investor perspective it’s a neutral effect.

KIRYL SUKHOTSKI: But you’ve posted a record profit in the first quarter, but you also revised upwards your profit forecast for the whole year, so you don’t think that Bank of Moscow affair will down your profits?

HERBERT MOOS: I think today we are announcing the results, we are also announcing the details of the support package that Bank of Moscow has received, and very shortly, that support package means that shareholders of Bank of Moscow, as well as shareholders of VTB Group will not be impacted by this. So therefore, we expect that Bank of Moscow issues are now neutralized and going forward only the good things will come out of Bank of Moscow.

KIRYL SUKHOTSKI: You will need to raise your stake in Bank of Moscow, you said you will to 75% to unlock the state bailouts and above. To what extent this is a bailout of Bank of Moscow and to what extent this is really a state bailout of VTB?

HERBERT MOOS: I would not call it bailout, I think practically the bank functions as it normally does, there are no administrators in the bank, so the bank provides all the services an all the liquidity available to the bank right now. It’s simply a support package that the Central Bank is providing, it’s a loan, so it’s not an injection of capital or debt, it is simply a loan that enables the bank to book sufficient level of profit to offset the creation of reserves. So it’s an optimal decision both for the government, as well as for the bank.

KIRYL SUKHOTSKI: Do you think it is a warning sign for the banking industry, for the banking sector in Russia as a whole, do you have questions to the regulators, many say is it now a one-ff thing, or if Bank of Moscow goes down, the fifth biggest bank, then, you know, what happens to other banks?

HERBERT MOOS: I would say that this is an issue specific to the management of Bank of Moscow, specifically the related party lending that they’ve been performing. I would say it’s just a lack of controls within Bank of Moscow that enabled this to happen. And I wouldn’t associate it with any systemic issues.

KIRYL SUKHOTSKI: Also $14 billion, you said it’s just a loan, it’s not a bailout, but still, even if you sustain the current level of profitability, it’s 4 years of your profits, roughly 4 years. We spoke to a Russian billionaire Alexander Lebedev last week, and he said that there is a danger that the Bank of Moscow will bring down VTB altogether. Do you think that VTB may go down pretty much the same as your previous employer Lehman Brothers did?

HERBERT MOOS: I wouldn’t necessarily have a view on what Mr. Lebedev is saying, obviously he is an expert in his own field. From our perspective, as wee just commented, the state support package enables the bank to recognize a profit of 150 billion RUR, it’s a very significant number. So, the bank will realize significant profit and that will offset in its entirety the reserves. So from that perspective the net result of this exercise is zero P&L effect to Bank of Moscow, and obviously for VTB group it’s a positive effect. Now we have a cleaned-up bank that has great relationships with the new government of the City of Moscow, has a great client base and can only add more resources to develop this bank. We expect that overall Bank of Moscow will be generating approximately 20% of return on equity. So from us it’s a great acquisition and we hope that shareholders will recognize that.

KIRYL SUKHOTSKI: Many thanks to Herbert Moos, CFO of VTB, Russia’s second biggest bank, and you can watch more interviews on Russian Reuters Insider platform here in Moscow, I am Kiryl Sukhotski. This is Reuters.

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