With the Russian economy stymied by the West’s sanctions the operating conditions for state-controlled lender VTB Group are hardly ideal.
And yet profits are surging at Russia's second-largest bank.
Riccardo Orcel, deputy chief executive of VTB Group and head of VTB International, tells FinanceAsia how Russia’s second-biggest bank by assets is scouting for business opportunities in China where it is expanding its footprint.
Although still a long way short of the volumes achieved in 2016, outbound Asian mergers and acquisitions in Russia totalled almost $1.8 billion in 2018, Dealogic data shows.
However, focusing VTB Capital is refocusing its bond business onto more strategic deals and as the Chinese economy slows, said Orcel, a former investment banker at Bank of America Merrill Lynch.
He also explores the outlook for Russian investment banking in 2019 during an interview in Moscow.
Q What do you think will be a hot growth area for investment banking in Russia?
A The markets are quite volatile at the moment, and investors are waiting on the sidelines.
However, the moment the market sentiment changes and there is more stability, we expect very strong investor inflows as Russia is under-owned while it offers stable macro fundamentals together with very low valuations - such as being the only major emerging market priced below book value and trading at half of the emerging market average P/E ratio. We look for growth in volumes of both debt and equity capital markets. We also cross-border advisory to continue to grow from China.
Q There hasn’t been a single Russian IPO in 2018. Will that change in 2019?
A Russia is trading at a large discount that looks very attractive to investors. However, we need a period of limited volatility for emerging markets in general and Russia in particular in order to see new IPOs.
Q VTB reportedly cut headcount in London by a third in the wake of Brexit. What does that mean for your investment banking business?
A In fact, we started bringing the headcount down a few years ago, partly due to Brexit: we had about 500 people in London, and by the end of 2019 we plan to have about 140. Frankfurt is now the headquarters of our European business for both commercial and corporate banking.
Our London office will retain its high-quality advisory and capital raising businesses which have been working well at VTB Capital for 10 years. Our senior bankers based in London travel extensively and increasingly we are deploying the team in London to the markets of the future. As an example, all of our London based managing directors visit China multiple times a year and this is driven by client demand - to learn more about how to invest in Russia and hear of potential investment opportunities related to topics such as the One Belt, One Road initiative.
[On June 25, Moody's credit rating agency placed on review for downgrade the long-term bank deposit ratings of the UK-based VTB Capital plc.]
Q Is Chinese interest in Russia becoming more concrete?
A More concrete and more widespread. It’s no longer just the top state-owned enterprises in China doing deals following meetings between government officials, these days we also see interest extending beyond the natural resources sector to other industries such as real estate, infrastructure, agriculture and others.
Q VTB Capital started 2018 off strongly advising Chinese companies on debt capital markets (DCM) business before sentiment soured. What’s the outlook now?
A We were focused on a particular niche – high yield property developers. The fees were attractive. Then we stopped at the end of April because the Chinese economy was slowing down and we correctly expected spreads to widen.
In the meantime, we looked at our business and recognized that we should combine our Russian and global markets expertise to offer unique products for our clients. For example, what we want to do is more bonds like we did in November when we led RusHydro’s Rmb1.5 billion issue. We sold 82% of it in Asia. What we will also do is continue working towards the necessary reforms needed to open up the Panda bond market for Russian issuers.
We want to advise Chinese companies who invest in the countries that are part of the One Belt, One Road initiative and that we can support with financing and local expertise. We want to stay focused on being a leading emerging markets investment bank and operate in Russia CIS, CEE, MENA, India and China.
Q Any likelihood of a Panda bond in 2019? Are more Russian companies interested after Rusal led the way?
A Regulations are not yet there to allow easy access to the market but we hope we will be able to work on new deals in the near future.
Q What are your plans for the Chinese market?
A We will be increasing VTB’s footprint in China via expanding our traditional banking business to capture growing Sino-Russian bilateral trade - which will hit $100 billion per annum by 2018 year end - and which is expected to grow to over $200 billion by 2024. This will involve growing our lending book to support cross-border business, as well as addressing customer needs in transactional banking space with FX and various trade finance solutions.
Q Do you see China’s state funds becoming more active in Russia in 2019?
A With One Belt, One Road, you have to be selective. The markets that are interesting are Kazakhstan, rich in natural resources and Chinese companies are already quite active there, and Russia where you can definitely say there is political stability. Especially in the last three years, there have been phenomenal efforts to have an economy that can withstand shocks from outside and Russia now has stable GDP growth, low inflation, little sovereign debt and an account surplus in 2018.
Q What are the implications of the fallout from its CEFC China Energy’s failure in 2018 to complete the purchase of a stake in Rosneft?
A It’s maybe a lesson for all of us. It was a very large investment in natural resources that maybe really needed to be left to government-to-government discussions.
There will be other deals. It is something that plays along the synergies between the economies of Russia and China. But it is a mistake to say Russia is turning to China simply because of the sanctions as China has been Russia’s leading trading partner for the last eight years - although we are now witnessing an acceleration in economic cooperation. In 2017, according to Ernst & Young, foreign investors put up capital in 238 projects – a record number for Russia since the launch of the survey in 2010 and 16% up on 2016. China became the leader by the number of FDI projects for the first time.
Q Are China’s plans for a Digital Silk Road across Russia an opportunity or threat for Russian banks?
A The digital revolution is upon every bank, independently from the region. It is a priority for every management of a financial institution to adapt to the transformation happening in the world. I think that Chinese know-how and technology will represent an opportunity for the Russian banks who are able to embrace the challenge rather than fight it.