When Russia's second largest bank, VTB, 85% state-owned, appointed the first ever foreign national to its board in December 2009, it was a clear signal of intent. Herbert Moos, the son of a Russian mother and a German father, became chief financial officer (CFO), and was also made deputy president of the bank, to ensure that he has the authority to drive through an agenda of change.
Mr Moos had previously run the London operations of VTB Capital, the group's investment banking arm, and had already held a CFO position at Lehman Brothers, Asia excluding Japan. However, his role at VTB is also a personal departure, as for the first time he now has responsibility for the finances of a universal banking group, which includes VTB's corporate banking business, the VTB-24 retail brand and VTB Capital.
The bank has launched a new three-year strategy entitled 'Road to 15', intended to lift its share price to 15 kopeks, from about seven kopeks at present. Of course, this target is partly subject to wider market conditions, but the core concept behind it is to shift the focus from scale and asset growth to quality growth and profitability. This is a significant change for a bank whose assets have grown from $4bn at the time current president Andrei Kostin took charge in 2002 to about $120bn today.
Controlling the curve
Inevitably, the quality and profitability transformation affects the bank's funding strategy, and optimising its liability structure is a central task for Mr Moos. Overall, the bank's net new financing needs have been slimmed down, as it delevers after taking significant provisions for just under 10% of the loan portfolio in 2009, which led to a net loss of $1.98bn.
VTB is also switching the weight of its portfolio further towards the retail segment, allowing its corporate credit market share to remain stable at about 13%.
"The old philosophy was to issue into size; the new philosophy is to issue into demand. In the past, we had to issue a certain amount to fund rapid growth, and we could not even predict if we might need to come to the market later. So we had to push size; therefore we had to pay up, punishing our existing lenders," says Mr Moos.
Going into the financial crisis, VTB had the largest amount of outstanding Eurobond debt and the most volatile international yield curve among Russian banks. During the crisis, the bank bought back about $1bn of its own debt, helping to improve its secondary market position considerably.
"This was not only a very profitable exercise for the bank, it was a significant confidence-booster for investors - we went out in the darkest hour and put bids on our own paper, showing that we had plenty of liquidity. Coming out of the crisis, we now have much less paper outstanding, and we are telling investors that we will be issuing much less in our traditional Eurobond market," says Mr Moos.
This deleverage created a favourable context for the $1.25bn benchmark Eurobond issue launched in February 2010, and VTB received orders for $3bn. For the first time, the bank managed to price a Eurobond inside its secondary curve, and it also altered its investor base. Asian investors, previously negligible among the bank's bondholders, accounted for 15% of the uptake, and the share taken by hedge funds fell below 50% for the first time. Instead, there was greater demand from private banks and long-only funds. "We acquired a much more stable and diversified pool of investors, in return for discipline in our issuance," says Mr Moos.
Going local
Another crucial element to VTB's reduced Eurobond borrowings has been the rise in funding from rouble bond markets, helped by the Central Bank of Russia's rapid interest rate cuts to below 8%. This has enabled VTB to reduce funding costs by shortening the duration on its liabilities. Rouble bonds account for about 34% of VTB's total outstanding wholesale debt, but more than 50% of new issuance in the past 12 months, most recently a three-year bond for Rbs20bn ($640m) in March 2010.
"The interesting feature of the post-crisis world for Russian corporates and banks is that internal capital markets are now significantly deeper and more meaningful than the traditional sole source of funding in external capital markets. This means that, structurally, the issuers are no longer as vulnerable to external markets collapsing or not being available to them," says Mr Moos.
The domestic switch, together with a rise in deposit funding to 55% of liabilities (from 30% historically), allowed VTB to achieve a record interest margin of 5% in the first quarter of 2010. It is a useful step on the 'Road to 15' and towards the bank's ultimate objective of issuing fresh shares to raise the level of private ownership.