Dow Jones: Russia's Inter RAO To Get Billion In State Assets –Vedomosti

WSJ: A Russian Bank's Strategy: Double the Stock in 3 Years

By WILLIAM MAULDIN

In an interview before the board meeting to approve the new strategy, expected Wednesday, Mr. Kostin said he would shrink the proportion of low-margin loans to big state-controlled companies that can now borrow more cheaply than VTB on international markets. The bank will instead compete for deposits to reduce reliance on international funding, and it will focus on its more profitable retail- and investment-banking businesses. "Our corporate banking is not quite efficient," Mr. Kostin said.

The goal of the new strategy, dubbed "The Road to 15," is to raise return on equity, a measure of profitability and efficiency, to more than 15% in 2013 for each of the bank's three main businesses, a move Mr. Kostin believes will boost the stock price to 15 kopecks (about half a U.S. cent), comfortably above the 2007 IPO price of 13.6 kopeks and more than double Tuesday's closing price of 6.59 kopeks on Moscow's Micex.

The share price of state-controlled VTB is politically sensitive, because more than 100,000 ordinary Russians bought into the ill-fated offering as a part of a program of "People's IPOs" promoted by then-President Vladimir Putin. Minority shareholders have even demanded the government buy back the shares at the IPO price.

During the financial crisis, the government pumped capital into VTB and other state banks, pushing them to lend to boost liquidity and rescue important companies. Now those loans are turning out not to be as profitable as retail loans and investment banking: VTB's net interest margin for corporate lending hasn't been above 4.1% in the past three years, compared with 7.5% for its retail portfolio, according to UBS AG.

Meanwhile, Russian bank lending is just starting to grow again, after shrinking slightly in the first quarter of 2010 as debt-ridden companies shied away from relatively expensive credit in uncertain times. Banks are also waiting for nonperforming loans to peak, which could happen as early as this summer, according to bank chiefs, depending on commodity prices and Russia's flagging economic recovery.

Under its three-year strategy, VTB expects its net income to jump to between $4 billion and $5 billion in 2013, compared with a forecast of $1.59 billion in 2010 and a loss of $1.9 billion in 2009, when the bank swelled its reserves against a wave of bad loans triggered by the financial crisis and a drop in commodity prices.

VTB plans to shift its 100 biggest clients to its investment-banking unit, known as VTB Capital, and seek new corporate clients in regions outside Moscow and St. Petersburg, Mr. Kostin said. But he conceded that the structure of the Russian economy makes lending to smaller companies difficult, with behemoths such as OAO Gazprom and OAO Rosneft dominating the landscape and the small and medium-size business sector less developed than in some Western countries.

The bank is looking at expanding into direct consumer lending in shopping malls, perhaps through a partnership or acquisition, and this could help boost overall retail banking to the goal of one-quarter of the group's assets at the end of 2013, from 18% at present, Mr. Kostin said. The share of its corporate business will slip to "slightly higher" than 50%, from an estimated 64% at the end of 2010.

Surrounded by photos of Mr. Putin—now prime minister—and current President Dmitry Medvedev, Mr. Kostin brushed aside suggestions that the government would persuade him to lend to other state-controlled enterprises, undermining the bank's push for greater profitability.

He said that while Mr. Putin pressed VTB and other top banks to lend more during the financial crisis, no one told the bank who should receive a loan. He said the bank halted loan growth in the previous two quarters as liquidity returned to Russia and the government grew less "outspoken on this."

He also said he sees no need for VTB to increase its loan-loss reserves, unless Russia is hit by a second wave of economic problems.