VTB Capital is already established as Russia’s largest investment bank. Bulgarian national Atanas Bostandjiev explains the state-owned bank's plans to expand its activities into new markets.

Since its build-out from Russia’s second largest bank in 2008, VTB Capital has quickly established itself as the country’s largest investment bank in terms of deal flow. That status was confirmed in the first half of 2013, when Dealogic data showed VTB Capital as the largest player in Russia for debt capital markets (DCM) and equity capital markets, with market shares of more than 30%. It also had the largest market share for DCM in the central and eastern Europe (CEE) region, at 10%, and for mergers and acquisitions advisory, at 18%.

Activity in Russian capital markets continues to pick up after a very quiet period in 2011 and the first half of 2012, and VTB benefits from its state ownership and the second largest corporate loan book in Russia. But with such a substantial market share and growing competition from other state-owned banks moving into investment banking, VTB Capital is understandably broadening its horizons.

The investment bank now has offices in London, New York, Hong Kong, Singapore, Dubai and Sofia. Its London-headquartered international arm, VTB Capital plc, is run, appropriately enough, by a US-educated Bulgarian, Atanas Bostandjiev. He joined in May 2011 from Goldman Sachs, where he was head of CEE sales and origination, having started his career in derivatives and later fixed-income sales at Merrill Lynch in 1996.

“As you can imagine, it is quite a change switching from one of the leading US investment banks to a government-owned financial institution. But at the same time, VTB Capital had a strategy from its inception to become not only the leading Russian investment bank, but also a global investment bank focusing on emerging markets. Building out that presence is a huge and challenging task, and few people have an opportunity in their career to take on an amazing role such as this,” says Mr Bostandjiev.

Broadening appeal

Mr Bostandjiev explains that the plan to expand is not just driven by VTB Capital’s intention to diversify its business beyond the Russian fee pool, but also by the needs of its key clients. When the bank started to grow internationally, its core competence was acting as a conduit taking Russian companies to the international markets, and bringing international debt, equity and strategic investors into Russia, as an adviser and sometimes a co-financier.

“We speak regularly to a broad number of dedicated emerging market funds, and we quickly realised that Russia is only a small fraction of their global emerging market portfolios. Hence they wanted to see additional emerging market product for us to stay relevant to them. Russia is our calling card, but the demand is for us to show additional products so we can get a bigger proportion of the business from international investors,” says Mr Bostandjiev.

The bank is picking its targets carefully, seeking markets where it has an obvious competitive advantage, or a historic presence for its corporate lending activities. Even the central European economies such as Poland or the Czech Republic, which are geographically close and have investment flows with Russia in both directions, are not a primary focus because of strong competition from western European banks. By contrast, Bulgaria provides a good base from which to seize opportunities further south. VTB Capital was a lead manager, alongside Deutsche Bank and HSBC, on the $750m five-year Serbian sovereign bond launched in November 2012.

“The retreat of some eurozone and especially Greek banks from the Balkan region has opened up a niche for us, a vacuum to fill. We have been leveraging our core competencies very intensively to originate product for the global investor base that other banks are slow to originate or not capable of originating,” says Mr Bostandjiev.

Selective growth

Similarly, while VTB Group is active in Asia, Mr Bostandjiev expects opportunities to be scarce in the more mature investment banking markets of Japan, South Korea and Taiwan. Instead, his attention is on markets with lower international competition where the incremental value for clients of VTB Capital’s presence is greatest. The bank is looking to source local equity and credit risk in markets including Indonesia, Malaysia, the Philippines and especially Vietnam, which has historic trade ties to Russia.

In the Americas, VTB Capital is proceeding more carefully due to its limited historic presence. Instead, the bank has signed joint ventures to develop bilateral flows with two fast-growing partners – Brazilian investment bank BTG Pactual and US boutique Evercore. Mr Bostandjiev says VTB Capital will expand its own coverage of Latin America if the partnership with BTG leads to significant origination activities, but the Russian bank has plenty on its plate for now.

He is perhaps most upbeat on the opportunities in sub-Saharan Africa, where he views South Africa’s Standard Bank as the only competitor with a meaningful local presence across the region. VTB Capital’s investment banking coverage of the region is run from Dubai, and VTB Group has a banking subsidiary in Angola. Mr Bostandjiev says VTB Capital has particularly strong relations with public sector and large corporate issuers in Africa, and the bank arranged the private placement of a debut Angolan sovereign bond for $1bn in August 2012.

“When the fee pool grows into the multi-billions, then you can be sure that the major US and European investment banks will focus on sub-Saharan Africa, but that competition is not there yet, their presence is low touch,” says Mr Bostandjiev.

Integrated strategy

The focus on markets such as Vietnam and Angola, which were political allies of the Soviet Union prior to its collapse, serves as a reminder of VTB’s origins as the Soviet state bank for foreign trade in 1990. The group network is integral to VTB Capital’s expansion outside Russia and the Commonwealth of Independent States. VTB Group has representative offices in Vietnam, China and India, with some VTB Capital staff allocated there to complement its two dedicated Asian offices.

The willingness of the bank to deploy its own balance sheet to support its investment banking operations has made it distinctive in the current, capital-constrained environment for global banks. VTB Capital invested alongside Bulgarian closely held bank Corporate Commercial Bank to buy troubled Bulgarian telecoms company Vivacom in 2012. The consortium put in €130m of equity and helped repay €588m of outstanding debt as part of a restructuring deal. A year earlier, VTB Capital had paid €100.1m to buy Bulgarian tobacco manufacturer BulgarTabac.

“Obviously we have different legal entities from VTB Group that need to operate within the local regulatory requirements, but the balance sheet is fully integrated, it is one big virtual ownership that we can tap into, which is globally and vertically managed,” says Mr Bostandjiev.

VTB has also used the liability side of its balance sheet to further its investment banking ambitions, becoming the first Russian entity to issue in Chinese renminbi in 2011, and following up with Russian debut issues in Singapore dollars and Turkish lira in 2012. A further lira issue took place in February 2013. Secondary offerings of VTB equity have also involved anchor placements with the sovereign wealth funds of China and Azerbaijan, most recently in May 2013.

Growth opportunities

Mr Bostandjiev believes there is further to go in pulling together VTB Capital’s presence in new markets and its existing strength in Russia. He says a number of Chinese investors have taken an interest in Russia, and VTB Capital has been able to arrange some private equity deals. But in general, Russian equity markets have underperformed and greater inward investment will most likely have to await a sustained upturn in valuations on the Moscow Exchange.

The advantage of building the firm in a period of relatively subdued activity has been the quality of staff available for hire, with Mr Bostandjiev’s fellow Merrill Lynch alumnus Damian Chunilal joining as head of Asia in January 2012. In the same month, Nomura’s former head of emerging markets, Makram Abboud, joined VTB Capital as head of Middle East and Africa. With the geographic footprint largely in place, the next step for the bank is broadening its product offering beyond the current focus on loan, bond and equity markets.

“The moment you interact with a client from a financing perspective, you want to be able to offer them additional services: foreign exchange hedging, commodity hedging and offtake financing, structured pre-IPO [initial public offering] financing. We have developed these capabilities in house and we see them as an integral part of the product platform that we need to have,” says Mr Bostandjiev.

He sees the sustained low interest rate environment in the US and Europe continuing to support the further development of the bank. As investors search for yield, they are travelling further into the frontier markets where VTB Capital can be a partner of choice to find appropriate assets. 

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