Andrey Kostin, CEO of Russias second-biggest bank, says VTBs market-share gains in Russia are set to slow.
In an interview with Euromoney, Kostin says the bank is shifting towards retail from corporate and investment banking, where VTB Capital has come to dominate local league tables.
We want to grow faster than the market in general, but it will not be like in previous years, when VTB demonstrated a pace of growth a couple of times faster than the market, says Kostin, discussing the banks overall growth within Russia.
As the Russian economy is only projected to grow in the low single-digits, he says the state-owned lender will focus on gaining consistent returns from its existing scale a potential departure from the past 10 years, which has seen big gains in market share, including via M&A.
|VTB CEO Andrey Kostin|
VTB might be considered [by investors] to be a more risky investment, because Sberbank is the largest bank and has a stronger retail base, which generates very reliable income, whereas VTB has a bigger share in investment and corporate banking, he says.
Now we are focusing on developing other areas retail, first of all. We had some [staff] cuts in investment banking, and we will continue to do so if business volumes shrink, if there are fewer IPOs and M&A [deals] in the market.
Yuri Krapivin, portfolio manager at Kazimir Partners, says he has stayed away from VTB shares, partly due to the relative tendency to bigger, high-profile financing rather than retail and mid-sized corporate lending.
Compared to Sberbank, VTB is generally more difficult to analyse, he says.
Amid rapid growth in consumer lending in Russia during the past three years, and slowing corporate lending, Kostin sees interesting niches [in retail] which provide good opportunities. He points in particular to Leto Bank, a mass-market brand, which VTB set up in 2012.
He says: If you are managing your capital, where would you invest: in businesses with a yield of more than 20% return on equity, or slightly higher than 10%? Definitely, you look for a higher margin, and retail always has a higher margin than corporate business at least in Russia.
However, focusing on retail, when it concerns unsecured loans, might still be risky, particularly as Russias consumer loans boom begins to mature as Kostin partly acknowledges.
When we started to work with low-end clients, we found that they have a much higher risk profile, he says.
It was previously our decision that we would work mainly with higher-end clients. Then we decided to broaden our offering, and Leto Bank is positioned as a bank for younger people or those with more moderate income. That approach carries a higher risk, though it produces higher income [for the bank].
VTBs bad-debt ratio is 5.4% at the end of the third quarter 2013, compared with Sberbanks 3.3%. As the Russian economy slows, VTB and other banks provisions have been increasing since early 2012. In the first nine months of 2013, VTBs provisions were up 62% against the same period in 2012.
Eugene Tarzimanov, banks analyst at Moodys, says: Given the lack of growth on the corporate side at VTB and the other banks, VTBs retail business mainly unsecured lending is increasingly supporting the group. Theres a growing dependence on retail, when there are growing risks in that segment.
Kostin says the bank will put new limits on its private equity investments, after the bank in October sold a 50% stake in mobile phone firm Tele2 Russia after acquiring 100% of the company in late March for $2.4 billion.
Since Basel III is more demanding in terms of capital allocation, we now take a very balanced approach to private equity investments, he says.
Yuri Soloviev, VTB first deputy president, adds that VTB Capital has sold a portfolio that led to losses in 2011 and no longer maintains a prop book. He says VTB is focusing more on mid-sized corporates a core strategy for [VTB] going forward and cross-selling between the corporate and the retail divisions.
Kostin says VTBs valuation discount to Sberbank stocks has begun to narrow. There are a lot of investors betting against us, taking a short position on VTB, he says. The position [of VTB and Sberbanks valuations] will change.