Q&A with VTB CEO Andrey Kostin
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Q&A with VTB CEO Andrey Kostin

In an in-depth interview with Euromoney, the head of the powerful Russian state lender discusses domestic bank competition, regulation, credit growth and reveals the impact of state ownership.

Over the past 10 years, VTB has greatly narrowed the gap with Sberbank in terms of size of assets. Could you eventually overtake Sberbank and become Russia’s biggest bank?

We have never said we want to be the biggest bank, or to overtake anyone. Size does not necessarily matter.

Sberbank and VTB had very different starting positions. The former still dominates in the Russian retail market. Where does this dominance come from? Sberbank started with 20,000 branches and hundreds of thousands of employees all around the country, inherited from the Soviet period. Hence, Sberbank possessed unique competitive advantages both in terms of its network and client base from the very inception of the Russian banking system.

When I joined VTB 11 years ago we set the goal of evolving into one of the leading Russian banking institutions. It was a challenging although realistic target. We decided that the bank should have a substantial part of the domestic market – which we have successfully achieved.


VTB started in the early 1990s as a mid-size bank servicing the foreign operations of a small number of then state-owned trade organizations. Eleven years ago, our assets were only 10% of those held by Sberbank. Today VTB’s assets are equivalent to half of Sberbank’s. In terms of assets and capital we are firmly number two in the Russian market, with other banks lagging behind.

It is also noteworthy that over the past 10 years we have created a number of new profitable businesses almost from scratch, primarily retail and investment banking.

We are proud that our investment banking arm – VTB Capital – established only five years ago, is number one in Russia. With the biggest market share, VTB Capital is well ahead of Sberbank's CIB. Competition in the area is tough and I must say our colleagues do not let us become too complacent. However, again, we never set a target to be the largest. As I pointed out, we want to create an efficient, well-diversified world-class financial institution.

Indeed, in the past 10 years we have developed quickly both through organic growth and acquisitions. We have also channelled substantial resources to expand into new areas – retail and investment banking. Looking back I must say that it was the right strategy. VTB Group managed to make the most of the opportunities that the growing emerging markets and the global economic situation provided at that time.

Now that the world economy and Russia as an integral part of it are entering a period of post-crisis uncertainties, we have very strong prerequisites to resist any potential downturn. We are also able to secure sustainable performance and attractive returns for our shareholders in the future.

As for industry growth expectations, we tend to be more conservative at the moment.

If the [Russian] economy is now growing at 2% or 3% [then rapid growth of the bank, and the banking sector] can’t last forever. Indeed, growth in the industry should be, to a certain extent, in line with that of the economy. However, given that penetration of banking services in Russia is still low in comparison with emerging market peers, we can reasonably expect banking industry assets to grow at a pace of between 10% and 15% a year, at least now.

When you say ‘now’ you mean...?

By ‘now’ I mean this year and the next two or three years. We expect moderate economic growth in Russia and therefore I think that there will be equally moderate growth in the banking sector.

What about development of retail? Sberbank recently announced its growth in retailwould gradually slow over the coming years. Does that present you with an opportunity, particularly in retail?

On the one hand the economy is slowing down today. We are seeing a slowing in growth of corporate loans. It has also become clear that further growth of retail lending is [producing commensurate growth in] non-performing loans and related provisions. On the other hand, however, there are still interesting niches in the retail segment, which provide good opportunities. We started our new project, called Leto Bank, because activities such as consumer loans and point-of-sales lending were not covered by VTB.

However, I would be very cautious about saying that we will grow much faster than the market here. We want to grow faster than the market in general, but it will not be like in previous years, when VTB demonstrated growth that was about twice as fast as the market.

Previously our growth [in retail] was very much related to our corporate lending. For example, we lend money to various corporations, and we service their employees on the retail side. This is a group of clients that is more reliable, because we know their income. When we started to work with low-end clients, we found that they have a much higher risk profile.

That is the stage where you are at now?

A. Yes. 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, although it produces higher income [for the bank].

So in general there is a shift away from growth in corporate banking, to retail, in the market as a whole – and you are also focusing more on retail?

For sure. 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.

Your valuation compared with Sberbank is not nearly as good; VTB’s stock price this year is also down about 20%. Why do you think that is?

VTB’s stock is undervalued. Last year we posted 15% return on equity, and our value was 0.6x book. We do not think it is a fair valuation of the stock – but we realize investors take many things into account.

One is international investors’ general view of Russian stocks and markets. Most stocks in Russia are undervalued, probably including Sberbank: it trades at around 1x book value, and generates around 20% ROE. I assume the situation reflects a lot of [...] concerns among investors that US quantitative easing will be tapered, and money will become more expensive. Sometimes there is a negative view on the investment climate in Russia.

Another factor is that VTB might be considered 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. Large-scale frauds conducted by the previous management of Bank of Moscow and discovered after we acquired it might also have contributed.

I think that investors’ sentiment towards VTB will change. Over the past month or so the trend [in the stock price] has reversed. There are a lot of investors betting against us, taking a short position on VTB against a long position on some other Russian stocks. We hope that will change.

You mentioned Bank of Moscow. Looking back, do you regret that acquisition; has it added value to the group?

A. We still are working very hard on this. This year we expect Bank of Moscow will generate about R26 billion [$781 million] net profit – and next year we expect R40 billion. Net profit of R40 billion means that we will achieve a return of 15% on the investment we made in 2011. This proves that this was a good investment.

Of course it was quite a difficult operation. We faced the largest fraud in modern Russian banking history – absolutely unthinkable for any large bank. On the other hand we helped to rescue the fifth-largest bank in Russia. Actually, we prevented a Lehman Brothers-like negative effect on the domestic banking sector as a whole.

Of course we find it very regrettable that the UK authorities gave political asylum to a person who committed a huge criminal offence in Russia. That is an unfortunate case; we have nothing to do with it. It is for Russian law-enforcement agencies to deal with.

Now we are focusing on, and being very successful in, selling Bank of Moscow’s non-core businesses, and streamlining the bank’s operations, with help from the central bank, which has provided good support.

At the end of the day, the deal caused us a certain amount of stress. But from the financial point of view – from the business point of view we hope that this transaction will be seen as a Hollywood horror movie with a happy ending.

You said that you have been quite successful as an investment bank. Has investment banking, perhaps considered relatively more risky, been too much of a focus for investors in your shares?

Maybe [investment banking] is not very much in fashion today, but the world and the financial system cannot exist without it. To raise capital, to generate more investment, to have a successful corporate market [and] a fixed-income market, you need investment banks.

Maybe investment banks lost their sense of reality to a certain extent at some point. But investment banks will continue to be in demand, because they occupy an extremely important niche in the financial sector.

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.

But I think it is a vital part of the banking system in all countries, and I am quite sure that investment banking will continue to grow in Russia and other parts of the world.

What about your investment in Tele 2. Should a bank, which takes individuals’ money, be deploying capital in this way?

Private equity investments is normal practice worldwide. Look at the US banks. They buy commodities, they buy tankers of oil.

We have quite a large private equity business, but we have a strict limits on this.

As for Tele 2, we have sold 50% of the company already. The operation took only six months and we made a profit on the transaction. The next 50% we are planning to sell within the next three to five years. For us it is a financial investment; it’s a private equity transaction.

Once I was discussing our non-core businesses, and my interlocutors said that the bank should try to get rid of them. Life is more complicated than just black and white. For us the core business is of course banking – retail and corporate banking. But private equity is very close to this.

I found the leading US and German banks, for example, until recently owned assets such as ski resorts in Japan, or casinos in Las Vegas.

In the US there are private equity funds that normally do this sort of transaction, but in Russia they don’t exist, so to a certain extent banks are taking on this role. Maybe the day will come when Russia will have developed a system of private equity funds, and then the banks will not be in this business. They will delegate this business to private equity funds.

 Why is it important for you to do these kinds of private equity deals?

It brings money.

It brings better returns?

VTB CEO Andrey Kostin

It brings money. For example, the government is planning to spend a lot of money on infrastructure projects. We are running one of these projects in St Petersburg. Next week, we will complete the construction of a new international airport at Pulkovo. After that, we will consider options how to sell this stake (which is more than 50%) – through an IPO, or to strategic investors. We expect that the yield from private equity deals will be much higher than from conventional lending. That is basically why we are making these investments. Since Basle III is more demanding in terms of capital allocation, we now take a very balanced approach to private equity investments. We will put further limits [on our private equity investments].

You mentioned it was beneficial to the system for you to buy Bank of Moscow, and how investment banks are needed in Russia. Do you think VTB has a kind of social role to play in Russia?

A. It depends on what you mean by “social “ole’. The banks that we call “too big to fail” play a very important role in the economy and the financial sector – as in any other country. VTB and Sberbank are systemically important financial institutions in Russia, and both carry economic and social responsibility.

Particularly so, would you say, because VTB has a large degree of state ownership?

The government’s position is that VTB is a systemically important bank and they will support it, even if it is 100% private – it doesn’t matter. State ownership has no particular significance.

The government’s stake is now at 61%. Could you see the state’s stake falling below, say 50%?

Of course. When we need new capital, probably in two or three years’ time, we will go to the market and we will sell another stake, and then the level [of state ownership] could go below 50%.

This process [privatization] will definitely continue, but it will be gradual. However, what is important to understand is that privatization effects may be controversial as well. Rating agencies tend to say: “If you sell a majority stake then you will have less support from the government. So we will downgrade you!” Hence, in a paradoxical way privatization today may be adversely interpreted by investors tomorrow.

Another negative effect may be due to the size of the deal. If I say: “Tomorrow I will sell 100% of the stock,” investors will wonder why they should buy the stock now, if, over the next one or two years, there will be dozens of billions of dollars of new stock. It will exert pressure on the price.

My stance is that we should take a very cautious approach in respect of privatization. We shouldn’t speed up the process. We should sell just enough stock for the market to digest, and all the talk about “speedy privatization” is just harmful.

 Can you see that in, say, 10 years’ time or 15 years’ time, the government stake will be zero?

I think so, yes. But in my opinion it should be a gradual process. I am personally not in favour of speedy privatization, because I see no advantages at the moment. I see the negative sides, but not the advantages. [...] Nobody can tell me what is bad about being partly state-owned – nobody.

We are firmly on track for privatization. But the state is not planning to sell very quickly, just for the sake of selling. The deal should be sound in business terms: the right stake at the right time. No more, no less.

You don’t feel more pressure to make certain loans because you are state-owned?

Let me explain to you briefly how state-owned banks are governed. For instance, VTB is organized in the form of an open joint stock company. The bank is owned by shareholders (of which the state is a big one, with over 60%), and operates in accordance with domestic and international rules and practices.

The management board carries full responsibility for operational issues and governs day-to-day business. It is the bank’s supervisory council where the government as a major shareholder has its powerful voice. The council decides on general matters, including development strategy. Beyond this legal framework, government officials have no other channels of influence. Of course, if the president or the prime minister makes a telephone call, it might be a case. But according to my experience in VTB they have never ever intervened in running day-to-day business. They fully trust the professionals.

Let me reiterate again: the decisions on operational issues are made solely by the management board in the best interests of business. Moreover, there is only one criterion of management board members’ performance – the bank’s financial results.

Actually, I cannot remember a case when Mr Putin called me and said: ‘‘Look Andrey, you need to give $20 million; Libor plus 5, for three years, and there will be the following covenants...’

Perhaps he or someone close to him might hint that his will was for a particular company to be financed?

Nobody from Mr Putin’s entourage can tell me this, because it would not work. They know I can double-check it directly with the president.

For example Uralkali: whoever gets funding from the state banks will probably control it. So it’s your decision who you lend to [in this situation]?

A couple of individuals have approached the bank regarding the Uralkali situation. As in any other deal, the bank will make its own decisions irrespective of a person’s position or influence.

There was one person, a very good friend of mine, but he did not have enough money. I gave a plain answer to his request: “There is no way you can get the money [from the bank]”. There is another candidate whom I don’t know equally well, but who has much more money. Since a possible transaction in this case looks more attractive for the bank, we might strike the deal with him.

Perhaps the government might feel happier about VEB, or VTB, taking risks in its pet projects compared with Sberbank, given Sberbank has around 60% of Russian retail deposits, and VTB doesn’t.

VEB is not comparable with us. VEB by law has a special status of state corporation, not a bank.

VEB is a development institution. Its role is to support certain areas of the economy, weak enterprises, or make long-term investments. That is why VEB’s supervisory board is chaired by the prime minister and consists of government representatives. VEB is not profit-oriented and is not subject to supervision by the central bank – unlike VTB or Sberbank, which are commercial banks and are treated by the central bank on equal terms with any other commercial bank in the country.

So, you are entirely commercial?

Absolutely. We are a commercial bank. As chairman and CEO I am responsible for key results. If VTB’s financials are poor, then the prime minister or the president might raise questions. But they never ever guide the management board on particular deals or industries we should finance.

Indeed, the bank might make arrangements or agreements with the government or with the central bank. But all these arrangements have always been business-driven.

In 2004 the governor of the central bank called me. I was on holiday. He said, “Could you possibly buy Guta Bank?” I answered: “No way, because it is losing money.” Then I added: “If you lend me $1 billion, very cheaply, for three years, then I will buy it.” We made the arrangement. But I stress that the decision was not imposed upon me. I found the deal’s terms interesting, so I agreed.

Relations between commercial banks and the government were tested during the last crisis. It is noteworthy that the government didn’t force us to lend money, unlike in many other countries. Moreover, the government provided all the banks with guarantees and we started lending against them. That is how lending was promoted during the crisis in Russia, not by orders given from above.

You can even bargain with the president?

You see, it is a hardly imaginable situation when anybody including myself bargains with the president. But Mr Putin – I would like to underline it again – the president never intervenes in day-to-day work of the management of state-owned companies. He has different set of responsibilities – to run the whole country.

It would be equally ridiculous if the president were to give surgery instructions to the doctors in the state-owned [health] clinics. The same with the bank. Mr Putin understands that this [banking] is a special art.

But money is power – and he is the most powerful man in the country.

Maybe you are right. However, we must not ignore the concept of division of responsibilities and the principles it works by. These principles are applicable both for the companies and for the state.

For example, I will never approve a loan unless my subordinates and the management board endorse it, because it is their responsibility and authority to check the financial state of the borrower and other deals' provisions. I will never tell a client: “I am the boss here and I will give you a loan” – unless my colleagues draft proper documentation.

More generally, if you have the three biggest banks, all competing with each other, and all guaranteed by the state, does that not even produce a certain moral hazard: a risk that they will take on too much risk?

Like any other business, banking involves taking risks. We are paid for managing risks. I need to prove that I am a good manager. If I fail, the vote of the main shareholder is enough to replace me. So, if I lose a lot of money, then I will be fired, and that is quite fair.

You mentioned capital raising this year. Did that go well for you?

It was a real success. In May 2013 VTB completed a secondary public offering. As a result of the deal we raised almost $3.4 billion in capital.

In many ways our placement was a landmark transaction.

We sold mainly to five institutions, two of them large Russian investors, and three are world-class quality investors, namely the sovereign funds of Norway, Qatar and Azerbaijan. No other Russian company has got such a pool of high-quality international investors before.

It is also important to note that the whole equity issue was placed only in local shares in Russia. We took advantage of improved regulation. The deal demonstrated the attractiveness of the domestic stock exchange.

Given the above and tough global macroeconomic conditions, we gave the investors a 10% discount to the market, and I think they are quite happy.

The main implication of the placement for our business is that it gives us enough [capital] to grow for the next perhaps two to three years. If we want to develop at the same pace or slightly faster than the market we will need more capital in about three years’ time.

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