Russia's VTB Capital expands its horizons
Financial News (UK)
Launched during the financial crisis, VTB Capital is now Russia's top investment bank and believes it is benefiting from 'deglobalisation' in the industry, write Matt Turner and Matthew Attwood
April 2008 was not the most auspicious time to launch an investment bank. UK lender Northern Rock had been nationalised, US investment bank Bear Stearns had been saved from bankruptcy by JP Morgan, and the International Monetary Fund had dubbed the US sub-prime crisis “the largest financial shock since the Great Depression”.
But five years later it appears Russian lender VTB Group's decision to hire a swathe of Moscow-based Deutsche Bank staff to help form its investment banking arm - VTB Capital - during the crisis has paid off. It has built up a dominant position in Russian investment banking, ranking top for revenues in every full year since its formation.
Alexei Yakovitsky, one of those first to join VTB Capital and now global chief executive, said the scale of the growth had exceeded expectations but added that the shape of the operation was very different from what had been imagined, with a much greater dependence on fixed income.
Yakovitsky said: "We clearly have been able to build market share, grab revenue opportunities and establish ourselves in many products faster [than expected]." However he added the dependence on fixed income was greater than expected "because equities have had a hard time and inking fees aren't where they used to be".
Several high-profile foreign executives have joined the firm, including former Goldman Sachs partner Atanas Bostandjiev, who now heads the UK and international business, and Riccardo Orcel, a former senior Bank of America Merrill Lynch dealmaker.
Orcel, who joined in summer 2011 and is now deputy chief executive at VTB Group, recounts that the first time he met the management of VTB Capital he asked "What do you do next?"
The answer was international expansion. Orcel said: "It's very easy to have a strategy as a start-up in Russia: you want to be number one. But when you get there in 18 months you can't just be happy being number one in your country. An investor always wants something that's growing and that's why we need to go outside Russia."
VTB has also been forced to think about how it can continue its growth in light of increased competition in recent years from another state-backed Russian investment bank with serious ambitions: Sberbank. The competitor, which is part of the retail bank Sberbank, which holds almost half of Russian retail deposits, has quickly risen up the league tables since it acquired Russia's oldest private investment bank Troika Dialog last year. It finished 2012 second in the Russian investment banking revenue rankings, behind VTB Capital.
Orcel said: "If you stay in one market only and a competitor like Sberbank buys the market through balance sheet, you put at risk your future revenue stream."
Russia remains the starting point, specifically VTB Capital's ability to distribute Russian risk to foreign investors, a critical ability given the international ownership of the Russian market. However, the way investors allocate resources gives VTB Capital a natural advantage in other emerging markets, according to Orcel.
"When you call BlackRock and you want to sell a Russian bond the person who buys the Russian bond is also the person who buys the Turkish bond or the Slovenian bond. This is especially true in Hong Kong. When you speak to the funds there, nine out of 10 of them will be dedicated to the Asian countries and one person does [emerging markets] for the rest," he said.
VTB Capital now has a footprint in London, New York, Hong Kong, Singapore, and is considering lending locally “on an opportunistic basis" from those cities, according to Orcel.
However, he is realistic about what VTB can achieve in markets such as the US and hopes to build up the bank's international business through strategic alliances. In the US, the firm has a joint venture with Evercore and has also struck partnership with BTG Pactual in Brazil.
The approach challenges what Orcel calls the global model, where every bank wants to be global and be everything to everybody. Instead, he is more in favour of a focused strategy playing to an institution's strength, such as that employed by UBS Investment Bank, helmed by his brother Andrea.
He said: "Maybe one or two banks can be global - JP Morgan or Bank of America Merrill Lynch - but for everyone else it's too expensive."
Meanwhile, the advent of regulation such as Basel III and this increased expense of global coverage has led to what Yakovitsky describes as the "deglobalisation of investment banking’’.
Yakovitsky said: “There is clearly an argument that there is a role for regional and pan-regional banks, especially coming out of emerging markets, whose share of global GDP has grown in the last 15 to 20 years."
For those employed by European and American bankers in the region, facing off against VTB Capital and Sberbank, both state-backed investment banks, might feel like an unfair fight.
Yakovitsky is clear that, in the case of VTB Group, state-ownership -it is still around 61% owned by the Russian government — has been helpful, though he points out that many western banks were also in receipt of state aid during the crisis.
"If you think about it, no private capital would have the appetite, or the nerve, or the lump sum of money in Russia, to launch a project like VTB Capital. In the circumstances we were in in 2008, it could only have been done by the government."
• BTG Pactual
VTB announced the alliance with its Latin American partner, BTG Pactual, in June last year during a busy period for the Brazilian bank, which went public in April with a $2bn listing.
BTG’s attractions as a strategic partner in the region are evident: year to date, it is the number one bookrunner for mergers and acquisitions in Brazil and number two for equity capital markets, occupying the number three position in both those markets in Latin America. It advised on just under a quarter of completed M&A deals in Brazil in 2012 and was on 10 of the year’s 12 public offerings.
Most tellingly, it topped the investment banking revenue tables for both Brazil and the whole of Latin America for the first time last year, with a market share in Brazil of just under 18% and $168m of revenues.
It has not always been so dominant. According to Dealogic, the bank was number two for investment banking revenues in Brazil in 2007, accounting for 13.3% of business worth a total of $212m. But the following year it slipped to number five, with a 6% market share worth $58m.
The bank has endured a similar roller-coaster ride in the Latin American league tables, dipping from number three with 8.6% market share worth $219m in 2007, to number six and a 4.5% market share worth $64m the following year. In 2012, it was number one with market share of 10.7%, worth $199m.