Interview by Alexei Yakovitsky, Global CEO at VTB Capital

Wednesday, 12 October / CNBC

HOST:Geoff, these comments could be interpreted as being somewhat political, depending on which side of the argument you are on, Brexit or remain. How do you take on what VTB is saying, what intel does that give us about how Brexit could impact the City of London?

GEOFF CUTMORE: Well, I think they are doing the same maths that everybody else is doing. You remember, I was just in DC at the IMF-World Bank meeting, and we have those comments from Axel Weiber, suggesting that there was structural over-investment now in London by the financial community, because perhaps the passporting rights were going to change or there would be a loss of liquidity in the London markets, because something like euroclearing might shift out of the capital. So, I think a lot of business people in the banking industry are basically just doing the maths and coming up with the conclusion that perhaps it is time to downsize a little bit in London, but of course Brexit is still a story of the unknown, so while people are starting to talk about it, nobody is really making any major decisions at this point, but I am really pleased that we have with us Alexei Yakovitsky, he is the Global CEO of VTB Capital. Nice to see you this morning, sir, and thanks for having us at your event. Well, let me ask you this question, London is very interested about what banks are going to reduce their headcount, what business they think may come out of the London economy, what do you think will change for you at VTB Capital, do you intend to reduce headcount in London?

ALEXEI YAKOVITSKY: It is definitely very early to say at this stage what the actual implications of Brexit will be on the financial industry and for the financial industry in London, to say that banks have really finished their calculations of that they understand all the implications, even to say it is going to be better or worse compared to what it was a couple of years ago, that is really still a big question mark. So, just like everyone else, we are assessing what the potential outcomes are, and within a broader VTB context we do have European presence in Germany, Austria and France, in Continental Europe, this is where we are seriously cosidering whether we do need three European banks pretty much in the same regulatory environment, and you would agree that it probably does not make sense to potentially decrease the number of licences. When it comes to London, it remains a very important center of our investment banking activity, both in terms of selling Russian risk to the international investors and in terms of doing some international business in selected jurisdictions, so from from this perspective things remain intact at this stage.

GEOFF CUTMORE: So, still committed, but obviously a watching brief over where the business goes, but ultimately, if the liquidity starts to leave London and head to Frankfurt or Paris, I guess you'll just go where the money goes?

ALEXEI YAKOVITSKY: You're totally correct. London is important because there is human capital, there are clients, there are investors, and it is really the center, one of the global centers of international finance. If this changes, we will clearly evolve together with the market, but at this stage there is no sign that this is happening.

GEOFF CUTMORE: When it comes to your opportunity, running into 2017, what do you think the key growth drivers are going to be for VTB Capital, and which markets do you think will generate best return?

ALEXEI YAKOVITSKY: What's important to understand about us is that even though Russia as a business place is not experiencing massive growth it has experienced in the previous decade, the competitive environment for us has improved. This has to do with the fact that our European competitors, and to some extent our American competitors have been decreasing their presence. This is not really only about Russia, but this is a structural change in the market, so from this perspective we have been able to offset the somewhat shrinking pie, if you know what I mean, with more market share, less competition, therefore, more pricing power. So, from this perspective I think the impact of market share gain is not over yet, we'll see more of it in 2017, we are launching a number of new initiatives, we are developing, for example, our commodities businesses, again another example where a lot of our competition has withdrawn, we are starting from scratch with a clean balance sheet. We are starting with a very solid corporate client base, and really we're building a business, our commodities business around our core competence, which is access to Russian clients, a lot of whom are, naturally, commodities-related businesses. So these are really the things we are focusing on, but what is also important, we are starting to see some European business, even in developed Europe and more mature Europe, which I would attribute it to the fact that a lot of European banks are shrinking, not only in Russia and not so much in Russia. They are actually shrinking in their core markets and there is a big void developing, which will be filled as any void, with banks like us and emerging markets banks, and some of the global banks that are still standing.

GEOFF CUTMORE: Well, let me get a market view from you then, because it seems that we are at a point when markets are looking at quite high valuations for equities, the bond market feels like it almost could be beginning to turn, with some government yields rising. Could I ask you for your view on where you feel the markets are going to run to into the early part of 2017 and what the impact will then be on capitalmarket's activity?

ALEXEI YAKOVITSKY: My view at this stage is that you're not likely to see any drastic moves, you're totally correct, if you look at the equity valuations, they do look cheap relative to the debt markets, if you look at debt relative to equities, it does look expensiv, whether that's because equities are cheaper and debt is too expensive, it is yet to be seen. A lot of it will actually depend on the timing of this discovery, it will really depend on what the central banks are doing, but as I said, my view is that no drastic changes are likely in the next few months.

GEOFF CUTMORE: OK. It's been very good catching with you, Alexei, thanks very much for joining us here at the CNBC position, and I'll send it back to you on that point, very interesting that the view here in Moscow seems to be a sideways trend for markets, perhaps running into the early part of 2017, back to you, guys.


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