Vedomosti has posted an investment memo by ATON on the state-owned bank VTB. The document is so remarkable that I’m reproducing it in full. This wasn’t written by opposition-minded financiers, but by investment analysts—yet with every new sentence, you almost expect to come across something about the Party of Crooks and Thieves (a popular opposition nickname for the ruling party, United Russia). Where else could something like this happen: analysts state in official memorandums, “Sell” recommendation and “Downside potential: 61%,” while the management of a state-owned bank remains firmly in place, receives state support, feels perfectly fine, and even sits on the leadership bodies of the ruling party.
:** give us money—and lots of it** VTB is asking the government for cheap long-term funding, saying it will not be able to meet its lending growth targets without it. In our view, the real reasons for this request have nothing to do with loan growth—they are the bank’s weak financial position, its limited ability to generate profit from its core operations, and the proximity of major debt repayments. Putin’s order… On February 22, Prime Minister Vladimir Putin instructed the Finance Ministry to address the problem of rising lending rates following complaints from corporate borrowers. In the head of government’s view, “there are no objective reasons for this [increase in lending rates]. The Central Bank is not raising the refinancing rate.” We believe the prime minister’s desire to regulate pricing in the credit market is driven more by political than by economic considerations. In addition, we find it odd that the problem of bank lending rates was assigned to the Finance Ministry to solve (and that it agreed to do so). …and Kostin’s response. VTB President Andrei Kostin responded to the prime minister’s statement immediately: that same day, in an interview with the Financial Times, he called for the Bank of Russia (and the state more broadly) to provide his bank with cheap liquidity. According to Kostin, VTB will not be able to grow without additional cheap long-term funding, while relying exclusively on deposits for funding will increase the cost of loans, and “there is nothing good for the economy in that.” We believe the large volumes of liquidity VTB received during its takeover of Bank of Moscow came in very handy, and it is hardly surprising that VTB would once again like to receive state funds on similarly favorable terms. If this plan is implemented, the additional funds will have a beneficial effect on VTB’s financial position. The funds will be cheap, improving net interest margin, overall profitability, and ultimately capital. They will also be long-term, allowing the bank to improve the maturity matching of assets and liabilities (ALM). The last time VTB disclosed ALM information was with its 2010 financial statements: at that time, the maturity “gap” for liabilities due in less than one year amounted to 16% of total assets. Since then, in our estimates, VTB Group has received $20 billion in liquidity from the state and regulators (in addition to the $10 billion loan to Bank of Moscow). Finally, the money would apparently arrive just when it is truly needed. VTB faces a substantial volume of debt repayments in 2012 and 2013. According to the bank and Bloomberg, VTB will have to pay $3.7 billion on its bonds in 2012 (principal and interest), and $5.1 billion in 2013. If possible put options on the bank’s bonds are exercised, payments would reach $5.1 billion this year and $7.3 billion next year. Given current conditions in the debt market, VTB is unlikely to refinance all of its debt in the capital markets. In essence, this issue appears far more significant for VTB than the noble goal of “supporting the economy”—it seems to be one of the real reasons for seeking additional state funding. The long-term effect is less immediate, but it will be negative and more severe. In our view, if this project is implemented, there is a risk of increasing the banking sector’s dependence on the state and regulators. Banks may also become less concerned with matching the maturities of assets and liabilities and with long-term planning in general, confident that the Bank of Russia will step in if necessary. In our opinion, the government’s generosity toward VTB is unlikely to come free of charge. Moreover, state support for VTB has so far brought no benefits to minority shareholders.