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Buildout: VTB’s new headquarters in Moscow International Business Center |
SOMETIMES LIFE CAN be cruel. When you’re hot you’re hot, when you’re not you’re not. Certainly VTB, Russia’s number two banking player, knows all about that feeling. In May 2007, it was unmistakeably hot, raising an $8 billion-strong war chest through an initial public offering that tapped into bull market sentiment towards Russia and its banking sector at home and abroad. The rapturously received IPO was a crucial milestone on VTB’s route from being a Soviet-era foreign trade bank to a fully fledged universal bank, boasting leading market shares in the corporate, investment and retail banking sectors in Russia.
In retrospect, VTB’s IPO was probably the high-water mark for international investor sentiment towards Russia’s work-in-progress financial services sector. Perhaps more important, it was seen as the flagship Russian privatization of 2007 & not for nothing was it widely dubbed the "People’s IPO", enabling ordinary Russians to tap into Russia’s seemingly miraculous economic recovery from financial bankruptcy in 1998. The strong retail demand for the offering, with more than 131,000 private investors bidding for $1.6 billion-worth of shares, was greeted as a signal that an equity culture was taking root in Russia.
In addition, the willingness of VTB’s management team to meet analysts and investors in the run-up to the IPO contrasted sharply with the attitude of Sberbank, whose $8.8 billion domestic rights issue in February 2007 was marred by criticism of the Sberbank management’s refusal to be open to outside scrutiny. David Nangle, director of banking sector research at Renaissance Capital, who was the lead analyst on VTB’s share offering, says that the very success of VTB’s IPO has ultimately come back to haunt it. "The VTB IPO was a phenomenal deal, one of the easiest I have ever worked one. At the time, the market was so hot for Russian financials and VTB ticked a lot of boxes with investors. If you wanted exposure to the Russian banking sector through an open, transparent bank, you wanted to buy VTB." As a result the bank was able to price its stock at a significant premium to its emerging market peer group.
Given the sharp reversal in market sentiment towards both financial stocks and Russia, Nangle says that VTB’s share price has almost inevitably underperformed. "VTB’s profile is very linked to market sentiment and in the past 18 months market sentiment has turned around completely," he says. "Who do you blame for that? The bank? The bankers who led the deal? Investors? It’s a difficult call." From the bank’s perspective, Nangle says that VTB has already delivered in a lot of the areas it promised to focus on when it did the IPO, such as expanding its retail banking operations and the buildout of its investment banking business. "VTB will only turn sentiment around by continuing to deliver on its promises," he says.
With the benefit of 20/20 hindsight, VTB’s IPO might be termed a classic example of the triumph of hope over experience, with some of the attendant investment banking hype that surrounded the IPO ultimately outweighing the financial realities of the VTB story. Perhaps not for the first time, and certainly not the last, VTB has come to represent the classic emerging markets phenomenon of an overbought, oversold investment theme. Given both the political and financial significance of the transaction, it is no surprise that VTB’s senior management finds itself stuck between a rock and a hard place.
The rock is the fact that, despite the IPO, VTB remains 77% state-owned & no bad thing considering that for all its trials and tribulations Russia is still an economic superpower in the making, with a grossly underdeveloped and underpenetrated banking market where government sponsorship is a key competitive advantage.
The hard place is the expectations of Russian and international investors that a bank that launched the biggest-ever banking IPO from central and eastern Europe actually gives them a healthy return on their investment rather than leaving them nursing a heavy loss. In a country where the economic liberals at least are seeking to preach the virtues of a market economy and stock market participation to the general public, the 40% loss that ordinary Russian citizens are facing is a source of obvious concern. Market participants in Moscow say that VTB chairman Andrey Kostin is under severe pressure to engineer a turnaround in the share price, to ensure strong domestic and international support for future privatization IPOs from Russia.
The big question is were investors & whether supposedly sophisticated western institutional buyers or naive Russian retail investors & sold a pup? Certainly the latest available public results for the first quarter of 2008 announced in mid-July are a mixed bag. Core income rose a heady 111.2% year on year and total assets rose 7.7% to just below $100 billion. However, net profits slumped to $126 million from $232 million a year earlier. Perhaps worst of all was the fact that the bank registered a $431 million trading loss on its securities portfolio & and this in a period when equity market conditions were relatively benign.
New school
Certainly if he feels under pressure, Nikolay Tsekhomsky, chief financial officer at VTB, does a very good job of disguising it. A poster boy for the new VTB generation, Tsekhomsky typifies the new school of young, urbane Russian investment bankers, as used to gracing the pages of Russian society glossies such as Caravan as they are being quoted in the financial press. Having joined the bank with a specific remit to spearhead the IPO process and be the first port of call for international investors ever since, he’s a consummate apologist for the bank and its share price performance. "Nobody was able to forecast the market developments of the last year, but we strongly believe in the future of VTB in terms of improving share performance and profitability," he says. "It’s important that people understand that their long-term commitment to VTB will pay off."