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AgendaMay 2 2016

How Russia’s VTB Capital has grown domestically and internationally

Riccardo Orcel, the head of global banking at VTB Capital, speaks to Stefanie Linhardt about cultivating the bank’s domestic Russian operation and taking an idiosyncratic approach to growing business in global markets. 
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How Russia’s VTB Capital has grown domestically and internationally

In its short history, VTB Capital, VTB Group’s investment banking business, has had to deal with many global challenges. Having only been set up in 2008, the year of the onset of the financial crisis, the young business faced an unfavourable environment, and has had to contend with Russia’s recent economic downturn related to the low oil price and Western sanctions. Yet, despite the headwinds, VTB Capital has developed into a growing business – capable of providing a balance sheet and willing to do work where some others would not – and its head of global banking did his fair share to help achieve that.

Riccardo Orcel joined the bank in 2011, when a lot of strategic decisions were yet to be made. And Mr Orcel was no stranger to the workings of VTB Group, as in his previous role he had worked with VTB’s management team on the bank’s $3.3bn second partial privatisation in 2010. This was as head of investment banking for central and eastern Europe, the Middle East and Africa (CEEMEA) at Bank of America Merrill Lynch.

Rich experience

Having spent more than 20 years at Merrill Lynch, which during the financial crisis merged with Bank of America, Mr Orcel learnt how the American investment banking model works – what to focus on and what traits not to transfer. He brought with him a focus on clients, the importance of teamwork and means and ways to grow a business.

“We put a lot of emphasis on growing revenues by talking to more clients in Russia and internationally,” says Mr Orcel. “At the same time, we managed to cut costs every year. We are now running one of the lowest – if not the lowest – cost-to-income ratios I have seen in the industry.” (VTB Capital’s cost-to-income ratio has not been made public.)

Mr Orcel has invested in talent, cultivating an international office in London, while also keeping a focus on his strategy: selecting the situations, clients, sectors and countries he wants the bank to operate in. He emphasises that these ambitions are something that can be concretely realised, rather than a vague set of plans that the bank cannot fulfil.

“When you are a new franchise that is expanding into growth regions, clients need to be at the centre of every decision you take. We heard a clear message from clients that emerging markets need an investment bank with high-quality product expertise that could be combined with a risk appetite to use capital where returns are attractive,” says Mr Orcel. 

International expansion

Despite prioritising growth in Russia, Mr Orcel wanted to make sure VTB Capital was not seen as a Russia-centric institution. “When you meet an oil major in Russia, there isn’t much you can say about the domestic market that they don’t know already,” he says. “However, they are very keen to know industry trends in foreign markets where we are active. Similarly, what we brought to foreign clients is the expertise developed in Russia in our core sectors such as natural resources.”

He explains that VTB Capital has created a network of partnerships in different markets to share relevant information in each industry. This means his team can provide the same level of service as global banks, but without the high overhead of having offices across the globe. 

“After the financial crisis… I do not believe in the global model anymore, except perhaps for the two or three top players,” he says. “It is difficult to be global, that is to say, to cover every client with all products: new regulations and changing priorities don’t allow banks to offer everything for everybody. Banks need to decide where they want to be. We decided and have found our niche.”

Growing outwards

VTB Capital initially focused on Russia and now has a market share in the country of about 50% in the capital markets and about 40% in mergers and acquisitions (M&A) in the country. The bank’s next step was to grow in the former Soviet influence zone of the Commonwealth of Independent States, where it consolidated its position as market leader within 12 months, according to Mr Orcel.

But there was no room to be complacent. About three years ago, the bank decided to also focus on business outside of Russia and the immediate region.

“We are looking at making some investments to grow in CEEMEA and in China,” says Mr Orcel. “We already have a strong international footprint in the group with a presence in more than 22 countries. We can grow our investment banking coverage to stay closer to clients and use the existing platform where it makes sense.”

For example, VTB Capital uses its Vienna office to do most of its CEE origination, while it otherwise mainly relies on its operations in London and Moscow. 

Challenging environment

The recession in the Russian economy, as well as Western sanctions imposed on some of the country’s largest state-owned businesses, have shown that VTB Capital’s decision to spread its operations was a wise one.

“We went from a world that was led by emerging economies and rising commodity prices to an investor community that is substantially underweight emerging markets and with banks cutting back from Asia to Latin America and CEEMEA,” he says.

He adds that in the current “challenging” environment, the focus on clients is especially important because clients will remember banks that have been there for them when times were tougher.

“It was wrong when every single bank in the world wanted to be in Russia, and made some very expensive acquisitions, [in some instances] even paying four times the book value of banks,” says Mr Orcel. “At the same time, we are now at the other extreme [which can leave us with some] great potential upside.”

For banks, being operative in a country during a recession means they can be ready for business as soon as the economy comes out of its difficulties. This was part VTB Capital’s strategy. It continued investing when others were pulling out – especially in Russia.

In the years of the recession, Russian companies saw not only profits and revenues suffer but also their stock market valuations, opening up a whole different universe of business opportunities. In 2015, VTB Capital was engaged in several buyback of shares and de-listings of Russian companies from the London Stock Exchange.

“We executed some very complex transactions in the UK with the delisting of Essar and Polyus Gold and the two buybacks for Uralkali,” says Mr Orcel. “We expect there could be more transactions from emerging market companies that look at their stock price and believe the current levels do not reflect the real value.”

He adds that the rationale to be listed in the UK can increasingly be questionable at a time when many stocks trade poorly and liquidity in the market has contracted. 

Turning east

Extra business is increasingly coming to Russia from China. Chinese companies are investing in Russia – not just in the traditional natural resources sector – and “are keen to hire VTB Capital to use our specialist knowhow in emerging markets”, says Mr Orcel.

VTB Capital has so far completed 12 bond issues and worked on three M&A mandates for Chinese companies. One example is the co-operation between the China National Chemical Corporation, also known as ChemChina, and Russia’s Rosneft. The memorandum of understanding signed in 2015 saw Russia’s largest petroleum company take a 30% equity stake in the ChemChina Petrochemical Corporation, a subsidiary of Chinese state-owned ChemChina, while the latter took over a majority stake in Rosneft’s Far East Petrochemical Company project. The details of such a deal may suggest to many that VTB Capital would act for Rosneft. In fact, the Russian bank was mandated by the Chinese company.

Working with a Russian investment bank also appeals to some African sovereigns, according to Mr Orcel, while in the CEE region the bank’s willingness to act as a lender is warmly received.

“Against all the headwinds, we continue opening new markets with clients from Mozambique to Croatia, from China to India and Turkey,” he says. “I think VTB Capital’s future should be bright. [When] the commodity cycle [turns] and emerging market economic growth again drives global consumption, we will be ready and hope to take advantage in full of the opportunities that lie ahead for the region in which we operate.”

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