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. Last Updated: 07/27/2016

Foreign Debt Weighing on VTB

VedomostiKostin and Alexander Potyomkin at the start of VTB trading on MICEX in June.
Troika Dialog on Thursday voiced fears that VTB, the country's second-largest bank, would be hard hit by the higher costs of refinancing its debt amid the global credit crunch.

The brokerage downgraded its estimate price on VTB's global depositary receipts by 8.3 percent to $11.42 in a note to investors. It retained a "hold" recommendation on the shares.

State-controlled VTB, which raised $8 billion through the sale of 22.5 percent of its stock in May, has borrowed heavily on foreign markets, said Andrew Keeley, a banking analyst at Troika Dialog. "The bank has far greater exposure to wholesale funding," Keeley said.

More than 30 percent of VTB's liabilities are made up of foreign debt and syndicated loans, Troika said in the note. This compares to just 5 percent at state-controlled Sberbank, the country's largest bank.

With the cost of international borrowing set to increase in the wake of the U.S. subprime mortgage crisis, VTB is particularly susceptible to higher costs of refinancing its debt.

David Nangle, a banking analyst at Renaissance Capital, said he was not concerned about VTB's debt position.

"Anyone borrowing abroad will be hurt, but VTB is in a very stable position," he said.

VTB benefits from the perception on debt markets that it is a sovereign risk with a slight price premium, Nangle said. The bank has a number of different avenues it can explore to refinance its debt, he added.

Troika Dialog's concerns come amid fears that the country's banking sector will feel the aftershocks of the global liquidity crunch. Analysts have largely shrugged off the concerns, however, arguing that the outlook for the sector remains favorable.

Mattias Westman, a founding partner of Prosperity Capital Management, which has a small position in VTB, said his fund was not overly worried about the profitability of Russian banks. He said the sector had been enjoying very high margins and that these needed to come down. "The banks have been taking on an enormous amount of capital [recently], and so they need to lend quite a lot," Westman said. "They will need to lower their prices."

Investors have piled into VTB stock, welcoming the opportunity to diversify away from Sberbank. The Templeton Russia & East European Fund, managed by U.S. firm Franklin Templeton, said in a financial statement that it bought into VTB in the second quarter of this year and that it owned $3.7 million worth of VTB stock as of Jun. 30. The fund also owns about $55 million worth of Sberbank stocks.

Goldman Sachs recently issued a "sell" recommendation on VTB shares, saying it saw better value in other stocks. Shortly afterward, Goldman Sachs CEO Lloyd Blankfein issued an apology to his counterpart at VTB, Andrei Kostin. Goldman Sachs helped manage VTB's initial public offering in May.

VTB is facing a shake-up at the senior level, news agencies reported. First vice president Denis Ursulyak, deputy CEO Igor Zabyalov and Alexei Akinshin, an adviser to Kostin, will shortly leave the bank, sources close to the bank said, Interfax reported. Other departures are rumored to be imminent.

A VTB spokeswoman declined to comment on the reports.

VTB depositary receipts were trading at $9.22 at 2:41 p.m. on the London stock exchange, down on its offering price of $10.56 in May. VTB shares closed at 12 kopeks on the MICEX, down 0.17 percent on the day, and at 0.46 cents on the RTS, down 1.5 percent.