Back

“We learned a new way of living – on-screen”

Yuri Soloviev, Chairman of VTB Capital Board of Directors, on investments, inflation and “unicorns”

This year seems to be one of the best years for Russian investment business – stock indices have reached multi-year heights, issues raise large volumes of funds, new instruments are being implemented. Yuri Soloviev, Chairman of VTB Capital Board of Directors, spoke to Kommersant of the stronger role of Russian retail investors, new names emerging at IPO market and development prospects for foreign-based companies of the group.

-      The inflow of investors to the Russian market is continuing, both numbers and volumes of transactions are going up for debt and equity capital. What are your expectations going forward?

-      This is a very good year. We timely responded to the challenges brought about by the pandemic, and these management decisions are bearing fruit: VTB Group profits will show record yearly results. Our corporate and investment business will also set a record. We continue to increase our presence in almost all segments of the Russian financial market and in some international business sectors: plans in all areas have been overachieved, and these were quite ambitious plans.

We consider our corporate and investment businesses interlinked. Those who issue loans should have a clear understanding of what’s going on with an issuer at a bond market and what’s happening to an issuer at an equity market. This enables greater performance efficiency for fixed income instruments, derivative instruments.

-      Could you quantify these records?

-      We took part in 120 DCM market (debt capital.- "Kommersant") transactions out of 187, executed this year,- both domestic and external. We have traditionally had a leading share of the market – about 29%. And this is also due to our management decisions. Since the end of 2020 we understood that globally the world could not manage inflation, and this feeling is still here, which means the CBR will proactively raise the key rate by strengthening the local currency versus those who do not take any measures against inflation. This helped us take our positions in interest rates, commodities etc.

And yes, there are lots of activities going on. We thought that at some point the number of transactions would decline, but for now the market is quite open and lively. There is demand, there is supply, many new names have appeared, the green and social financing sector is developing, the Eurobond market is ahead of last year’s numbers, when rates were going down, and there’s an absolute boom at equity markets.

-      This spring you mentioned ten IPO and SPO deals in the works. How many mandates are there now?

-      There have already been 22 offerings: 7 IPOs and 15 SPOs. We organized 2/3s of the total number of deals and participated in all Russian IPOs this year. This year will be a record one both for us and the Russian market in the number of deals and in the volume. And we believe this trend will continue.

Despite the fact that we are approaching December, when many investors go on vacations and the offering window closes down till the year end, we are still expecting one or two deals to happen in 2021, if only the markets remain normal. Of course, the latest commotion around our borders (the migrant crisis in the EU and Belorussia relations, reports of troops at Ukraine borders, the conflict between Armenia and Azerbaijan.- "Kommersant") will have its effects on investor sentiment – the first news led to a weaker ruble, the stock market going down, though I see no reasons for this whatsoever. Geopolitics is an unpredictable factor.

-       What offerings are expected – IPOs or SPOs?

-       I cannot say.

-       What are your expectations for the next year in terms of offerings?

-      The success of the latest offerings led to an increase in new names. We are now working with a whole range of customers from various industries: there is greater interest in the financial sector, in the TMT sector, in the mining sector. We have started working with a number of companies that have plans to go to the public market early next year. Some have begun IPO preparations for placement during the fall window of 2022. If market conditions remain favorable in 2022, we could expect IPO numbers to be on par with this year.

-      There has been growing role of private investors on the stock market. I am not sure if they take up most of the offerings, bit their impact is surely rising. What is the share of private investors today in offerings?

-      We can close bid books with Russian retail investors only for a number of IPOs. This has never happened in the history of Russia. Now there are RUB 15,7 trillion in broker accounts, half of these are retail investors. There has been an immense transfer from deposits, and this inflow happened just in time for a lot of retail investors – they joined the greatest rally in the world and made real money. The market has doubled since last year, many have felt confident and became more active in their investments.

From my personal experience, there were two cases when there was no need to invite Western underwriters to the table. They tried to says something to the issuer about Western fund interests, but they were shown the bid book, underwritten by Russian investors, who were more aggressive towards the price.

This trend became obvious back at the Aeroflot offering in the fall of 2020, when Russia showed western bankers that it could formally do without foreign money in a major offering.

This is quite a strong change in the balance of forces. It gives Russian issuers an opportunity to feel more confident.

Nevertheless, Western investors still play a major role. Western money means smart and long-term money, and we are willing to raise it. Any offering, even with large underwriting, requires a balance between retail, which largely acts as a speculator, and long-term institutional investors. A right ratio of all factors needs to be selected – nature of investor, his investing horizon, participation in issuer operations. For example, some investors buy in and never show themselves, and others engage in an active dialogue with management. We are trying to inform issuers of all these factors, and many are very cautious about selecting their investor pool at offering.

-      There is a simultaneous increase in the numbers of managers on the Russian side. Do you compete with them for offering volumes or do they, just the opposite, help you put together a more diversified base?

-      I always refer to this example from 2006. When I worked at Deutsche Bank, the overall volume of fees at the investment market, primarily IPOs and M&A deals, amounted to about $2 billion. At the time Deutsche Bank would count on 5-10% share, meaning it could make $100 million and more. And this was considered to be a lot. After 2009 and 2014, fees at the Russian market plunged by scores of times. But if we have to choose, we’d better own up to 10% of a $2 billion market than more than 50% at a $200 million market. Competition is always good. It shows that there is demand and there is supply, the market is developing, new players are entering it, and this raises interest of new issuers.

-       Has the market recovery let you raise fees? What are the fees at the Russian market now?

-      Fees differ. If an IPO fee level at American exchanges for medium capitalization companies varies in the range of 5-7% of a deal amount, then in Europe, including Russia, general fees are lower as a rule and are in the range of 2,5-3,5%. This difference is largely determined by numbers and amounts of deals: in the USA the IPO market volume is several times higher. Nevertheless, we see that over the latest year higher interest of companies in equity markets led to increasing fees for Russian deals.

-      This year VTB Capital became a shareholder of ivi, SPB Exchange, Delimobil. At the same time you are one of the managers of their IPOs. Does shareholding help get a mandate? You are not going to reduce your share in offerings and count on further growth?

-      These two businesses are completely unrelated. One business is investing and the other is a business where we operate as a manager. These are divided by a strong Chinese wall.

Purchases are handled with participation of our Private Equity & Special Situations division. These are elite special forces with immense experience and knowledge. And there is another division that works with IPOs – it is a different group of solid professionals, but with a different experience and other competencies. Plus there are analysts, publishing reviews, plus there is a syndicate collecting bids, plus sellers, who directly communicate with customers, handle phone calls and operate computers, and then there are market traders.

Teams from these businesses could interact at the level of boards of directors (if we have enough votes to participate), but in these cases VTB representatives, as a rule, abstain from voting on selection of managing banks.

 

But a totally different situation is also possible - when we work on two deals with similar issuers at a time within the same sector. In this case something we call “a Chinese cube” builds up. In this situation the “Chinese Wall” won’t do and we really need to build bunkers to prevent any chance the ways of both teams might cross. We work at numerous international markets and meet the toughest requirements.

- In SPB Exchange VTB holds a stake of up to 11%. Do you plan to retain that share? What ‘s the fair capitalization of the exchange?

- We don’t take a lifelong view. Each investment has its own horizon and philosophy. We regularly reassess them, at least once a year. Situations differ. Sometimes we have to quit before achieving any values. We have a risk limit that restricts the proportion of capital we can spend on some instrument. If the limit is full, but a new opportunity, which may be better than any of the previous ones, turns up, we may take a decision to sell something.

As for SPB Exchange, I’m quite satisfied with the way the deal is developing. It is balanced, so today shareholders can get some decent yield from it. According to our estimates, the capitalization is at least $1.4 bln. In fact, it is already a “unicorn” (a company that has reached capitalization of over $1 bln from scratch within a short period of time - Kommersant). Of course, IPO puts a lock-up on all the current shareholders, and we are going to stick to this restriction. Then we’ll see how the situation will develop. If the financial sector shoots up and grows exponentially, and we surpass our projected benchmarks, we’ll break free. But now we have to hold on.

- Do you have any intentions to become a provider for foreign investors on SPB Exchange?

- The management and shareholders of the exchange are quite mobile. They have quickly mastered the niche of access to foreign markets and, in fact, have become one of the biggest platforms for rendering services on foreign markets, first of all, the American. To be honest, I was really worried about our clients at the opening of the foreign retail platform. I have no idea whether they clearly understand the risk they take. But, as we are used to saying, the one who earned is right. Especially since S&P and NASDAQ indices have been steadily going up lately.

SPB Exchange has a couple of new ideas in the making that we support. All together we are working on a mechanism to provide access to American and European securities on SPB Exchange for the EU residents. They might be interested in it, thanks to both extended trade duration and significantly lower commission costs in comparison to foreign exchanges. Next year we are launching “VTB My Investments” in Germany. As we plan, clients will be given access to SPB Exchange as well. Bringing our mutual funds to the platform, expanding the list of securities, particularly starting ETF trade are up for discussion.

- Aren’t you put off by tough competition between St. Petersburg Stock Exchange and the one of Moscow?

- There are plenty of examples of such competition in the world. For example between NYSE, NASDAQ and CME in the USA. These are huge stock exchanges, but each has a different specialization. SPB Exchange constitutes another example of a specialized niche.

For sure, Moscow Stock Exchange is bigger. It is our strategic partner, and we have close relations. We are working on several projects together, including the one, related to carbon certificates trade. We are implementing this project on an open platform, so we are open for partnership and we see opportunities in it. In fact, it’s a part of our philosophy, both as a bank and as a group. From IT-architecture to business – everything we do, we do on open platforms.

The skill of working with partners as a team doesn’t come easily, but once you manage it, you’re sure to get synergy in everything.

- How large and how attractive is the market of carbon units?

- It’s already quite large. It’s estimated that the global volume of trade on it accounts for up to $0.5 trillion and is projected to surpass $1trillion. Our market looks less ambitious, but we have faith in it. By 2025 it can reach hundreds of millions of dollars in turnover. A lot of companies, of course, are thinking about how they can pay smaller quotas. But some will profit from it, for example, like Segezha Group, which specializes in forest regeneration.

- At what stage is now the joint project with Moscow Stock Exchange on carbon certificate trade?

- We are working out regulations. Hopefully, trade will be launched next year.

- Reducing carbon footprint and introducing ESG principles in general - those are popular topics. But what about our industry and investors? Are they ready to follow the new guidelines?

- More than half of the world's money is invested in stocks and more than a third - in debt instruments, based on ESG principles. If you look at the MSCI Emerging Markets Index on ESG from 2007 to 2021, you’ll see that its return stood at 140%, whereas the overall return for MSCI index was only 53%. Yes, there is a difficulty with unification - as it stands, it's all evaluated with the help of different indices and methodologies. Once we even evaluated a mining company from ESG perspective - so one parameter would give some result and another one would give a different value. We need more certainty in this respect. Anyway, this direction has a spark of potential for investors.

Russian issuers raising funds for ESG projects are already feeling the effects when they enter Western markets .In the EuroZone, there is a clear yield discount (or price premium) for bonds that green projects are financed by. Because the amount of money allocated is quite big, but the number of securities issued by Russian companies and banks is small.

Moreover, some countries have eased regulations for responsible investments, for example, in terms of taxation or provisioning. Unfortunately, in our country neither has been implemented yet. However our Government has clearly demonstrated its commitment to Sustainable Development principles. The Central Bank is developing a verification system for ESG bonds, but there’s still no incentive program. It’s introduction will be a big step up.

But the main thing is clear today - no responsibly governed company can ignore ESG principles anymore.

- And what about VTB itself?

- Our controlling stakeholder, namely the State, has an understanding of the issue. It sets us KPI in this aspect as well. On November 19, VTB Observing Council adopted the ESG-strategy for the years 2022-2025, which prescribes regulations for all levels of management and execution - from the Charter and Provisions on Observing Council and Board to the Groups employees, working with clients. Our primary mission is to make ESG principles our philosophy.

We are ready to assist the Government, retail clients, SMEs and large-scale companies develop ESG initiatives. In October ESG platform was launched. A Centre for Consulting and Expertise was also established. It works with federal and regional clients as a “one-stop-shop”. We also pay attention to the development of social initiatives and put the concept of“social treasury” into practice.To make our transition to the green reality smooth, we are working on decarbonization with refineries and power providers. Hopefully, in future the most responsible companies will profit from ESG certificates trade. If they are able to achieve their goals, they will make it possible to sell carbon units, so that, driving their revenues.

- From the bank’s perspective, what are the criteria of fulfilling the strategy? Are you going to stop using paper and get every employee a Tesla?

- We want to become more environmentally friendly, which is no news to you. We’ve been taking different steps in this regard for a number of years. But by 2030 we are going to become a net-zero organization, and it requires quite a large change program, which includes replacing our cars by “greener” ones, providing the bank with green energy, moving into a “smart office”, recycling the equipment and abandoning the use of paper in document flow.

- Your clients will have to stick to ESG principles as well, won’t they?

- We’ll be gradually integrating ESG factors into our systems of corporate management and risk management. In 2022 we’ll introduce routine stress-testing with ESG factors taken into account and in 2023 we’ll include portfolio’s ESG scoring in our assessments.

-So you may reject any company that doesn’t meet your ESG requirements?

- We’ve already rejected some projects with possible environmental risks. For example, in our interaction with mining companies at the stage of project financing we look closely at the organization of tailing facilities, as well as storage and transportation of production etc. We have extensive experience of financing such enterprises, so we understand that savings on necessary ecological measures will lead to losses in the end.

- But in general, you don’t renounce on providing loans to such enterprises?

- In case they meet environmental requirements - we don’t.

- In this regard your investments and deals in the energy and mining sectors look interesting. What is the strategy of getting out of “RusHydro” capital? Do you expect the shares price to reach the targeted value? Are there negotiations with some side on selling VTB’s share?

- We’ve signed a forward contract on “RusHydro” shares back in 2017. With all the prolongations the agreement implies conducting payments till March 2025. The company itself is a pride of the Russian energy sector and economy in general. It’s reasonably and dynamically managed, all the rights and responsibilities of the parties are clearly prescribed in the Shareholders agreement. The company pays dividends on a regular basis, this way reducing their payments to us under the forward contract. We are not going to quit - we like it to be its shareholder.


-      Are you planning any changes in the ownership of the grain company Demetra-Holding, where VTB owns more than 50%, with the rest held by Alexander Vinokurov and Sergei Zakharov's Marathon Group and Taimuraz Bolloyev's Agronova? Any plans for existing partners to exit or for you to bring in new ones?

-      The shareholding structure at Demetra is optimal. We have plans to develop all areas, we will continue our organic growth.

-      What is the volume of Demetra-Holding's planned investments for the next couple of years? What other assets are you planning to acquire?

-      The company itself is quite efficient. We are not planning any additional equity investments. This year Demetra will pay dividends for the first time. The development of the holding will take place at the expense of increased debt.

            Our priority now is to increase the capacity of grain export infrastructure. We plan to double the transshipment capacity of deep-water grain terminals, build an access railway to the terminal in Taman. We are also discussing a project of a new grain terminal in the port of Taman with our partners from EFCO. This year, we have already acquired two grain elevators and are considering new deals to acquire existing brownfield facilities and assets in need of restructuring or building new greenfield grain elevators.

-      The Croatian Fortenova Grupa (formerly Agrokor), also involved in the production and sale of agricultural products, remains in VTB's portfolio. According to Reuters, you and another major shareholder, Sberbank, are considering an IPO of the company in 2023-2024. What is the state of that process? Do you really value the company at $2.2-2.5 billion? What criteria and reference points are you proposing for such an exit?

-      An IPO of Fortenova in two or three years is one possible capital exit. But so far everything is at an early stage. The company recently held meetings with leading investment banks, which confirmed such a possibility, and they believe a valuation at IPO of over $2.2 billion is achievable. The key success factors for the IPO are growth as planned, strengthening in key markets and increasing profitability through the integration of retail assets. The debt load there has already been reduced.

-      Just the other day you announced your exit from a major Russian retailer, Magnit. Why make this decision now? What income has this deal brought you since the purchase (with dividends)? Did VTB credit the majority shareholder with the purchase of its stake?

-      Since buying the stake in Magnit in 2018, we have actively supported the transformation of the company's business, achieving a significant improvement in results. Buyers have also appreciated the transformation at Magnit - the growth in like-for-like sales over the past year and a half has outpaced the performance of key competitors. We have completed the investment cycle on this asset. This deal generated relatively high income and a high return on capital over the investment period, considering dividends and the sale price.

-      In September, VTB closed a deal to buy almost 33% of the shares in JSC Channel One, valued at RUB 2bn. At the same time, the channel had a substantial debt to you. Were you able to reduce it?

-      Channel One has repaid some of its debt, bringing its debt metrics into very good shape. Its debt load has been reduced significantly. We are pleased with this investment because the channel holds a leading position in Russian broadcasting in all slots. It has a fairly ambitious and professional entrepreneurial team working there. The channel was one of the first to launch digitalization. We see great prospects for successful development, increasing the volume of high-quality content, including that produced through co-production.

-      What is the "active involvement in the development of the channel" that you talked about in March? Are we talking about further development loans?

-      We are staying on as a financial partner and will participate in lending if necessary. Our task as an investment bank is to develop the asset - the management and technological processes. Now we are involved in the approval of management plans, which suggest cutting costs in a number of areas. We see the channel as a rather promising investment and are not planning any exit in the nearest future.

-      Sberbank has recently announced the sale of some of its foreign banks. How do you assess the performance of your foreign subsidiaries? How badly has the pandemic affected their operations?

-      Some time ago we carried out a major restructuring of our international holding. For example, we withdrew from France and significantly reduced our presence in Austria. The European subsidiaries are divided into three areas.

            Firstly, VTB Bank (Europe), headquartered in Frankfurt with a branch in Vienna. This year this bank has had double-digit growth, exceeding the business plan by 30% We transferred the entire European lending business to VTB Bank (Europe) from London, where Brexit and regulatory changes were taking place. At the same time, we brought a lot of people from London with investment backgrounds, although VTB Europe has historically been more of a commercial bank. We have now launched a whole range of new products there, including derivatives trading, real estate crediting, etc.

            By the way, we are planning to launch the My Investments application in Europe. We are now receiving permission for that project from the regulator and will do it on the basis of the German hub. There is no investment application with such a wide range of functions in Europe today. We expect that it will attract clients not only in Germany but also in other countries, and we will participate in the development of the retail investment market there as well.

            The global investment arm in London, where we have a team of investment bankers, infrastructure finance, is also having a record year in terms of volume across all lines of business. And from London, including offices in Hong Kong and Singapore, we cover a lot of investment, and the partnership with the former subsidiary in the US allows us to cover investors around the world.

            And the final element is our commodities trading arm in Switzerland, VTB Capital Zug. As we expected, inflationary pressures led to a record rise in raw commodity prices. This segment is therefore developing quite dynamically, as is the subsidiary itself.

- A year ago you said that the deal to sell a 10% stake in Banco VTB Africa in Angola had slowed down. Were you able to close it? Has the price changed?