Vneshtorgbank’s formidable growth and thirst for capital hit home this month through a landmark public offering. The successful listing raised $8 billion and was at least eight times oversubscribed, making it the biggest global IPO this year and the second largest ever Russian offering. Yet until now, Russia’s second largest bank by assets has been most noteworthy for its active and successful borrowing in the loan and Eurobond markets. In 2006, state-owned VTB took a step closer to achieving its long-standing ambition to become a mid-sized European bank through a series of ground-breaking deals.
Historically a corporate bank, VTB is developing its retail, SME business and investment bank franchises. In 2005, a majority stake in Promstroybank gave the bank exposure to north-west Russia, and in November 2006, VTB rebranded Moscow Narodny Bank into VTB Europe to provide Russian clients with penetration into European markets. By the end of 2010, its consolidated assets are forecast at $130-150 billion. Having developed its presence in Africa, India and China in 2006, an estimated 15% of its assets are now based overseas. The expansion into the domestic retail sector through its new retail arm VTB24 is particularly aggressive – VTB aims to increase its market share from 2-3% at present to 8-10% by 2010.
Smart borrowing
But to pursue acquisitions and expansion domestically requires smart borrowing, says Olga Fedotova, credit analyst, EMEA banks at HSBC: “Deposit funding will never be enough to support growth: banks need to innovate and diversify their borrowing profile.”
VTB in 2006 did just that. Two deals supporting the bank’s plans deserve particular acclaim. In April, the bank issued a three-year ruble-indexed Eurobond amounting to Rb10 billion ($361 million) with a 7% coupon. As Euroclear, the world’s largest settlement system, did not accept the ruble as a settlement currency, the deal followed the so-called Dali structure; VTB received rubles, investors bought the issue in dollars, while payments and settlement were also dollar-denominated.
The ground-breaking deal saw Barclays Capital and Citigroup acting as bookrunners and exchange agents. This allowed VTB to tap the international base through a full Euroclear settlement currency, while still avoiding foreign currency borrowing risk, and offering investors the chance to diversify exposure into the ruble, which is strongly underpinned by high oil prices and ongoing capital account liberalization. Moreover, investors were able to gain this exposure through relatively highly rated sovereign-supported credit. Sergei Stankovski, managing director of investment banking for Russia at Barclays Capital, says: “This helped to develop the market and enhance the infrastructure,” with Rosbank and the Bank of Moscow following with a similarly structured Rb5 billion deal.
In July VTB took the market by storm again, issuing the first Russian mortgage-backed security. The deal had two tranches – a $74.2 million senior issue which was offered to investors, and a $10.6 million mezzanine tranche bought by the International Finance Corporation (IFC). Both were supported by an 18-month international payment facility guaranteed by IFC to prevent dollar convertibility/transferability risks on interest repayments. These innovations gave the Class A notes a rating of BBB+ from Fitch, above the foreign currency sovereign rating for Russia which was BBB (both were subsequently upgraded the following month). Fitch was also clearly encouraged by VTB’s sovereign support, with Alexei Kudrin, the Russian finance minister and chairman of the supervisory council of VTB, personally signing off the transaction.
Michael Strange, director at Barclays Capital, says: “This involved huge amounts of analysis. Now with this breakthrough, any new securitization can take place in a matter of months. So this landmark deal provides the potential to raise significant levels of funding and capital, has developed the market infrastructure and has helped rating agencies to feel more comfortable with any further issues.”
With analysts expecting mortgage lending to increase dramatically, such transactions allow VTB and others to curb their exposure to interest rate risks and allows debt financing to emerge as an instrument for funding mortgage portfolio expansion. Although VTB is clearly in a privileged position to raise such issues through its size and majority ownership by the sovereign, Stankovski believes VTB’s management deserves credit for such success. “The senior management are resourceful: they like raising innovative issues, are not afraid of being first, and so far their risk/reward profile has worked successfully.”
Making choices
But prioritizing between domestic expansion and facilitating acquisitions and partnerships with international players is a delicate juggling act. Alexander Danilov, director of financial institutions at Fitch, believes VTB’s strategy is commendable: “This year, VTB’s deals have been quite innovative, and the bank has had a good growth expansion. The special focus on retail is clearly lucrative, and the strong demand for rubles will also help”.
John Bates, credit analyst at ABN Amro, also believes VTB’s approach has paid off: “The diversification of funding sources and instruments has been the hallmark of 2006. What puts VTB apart is the fact it is demonstrating solid, organic growth as well as a high number of acquisitions, which together have worked well,” he says.
With Russia’s untested legal environment and persistent currency risks, VTB will have even greater opportunities to balance the risks and rewards on their borrowing profile in 2007.