VTB Group has hit reset on its Asia strategy starting with a new branch manager in Shanghai and plans to hire relationship bankers in Hong Kong.
The Russian bank is looking to help intermediate more of the swelling trade between Russia and China, its senior executives told FinanceAsia.
As part of the push VTB Bank and China Construction Bank signed a cooperation agreement on the trade and delivery of precious metals on December 17.
The pivot to Asia comes after the West imposed sanctions on Russia for its role in the Ukrainian crisis. VTB, alongside other Russian financial institutions, has been barred from Western markets, which has raised its cost of funding and alienated many international borrowers who were clients.
“Asia is a good growth opportunity,” VTB Bank’s Mikhail Yakunin, senior vice-president in charge of the group’s financial subsidiaries division, told FinanceAsia in an interview. “We are currently putting together our 'Go East' strategy.”
VTB Bank, Russia’s second-largest bank by assets and branch network after Sberbank, has hired Pavel Ananenko to be its branch manager in Shanghai. Ananenko was previously treasurer at Russian petrochemicals company Sibur.
“Asia has always been an interesting opportunity but particularly now that lots of Russian companies are looking to grow in the region,” Ananenko told FinanceAsia by telephone from Shanghai. He started work in his new role on December 23.
China is Russia’s biggest trading partner. Trade between the two swelled to $95.3 billion in 2014, up 6.8% from 2013 and well above the roughly $40 billion generated in in 2009. Despite a subsequent slip in bilateral trade between January and September this year, politicians from both countries have reiterated their aim to see annual turnover hit $200 billion by 2020.
VTB’s bullishness is a turnaround. Not so long ago the 11-strong supervisory board, dominated by current and former state officials, discussed closing down VTB’s operations in Asia, according to a person familiar with their thinking. Damian Chunilal, a prominent banker in Hong Kong and VTB Capital’s chief executive officer in Asia left the firm in September 2014.
Other Russian banks have retrenched overseas this year as the Russian economy has shrunk and the price of its top export, oil, has plumbed an 11-year low.
VTB executives attribute the volte-face on Asia to the opportunities created by being the only Russian bank with a financial services license in China.
A greater presence in Asia will marginally help to reduce the overweening concentration of VTB Bank’s loan book to a relatively small number of large Russian borrowers, a risk noted by credit rating agencies.
"We are very committed to grow in China and develop our onshore bank in Shanghai where we want to hire more people and add to and strengthen the product range we can offer to our clients,” Riccardo Orcel, deputy chief executive of VTB Group and head of global banking at VTB Capital, told FinanceAsia. He outlined plans to hire relationship managers in Hong Kong to win business clients across Greater China.
VTB said its market share of yuan-rouble foreign exchange operations in China is about 89%. In 2015, the volume of the Shanghai branch’s yuan-rouble foreign exchange operations exceeded Rmb20 billion ($3 billion).
Gaining traction
VTB Capital has been gaining traction when it comes to China-Russia mergers and acquisitions.
VTB Capital acted as sole financial adviser to China National Chemical Corp. (ChemChina) on Rosneft’s equity investment in ChinaChem unit ChemChina Petrochemical Company.
When questioned about VTB’s ability to advise on the other side of a deal from a prominent Russian company, Orcel said: "We were, very properly, put to the test in terms of what we could deliver and if we could give independent advice.”
To be sure, only a heads of agreement was signed in September and final terms have yet to be inked, but if sealed it will mark the first investment by a Russian state-owned entity into the equity capital of a Chinese state-owned enterprise. It was unclear what level of fees VTB collects on such state-to-state deals, but generally this kind of deal has been less lucrative for bankers.
VTB, in which the Russian government holds a 60.9% stake, aims to facilitate more such deals and believes it has an edge. "In China our status as Russian SOE has been an advantage in establishing good relationships with Chinese state-owned companies," said Orcel.
VTB Capital was named financial advisor to ports operator China Merchants Holdings in September, which together with COSCO and CIC acquired a 65% stake in Kumport, a container terminal in Istanbul. The deal is the largest Chinese investment in Turkey.
Outside of investment banking in Asia, VTB Bank has lent Indian corporate Essar about $2 billion for domestic expansion. Funds were provided by several VTB entities worldwide.
“It will be part of our international strategy. We can engage VTB operating entities all around the world to support companies expanding into Asia,” Yakunin said.
It is also busy helping to finance the construction of an oil pipeline between China and Russia and it financed about 10% of Indian gold imports in 2014.
VTB Bank has branches in China, India, and a joint venture in Vietnam. In mainland China it has a branch in Shanghai and a representative office in Beijing.
Challenges
Whilst the Chinese and Russian governments are pushing hard to forge the financial infrastructure needed for greater cross-border investment, frustrations and gaps remain.
Chinese firms have been reluctant to invest in Russia due to the country's economic contraction, weak level of corporate governance, rule of law, and transparency. Also China has also been cautious in the wake of US and EU sanctions and many Chinese banks will not execute interbank transactions with Russian peers and have curbed cross-border trade finance.
Some Russian companies complain that direct settlement in renminbi leaves them with few attractive reinvestment options.
Talk of a Russian panda bond is, however, growing louder.
“Basic banking products are available for all types of commercial transactions between our two countries. The challenge is that both parties want much more than exists today,” said Ananenko who has spent more than a decade working for banks including HSBC and Citigroup and graduated from the Far Eastern Federal University where he studied Mandarin.
