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. Last Updated: 07/27/2016

From Soviet Trade Bank to Universal Lender

MTVneshtorgbank is giving the competition a run for its money as it expands into retail and corporate services.
Russia's No. 2 bank, Vneshtorgbank, is emerging from its historic role as the government's foreign-trade facilitator and is pushing hard to mold itself into a diversified financial institution.

Vneshtorgbank, or VTB -- sometimes billed as the only bank that could actually give industry leader Sberbank a run for its money -- is moving into retail and investment banking, expanding corporate services and buying up smaller banks in the CIS and Western Europe.

The bank even has plans to list shares on a foreign exchange as early as 2006, although some analysts say a foreign IPO may still be several years away.

Given its aggressive plans, state-owned VTB appears set to become an even more important player in the banking sector and economy as a whole.

"It's trying to transform itself from a Soviet trade bank into a universal bank," said Andrew Keeley, banking analyst at Renaissance Capital. "It clearly has the support of the administration in what it's doing. It's not to be taken lightly."

VTB itself says the changes are part of its strategy to take on global competition. "Only the big and the strong can compete with foreign banks," said Vasily Titov, VTB senior vice president and board member, in an interview. "That's why we're doing all this."

Despite this apparent dynamism, VTB came under blistering criticism from former Central Bank Chairman Viktor Gerashchenko earlier this month, who said the bank was in "financial deadlock" and compared it to a sinking ship. "It seems our Titanic has holes enough to go under, yet the orchestra is still playing a happy waltz," Gerashchenko said, Vedomosti reported.

Gerashchenko blasted VTB's plans to purchase overseas banks owned by the Central Bank -- Moscow Narodny Bank of London, Eurobank of Paris and Ost-West Handelsbank of Frankfurt -- saying they would not help keep the ship afloat. "A handful of dinghies won't do any good. They will just get drawn into the whirlpool," he said.

Although VTB reported profit last year of $263 million, Gerashchenko said that his analysis showed the bank's core operations actually lost money.

Titov declined to respond to Gerashchenko's criticism, saying the bank would not comment on the personal opinions of a private citizen.

Yekaterina Trofimova, banking analyst at Standard and Poor's, called Gerashchenko's judgment too harsh.

"The bank is in an expansion stage right now," she said. "The financial results are, as expected, moderate, which is absolutely normal for the bank at this stage of development."

Trofimova said the current results should be weighed against investments the bank was making in its network and products, as well as in acquisitions.

The new foreign acquisitions appear to make long-term sense, Trofimova said. "These links with Western Europe are very important for VTB's growing international business and export-import flows," she said.

Other analysts agreed that Gerashchenko probably went too far in criticizing VTB in light of the government's vested interest in seeing its own bank succeed.

VTB may be planning to use the government's proposed 37.5 billion ruble ($1.25 billion) capital injection -- ostensibly for purchasing the Central Bank's overseas assets -- as a leverage point for improving its domestic position, said Natalya Orlova, an analyst at Alfa Bank. "Acquiring overseas banks is a way to secure an increase of capital from the federal budget," she said.

VTB's strategy appeared to be geared toward using its position as a state champion to move aggressively into new sectors such as retail banking, Orlova said. "Increasing its capital will have a deeper effect on VTB's domestic position than ... owning overseas banks," she said.

The country's entire banking sector wobbled briefly in the summer of 2004, after the closure of two second tier banks spooked depositors. VTB used the opportunity to gobble up Guta Bank, the mini-crisis' main casualty, for a nominal 1 million rubles ($35,000).

Guta, now rebranded Vneshtorgbank 24, has been turned into VTB's retail arm, offering many services online.

Guta and the Central Bank's biggest remaining European-based assets are only part of VTB's acquisition binge. The bank has been steadily scooping up smaller Central Bank assets in Europe over the years, and it recently shelled out for 25 percent of St. Petersburg-based Promstroibank with an option to increase ownership to a controlling stake.

In a little over a year, VTB has also made waves in the CIS, buying a majority stake in Armenia's ArmSavingsBank, and 50 percent plus one share in United Georgian Bank. In March of this year, VTB opened a subsidiary in Ukraine.

These CIS banks are "not very profitable, but they're doing OK," Trofimova said.

They also could come in handy for servicing Russian companies expanding abroad, analysts said.

After months of reports that the European Bank for Reconstruction and Development and Deutsche Bank were both negotiating to buy a minority stake, VTB now says it hopes to list shares on a foreign stock market as early as next year. "We want to do an IPO, probably in London," Titov said. "But only the owner, the government, can decide that. We have made this proposal, but they haven't said anything." Titov said the listing could be anywhere from 6 percent to 20 percent of VTB.

Renaissance Capital's Keeley said a VTB listing would be a significant new target for portfolio investors.

"Investors are very eager to get exposure to Russian banks, but now they basically have very little choice" about where to invest, Keeley said.

Vneshtorgbank is still at best a head shorter than its bigger adversary.

Sberbank's deposits at the end of 2004, including retail and corporate deposits, represented 36.3 percent of Russia's total deposits, according to an estimate by Standard and Poor's. VTB came in a distant second with 4.2 percent.

Sberbank also handled an impressive 29.5 percent of Russian loans, compared with 7.5 percent at VTB.

Yet VTB is at least a minor giant in a country where most banks have less than 2 percent in both categories.

In deposits, only Gazprombank (3.5 percent), Alfa Bank (3.2 percent), Bank of Moscow (3 percent) and Rosbank (2 percent) broke the 2 percent barrier. In loans, only Gazprombank (3.8 percent), Alfa Bank (3.1 percent) and Bank of Moscow (2.3 percent) did.

Many experts question whether VTB will ever really compete with Sberbank, as they are both state-owned. As VTB puts down roots in areas like retail, smaller banks could be left with little option but to run between the legs of the two state-owned giants.



























Russia's Top 5 Banks by Assets
BankTotal Assets (millions of rubles)*Share of Total Banking Assets
1. Sberbank2,219,09428.87%
2. Vneshtorgbank504,7696.57%
3. Gazprombank379,6574.94%
4. Bank of Moscow (Bank Moskvy)210,1362.73%
5. Alfa Bank208,0172.71%
*Data as of July 1, 2005
Source: Interfax Center for Economic Analysis