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DIRECT SPEECH – VTB President Andrei Kostin on pandemic, Yandex, economy and reappraisal of values

VTB, Russia’s second largest state-owned bank does not see any risk of severe restrictions due to the pandemic or new sanctions on Russian banks, and is ready to invest almost a trillion rubles in the Russian state debt with a view of mutual support of the shareholder and the regulator, as Andrei Kostin, President of the state bank, said in his interview to Reuters.

Kostin on banking sector, Yandex partnership, grain business and state debt

Full text of the interview with Kostin follows below:

CRISIS, PANDEMIC, SANCTIONS
We are seeing an economic crisis that has not been caused by any financial problems, global or Russian ones. This crisis is of a different nature. That’s why, as I see it, there should be a quicker rebound that the one after the 2008-2009 crisis. And there is some proof to this.
But if just recently I have thought that economies, states and borders would reopen, now it is obvious: it is not happening anytime soon, the disease is spreading, the pandemic has got its second wind. And I see, at least for my friends and employees, that the virus has become even more “catchy” than it was this spring.
I do not expect any restrictions of the scale we have already seen this year. The majority of people do not want this, and the President and the head of the government are saying the same. Nevertheless, the current situation is slowing recovery of the economy.
We will have to live in the current conditions for some time.
We will obviously have to adjust GDP decline estimates for this year and forecasts for the next year. I have already asked my analysts to have a look at that. Previously my colleagues forecasted that GDP would fall by 3-4%. Now, if Q4 shows weak performance, it could be 4,5-5%.
I think we will be able to head into an economic growth phase next year. According to a forecast by our analysts, GDP will grow by 4%.
But it is possible it would be lower. Anyway, we have passed the lowest point of the economy’s slump, and overall I see by my customers that the situation is bearable, workable and the economy is feeling steady. I am a moderate optimist. I don’t think it will be worse, I think it will be better than it has been.
Still another factor not to be overlooked – continuing sanctions. Now we are on the verge of the US elections.
It is hard to say which candidate would be better for the US-Russia relations. For example, for some reason it was assumed that Russia had supported Trump’s election, but we see that his four years in office have been marked by severe sanctions against Russia.
However, even US experts say that the sanctions are largely depleted now. It is unclear, who or what to hit with any new sanctions. Now I take it as a given that the sanctions will not be lifted, but I do not think they will be tightened either. We are making our plans based on this premise. And then we’ll see. Nobody knows their future, right? And this may be the very essence of human happiness.

ARE THERE ANY NEW RISKS ARISING FROM THE SITUATION WITH NAVALNY?
I am not a politician to spin these things. I do not see any additional risks in these (new sanctions).

EXCLUSION FROM SWIFT
I never believed that exclusion from SWIFT is a realistic scenario.
There are two levels of sanctions against banks: a rather soft one, it was applied to major Russian banks, and the other — a hard one, and we have seen it imposed against Russia Bank and some others. The hard option involves ban on dollar settlements and payments, asset freezes.
A bank thus is cut off from international operations and cannot provide services in foreign currencies both to private and corporate customers. This is a severe measure, which makes exclusion from SWIFT pointless.
I think this will be the most likely scenario, if one forecasts development of sanctions. But I do not see these risks for now, at least not until the US elections are over and a clear program of a new president is announced.

STATE DEBT AND BANKS
As it often happens in life, if you support someone, you count on support in return. This is really a valid principle, though it doesn’t always work.
I am an advocate of an increase in state debt, this is important for economic development and investment into digitalization of the country, infrastructure projects. VTB is ready to finance the budget, especially if there are refinancing tools. This is a profitable and comfortable deal for the bank, since it requires no capital expenses, which is of particular importance to us.
We have been active on the OFZ market, we have already bought bonds for RUB 300 bn and plan to increase the volume by 2-3 times.
The ratio of the state debt to GDP in Russia this year will grow from 12,3% to 19,1% only. IMF thinks that such economies as Russia may take the ratio up to 40%. So we have a lot of headroom here. But the Ministry of Finance has no plans to increase the state debt anytime soon– it will grow a little over 21%. I believe this level of state debt is absolutely harmless for the country and enables resolution of issues with national project financing.
I do not see any risks for banks, risks are minimal if there is a refinancing tool in place. Default risk and the risk of the Central Bank scrapping the refinancing tool are out of the question.

FISCAL RULE
We plan to discuss this issue at our Russia Calling Forum at a macroeconomic panel discussion with representatives of the Central Bank, the Ministry of Finance and the Chamber of Accounts.
As I see it, the Sovereign Wealth Fund could have been used more actively. When a rainy day comes, you are supposed to spend saved money, but we are not doing this much. I think that limits of the fiscal rule could be eased and more funds could be spent to develop the economy. We have achieved overall sustainability, great success in managing inflation risks. So my expert opinion is that we could in this situation afford to make the fiscal rule more flexible on focus on the development objective.

KEY RATE
I do not see any reasons that would urge the CB to go for a higher rate. It is for the first time that in a critical situation the CB did not raise the rate but on the opposite brought it down four times in a row. From the viewpoint of inflationary expectations now there are no reasons to raise it. We have become like most countries with developed economies, where regulators reduce rates to support economic growth. And zero rate is something that I do not like. I think it is perilous both for banks, and for investments and for economy on the whole. Today we have 4,25% rate- and it is good, it enables cheaper lending to the economy, reducing the debt burden both for enterprises and private persons.

NON-PERFORMING LOANS – WHAT LEVE OF NPLs COULD BE EXPECTED AFTER RESTRUCTURIZATIONS?
Overall there are varying forecasts for the sector in relation to the share of non-performing loans which could become past-due: some speak about potential 30%, and some maybe about 15-20%. Since the start of the year we have increased our reserves by RUB 180 bn – this is almost 3 times higher than over the same period last year. But even if we take the whole restructured VTB portfolio and estimate the volume of past-due loans at a worst case scenario, it would be about 7% of the portfolio. This isn’t critical for us. This is the level that gives us no worries. Just for comparison – during the crisis of 2008-2009 the figure reached up to 10%.

DIVIDEND: DIFFERENT STRATEGIES OF SBERBANK AND VTB
Sberbank is one of the few global financial institutions that pays such high dividend now (50% of profit for 2019). Across the world, including Russia, due to the pandemic situation regulators recommend not to pay dividend. Most Russian banks did exactly that– Alfa-bank and Otkritie, for example, did not pay out dividends. European banks do not pat out dividends as well.
Another important factor: VTB is under sanctions, we have no opportunity to raise capital abroad. All we have is the Russian market, and here we cannot raise any shareholder capital either– there is a sanction risk for new shares.
Finally, it seems to me that there is a high load on the capital of Russian banks. Our risk-weighted asset ratio is almost 100%, when in the rest of BRICS countries it is 50-60%.
We, unlike them, need two times more capital to provide services to a comparable volume of business. High capital load is something we have been trying to overcome, but we have what we have.
Profit is almost the only source of capital for VTB. In Q2-Q3 of this year we were forced to significantly increase our reserves, that’s why we had to allocate a part of 2019 profit, which VTB had planned to pay out to our shareholders, for replenishment of the capital. This was a unanimous decision by the government, no lobbying whatsoever was required. Due to this we paid out 10% of the net profit.
If there are no major shocks, we hope to get back to 50% payouts. It is better for the CB as a regulator to have us increase our capital as much as we can, and the government is understanding of this. But dividend supports stability of shares, and generally it would be fair to shareholders, so let us count on increased payouts with reference to our capital load. Capital adequacy of VTB with all buffers as at the latest reporting date amounted to 11,8%. If the situation deteriorates, we count that the Central Bank will ease some capital requirements for banks, it is their authority.
Subordinated loans are also a source of capital, but still a limited one. We have a program for raising subordinated debt in rubles. We have registered a volume for RUB 200 bn. The program is a long-term one, we have no plans to raise the total amount this year. I think we will be placing subordinated loans depending on our capital needs and interest of investors in our bonds. Now two issues of our subordinated bonds are offered at the Moscow Exchange.
Initially we made each issue for RUB 10 bn, but in the first 1,5 weeks the total demand has already exceeded RUB 35 bn.

BUYOUT OF VTB SHARES FROM OTKRITIE
I’m not the one to answer this question: it is not our balance sheet, a decision has to be made by the Central Bank and Otkritie bank. Generally, we have such capacity: we can sell these on the market, there is interest from major investment and pension funds. But the management of Otrkitie has to make a decision, and the Central Bank should support it. It is not a burden to me. For me Otkritie is a friendly shareholder. Let them have it.
It is no worse than any American funds. The Central Bank says that it would not want these shares (VTB) were on Otrkritie balance sheet when it is sold. We have other concerns: continuous sale discussions may put pressure on the market. From this perspective a buyout of shares by major shareholders will relieve the pressure.

CONCESSIONS FOR BANKS
Given the protracted nature of the pandemic, an issue has probably to be raised on extending the concessions, given by the CB to the market. We never quit the dialog in this regard, though the CB is very cautious and is unwilling to reverse previous decisions – some concessions were terminated as of October 1. I think we will have to reassess the economic situation.
The CB has been very constructive and very helpful during the crisis.
We have managed to avoid a situation where banks could have been hit hard by all measures implemented by the authorities and the regulator. We always reach some sort of a compromise, and if the situation gets worse, then I am sure that the Central Bank will take some new measures.

USEFUL JURISDICTION
Qatar, let me remind you, in 2013 invested $500 mn into VTB’s capital. A good amount, a good investor. After some time the Qatar side proposed us to open an office in their country. A proposal of such a shareholder cannot be disregarded. Moreover, the region has become for us and our customers rather an attractive jurisdiction from the viewpoint of business development, legal and judicial systems. Qatar is a major producer of hydrocarbons, many companies have business relations in the region. A Qatar bank is preferable, for example, to our customers from Kazakhstan. We are getting customers from Uzbekistan, who find Qatar convenient.
We, being a bank, have joint trade financing projects, we conduct settlements for agricultural transactions, we are considering a number of other projects. Setting up a bank there is good business and a sign of long-term relationship.
We always view our international network as an additional toolset that we giver to our customers:
an opportunity to choose a jurisdiction, law that are optimal for specific businesses. Our European offices, offices in China and a number of other countries operate under this very logic. We had bad experience, and it was Dubai. But in this case the thing was that it is a special financial center, somewhat isolated and artificially created. Even with the use of English law it did not work out for us.
Now we have decided to work in Qatar and consider our experience there to be successful. We hope that further on many of our customers, especially those in the energy sector, will be interested in using the toolset.

$6 BN LOAN TO UNNAMED SOVEREIGN BORROWER 2 YEARS AGO: WHEN IS THE LOAN EXPECTED TO BE COMPLETELY REPAID?
The loan was issued for 7 years, it’s on for 5 more years, and the customer has the right for early redemption. There are no negotiations on early redemption. That’s why we can quietly wait for redemption for 5 more years.

RUSSNEFT
In late September we reached a restructuring agreement, but we do not see any issues with the customer, if, of course, there is no drastic plunge of oil prices. By the way, Russneft never had any issues with interest payments, no matter what.
They always paid the interest. The group has had a turbulent period, related to requirements of the CB and Trust bank. Now these issues have been rectified. Though the oil and gas sector is in a tight spot with tax payments. According to estimates of our experts, the company should be all right, not well-off, but all right.

DOUBLE DIGIT GROWTH OF HOUSING PRICES
This is a market law, nothing to be done here. Growing demand without adequate supply always leads to higher prices. The government is facing a tough task, and developers on the whole support increasing construction volumes. If construction volumes will grow fast, there will be no such growth of prices. That’s first.
Second: mortgage subsidies will not last forever. Now there has been a decision to extend the program till next July.
After that there will of course be a market and demand correction. Now many are concerned that we will get mortgage lending going fast via special measures and then we will stop it, and it all will come crashing down. I do not think so.
First, I do not see any bubble and I think that mortgage lending is very reliable. Our mortgage portfolio level of bad debt is 1%. In Russia the share of loans with minimal down payment below 10% is no more than 2%, which is negligible.
Second, banks are required by the CB to monitor debt burden of borrowers, and loans are issued mostly at a fixed rate. This means a customer will not have any issues with borrower interest rates – this is a major difference from the period when loans were issued in yens or at a floating rate.
I think mortgage lending has to be developed. We cannot compare ourselves to America, where the load burden in 2007 was drastically different, mortgage lending has to be developed, and housing construction too. I think that providing adequate housing to people should become a national idea in our country. It needs to be worked on. For people to feel good they need housing, first and foremost.

VTB AND YANDEX: SHOULD CLOSER SYNERGY BE EXPECTED
We’d like that. But it is important that our partners look that way too.
We’re developing a digital financial environment without aiming to become a hi-tech company of a kind or create our own ecosystem. We’re to make partners. This relates to Yandex as well. Over the latest years Yandex did not develop financial services due to their involvement with Sberbank...
We’re a small [Yandex] shareholder, and we don’t have a say in their decision making. This company is a leader not only in Russia, it is a world-class company. Of course we’re looking up to a full partnership, and we’ve already done something [towards that end].
This summer Yandex launched a fin-tech service based on a technology by VTB Capital Investments, which gave Yandex users an opportunity to invest in shares, bonds, exchange currencies at rates close to FX trading exchanges.
When we were offering shares of Aeroflot and Sovcomflot, we for the first time implemented a novel thing of that kind: our customers could buy shares on their smartphones, this was a new service, offered by us. And it was developed on the basis of VTB Capital Investments with the help of Yandex.
We set up dedicated teams to work on joint projects, the teams include IT and product division employees of VTB and our colleagues from Yandex. A synergy of technologies and financial services is fundamentally useful to both companies: it makes banking products more efficient and enriches technologies with a new product experience.
Yandex has many partners and interesting proposals, and we are ready to cooperate with them in niches, which may be of interest to them. Just like with other companies: this is a core principle of our partnership, when we are jointly developing various technologies, we are making network digital platforms.
We have met many times, but if you allow me, I will not speak of any specific advices to (Yandex in relation to financial market development strategy). Last time I met the top management of Yandex, when the deal (on possible acquisition of Tinkoff Bank) was still on the table. I believe that they (Yandex) need to develop financial services, but how and with whom - this question needs deep study.

GRAIN BUSINESS
The scope of work there is massive, and for now we have no plans to reduce our share (VTB owns 50% +1 share in Demetra Holding).
The situation cannot be drastically changed in one or two years. A lot needs to be done to develop the grain market’s infrastructure, rectify existing issues, to get this business optimized in Russia, and a lot needs to be done to be able to compete with global traders, which are currently selling our wheat. I believe that we will be in this project for the next three to five years, more likely five. This is a large industry; we’ll work on it. The project is managed by a very professional team, they are interested and we now think can we reinforce the team.

WHAT NEEDS TO BE OPTIMIZED IN THE GRAIN BUSINESS?
There are various things: we think that transshipment by smaller ships with insufficient sanitary examination is damaging to trade, and overloaded trucks, transporting grain, destroy roads... Many issues require solutions, to make things civilized and normal. Logistics need to be completed: access roads, railway hubs. To make this business more rational and more successful, more profitable, would require a lot of time. All these things are in our focus, as well as external market developments where we are more and more actively trying to enter with our Russian grain.

VACCINE INVESTMENTS
We are not manufacturers. But if companies decide to set up production facilities and come to us for a loan, then we of course would consider it and provide support, it is a very important thing.
This is essentially financing of production companies. I know AFK Sistema has been doing this.
The global vaccine market will be worth hundreds of billions of dollars – how is this business different from production of any other drug? Essentially there is no difference. I think this will be a profitable business. At setup phase– yes, it is a startup, but now, when vaccines are going out and into mass production – this is a manufacturing business.

DID YOU GET VACCINATED?
I have recovered from the disease; I have lots of antibodies.

AEROFLOT OFFERING
We participated as an anchor investor. We promised Aeroflot from the start that we would buy shares for RUB 5 bn and this was what we did. Now we’re going to wait when quotes will be picking up.
We never discussed any other figures: there were rumors (in media), that the whole issue (the deal amounted to RUB 80 bn) will be split by fiat and so on, but this did not happen.
We bought other shares at instructions by our customers. When we were running for the position of the primary SPO organizer, we said “yes, we will run the deal”. This very fact says that we promised to find investor for the whole amount of the offering. Ultimately some investors came through our bank, some did not, but the deal came through.
Aeroflot is a most liquid company on the Russian stock market and even before the deal it had a very diverse investor base. After the offering the company increased the number of shares in free float and as a result had improved its liquidity even more and expanded its shareholder base.
The deal was done on a short notice due to the pressing need, but this case is not unique now, there are other global airlines that raised money into their capital.
The airline businesses clearly keep suffering more than any other. International flights are severely restricted.
We think that the offering was successful and achieved its objectives. Pricing was transparent: a bid book was collected, a market clearing price was determined, and even the state bought the shares at the market value, participated as a co-investor. The price was set by the market.
If upon an offering a price fluctuates about 5% down, it is considered normal, there are always speculators on the market, buying and selling over several days. We believe that this is a fundamentally strong company. After the pandemic is over, there is every reason to believe that stocks will be picking up.
The amount (of the deal) was calculated by Aeroflot’s own management.
The government as the major shareholder and our experts looked at the amount and concluded that this was the amount Aeroflot really needed to get through a rough patch, to keep people, fleet, routes, which is very important. The amount of the offering was determined based on needs, this is the amount that according to everyone would let Aeroflot curb this hard period.

ON REVERTING THE AGD (ARCHANGELSKGEOLOGODOBYCHA) DEAL
Our position here is very clear: we can rescind it if [we’re] fully recompensed. So far, we have been offered to get only some of the money back, with deductions. We are not ok with that.

We have a surefire legal position on this case, we are a bona fide lender, and this company is pledged to us. If they pay us back – fine. We don’t care if this business will then go to Otkrytie or Lukoil. If we don’t get the money back, we’ll take over this business to get the credits repaid.

This I a perfectly strong legal position.

Will they take us to court? We’ll go to court no problem, although I don’t like this.

I think favourably of the stance taken by Orkrytiye, but I can’t see how a deal made three years ago can be severed. The price was too high? Don’t be ridiculous. If we use this trick, every new owner could invalidate their predecessors’ deals claiming that ‘the price was too high’. The price tag was put by investment banks, US banks among others. But if the deal is still reverted, and we get our money back – we’re okay with that. The fewer law suits, the better. If they let us go with our money, we’ll move on.

DO YOU EXPECT CHANGES IN SBREBANK TEAM AFTER SHAREHOLDER CHANGE?

It’s not a question I should take. However, I could ask you back – why? Sber has a very good, efficient management team. Of course German Oskarovich [Gref] is changing his deputies or line managers from time to time, but I cannot see reasons for a major overhaul. This is our leading bank, and it is run well. All’s good and quiet, keep your money with Sberbank, if not VTB. Sorry – Sber, not Sberbank.


Some time ago, VTB was also taken from the Cnetral Bank and handed over to the government – so what’s the big deal?
German Oskarovich [Gref] is a man of influence, and he knows all cabinet ministers very well, so I’m certain that he will be working hand in glove with the new shareholder.

In fact, I think this was the right thing to do. The Central Bank shouldn’t have a share in commercial banks, and they don’t need this.

After a while, this process will come to completion. The Central Bank will sell off its legacy shares, and will be just regulator. I believe this is what the Central Bank board is trying to achieve, step by step.

HAVE THERE ANY BOG REALIZATIIONS FOR YOU OVER THIS YEAR?
This year has been an eye-opener for me in many aspects. I believe that humankind needs to realign its development priorities.

I believe that, with all rapid digitization, we shouldn’t overlook the flipside of this process. We can now be working from anywhere in the world, we’ve grown so perfectly digitalized.

That’s good, and that’s right, but we have come to realize that all our grand undertakings and even trivial vacation plans can be ruined in the wink of time. When kids have to study gazing at computer screens, and when people get off their rollers having been confined to their apartments for four or eight weeks…

Perhaps we need to come to think that controlling epidemics and caring about the environment and crucial issues that must be put very high on the international agenda, as a pivotal issue for international and domestic policies. Diseases and environmental ailments are throwing us back, this is something that poses a threat to human lives, and we’ve got to face it. I think this is far more important than rolling out 5G [networks], really.

I watched an English feature film on the pandemic. It was hot seven years ago. It showed people eating soap and never feeling the smell or taste. All of a sudden, we’re inside this movie – I can’t believe it. Perhaps we have to rethink our priorities. The economy plummeted 8% in Q2 alone because of the tiny virus – a little thing no one can even see, but which we’ve come to feel sharply. Not only because more people fall ill with it, but because it has brought about an economic crisis. Perhaps, for the first time in human history, a crisis was flared by a virus.

I believe we should rethink what we’re doing and focus on our joint efforts to control the virus and environmental issued. These problems swooped down on us like an avalanche, and we can’t counter them. The whole world can do nothing about them, the Great America with its huge economy can’t do anything about this....

So far, we haven’t shaped a deep understanding of this: if the ozone layer rips apart, like many people predict – what are we gonna do? No vaccine will help in that case. I would still like to see the world safe for my children and grandkids....

I believe this is what we ought to be busy doing. We smirked at the Swedish girl (Greta Thunberg), but things are going that way. The virus serum has become an issue larger than many other issued. This requires us to revisit and rethink our priorities, including the very fundamental ones – humankind, research and development, investment, etc.... It has never happened before that the whole world would be ill, the whole world locked down. We’re now living in a different world, a totally different world. And we’ve got to think how we’re gonna live this new life in it. This is the crucial question today.

Tatiana Voronova,Yekaterina Golubkova