VTB Capital Sees Major Russian Bank Consolidation

24 April 2009


By Alessandro Pasetti and Alexander Kolyandr

LONDON (Dow Jones)--Russia's banking industry must shrink drastically and its metal, mining and electricity companies will also consolidate at a time when default rates in the country inevitably will rise, VTB Capital President Yuri Soloviev said this week.

Russia has nearly 1,300 banks at present. "We think that 300 to 400 is the number [of banks that will be left]... plus other regional specialized banks and settlement banks," Soloviev told Dow Jones Newswires in an interview.

"There is a clear need for consolidation," Herbert Moos, chief executive of VTB Capital in Europe, added. VTB Capital is the investment-banking arm of Russian bank OAO Bank VTB (VTBR.RS).

The two executives told Dow Jones that the state-sponsored investment bank would benefit from restructuring activities and also the withdrawal of foreign banks from the country.

"Those who have not built any onshore operations or connection to the real Russian economy...they suddenly found that (their) operation is empty, and for us, this is an incredibly complementary development, as the competitive environment has dramatically improved," Moos said. This applied particularly to institutions that had perceived Russia as an opportunistic market, he said.

Today's market might well be favorable to VTB Capital, but it remains extremely challenging for a string of first- and second-tier companies and financial institutions.

Battered by a sharp drop in oil and metals prices, as well as frozen credit markets, Russia has just entered its first recession in more than a decade. Banks are gearing up for massive defaults on corporate debt in what Finance Minister Alexei Kudrin has called a second wave of the crisis.

The country's biggest headache is the amount of debt that has to be repaid or refinanced by the end of this year.

According to Konstantin Vyshkovskiy, head of the finance ministry's state debt department, $136 billion of foreign loans are due for repayment in the next eight months, although the VTB bankers don't see this as the threat it appears to be. "This figure implies that not a single company would be able to roll over the debt, which is impossible," Soloviev said.

"There won't be any state guarantees on foreign debt," Vyshkovskiy said at an event hosted by VTB Capital in London this week.

The likelihood of Russian borrowers finding support from Western European banks is even slimmer.

The syndicated loan market is virtually closed to borrowers from the Commonwealth of Independent States, with some western European banks still licking their wounds after years of big deals with long tenor and extremely tight margins.

In the meantime, since the collapse of Lehman Brothers, some potential lenders have simply disappeared from the screens.

"There is still liquidity for some names, but it's just on a pre-export financing basis, while refinancings are not really an option for most of the borrowers in Russia," the head of emerging-market loan syndication at a European bank said.

And the bond market isn't in good shape either, despite OAO Gazprom's (OGZPY) recent $2.25 billion, 10-year bond issue priced at 9.25%.

"I think the Ministry of Finance is a much better body to kick-start the whole activity on the Russian market and make the spreads tighter and ease the liquidity," Soloviev said.

"From my perspective, the ministry is closely looking at it, and they have pretty high ambitions for the domestic market, but they may definitely consider a Eurobond as a potential issue," he added.

Vyshkovskiy reiterated this week that the Russian government is "looking to foreign borrowings," but he wasn't willing to provide any indication on the possible timing, leaving the door open to suggestions it won't be easy to raise funding internationally.

The government has an official forecast of a 2.2% decline in gross domestic product in 2009, but this is called optimistic even by the finance minister.

Russia's Economy Ministry predicts a drop of between 8.7% and 10% in GDP in the second quarter of 2009, from 9.5% in the previous quarter.

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Natalia Cherepova
Corporate Communications VTB Capital