Dear Editor,

I was surprised and disappointed by your story “Russia’s state banks are rotten” (bne June 29, 2015), which contains a number of misleading assertions and implications about VTB. It is also disappointing that you did not give us an opportunity to comment ahead of publication on an article that contains a number of serious claims regarding VTB. I would like to take this opportunity to set the record straight, and to address some of the specific points you make.

It is undeniable that the operating environment for all Russian banks is currently challenging, and that Western sanctions complicate matters further for VTB and other state banks. However, to imply as you do that VTB’s share price and profitability declined as a result of sanctions is as you know a gross oversimplification and in at least one key respect simply inaccurate (our share price is in fact up 93% in ruble terms and 22% in dollar terms since the sanctions were imposed). We have indeed seen a surge in credit costs and interest rates, but all major analysts say this is to a much larger extent due to the fall in the oil price than other factors (including sanctions) combined. 

And your unsourced claim that VTB is “Russia's worst bank” is just insulting! We have a large and growing clientele and a broad institutional shareholder base, which simply makes this statement ridiculous. 

Some comments on specifics.

The capital increase through an issue of preference shares subscribed for by the government is not a “bailout”. VTB has comfortable capital ratios and solid liquidity. Nor is the bank’s balance sheet in “a mess”, as you allege. Rather, these facilities are to ensure that systemically important banks have sufficient resources to enable them to continue growing and lending to the economy, and do not have to deleverage their balance sheet in the event of new external shocks.

Your graph of “adjusted” net profit uses non-verifiable numbers and questionable methodology (why net off FX costs, when a large part of FX gains are transactional in nature?) to create the misleading impression that VTB was lossmaking in 2014. This would be news to the auditors at Ernst & Young LCC who signed off on our accounts.

Your assertion that “the lucky few that have access to the state-directed loans are enjoying subsidised loans well below market rates” does not stand up to scrutiny either. The reality is just the opposite: the Central Bank’s funding is available for the entire banking system, and is in fact extremely expensive, and VTB's CEO Andrey Kostin has been among the most prominent voices calling for rates to be reduced.

Your interpretation of bank provisioning is not accurate. You say that “if a bank receives $100 in interest income but its provision is $50, it basically means that the bank thinks that it won’t be able to collect on $50 of other loans on which it is eventually due payment”. Actually, provisions refer to the whole amount of the loan, including interest payments due, while interest income only refers to the interest paid due on the loan during the reporting period.

Finally, you make a number of unsupported assertions that are potentially misleading to your readers. VTB Capital has continued to win awards as Russia’s leading investment banking franchise and our segmented reporting shows that investment banking delivers consistent profitability; what is your basis for saying that its “relative performance stands out as being particularly bad” and for alleging a vague and unmeasurable “deterioration across the bank’s entire portfolio”?

As you know, VTB has had a cooperative relationship with Business New Europe for some time. We hope that this can continue, but have serious concerns about the objectivity of this article. We hope that you will either amend the article to reflect our concerns or come back to us to clarify your position.

Best,

Vadim Sukhoverkhov, head of VTB press service

Editor's note: bne IntelliNews interviewed VTB CFO Herbert Moos shortly before this article was written and after the first quarter results had been released but was asked specifically not to pose questions concerning the results.

To clarify the question of cheap funding: ownership of the large state-owned banks comes with an implicit guarantee of support by the state - as they are systemically important banks that are in addition partly owned by the state - and so they are perceved as less risky, which reduces their cost of funding when raising money on the market. We didn’t intend to imply that VTB is getting funds from the CBR more cheaply than other Russian banks. The Central Bank of Russia (CBR) is making RUB1 trillion available (bne IntelliNews, May 26, 2015) to 27 selected systemically important banks (bne IntelliNews, June 2, 2015). Both private and state-owned banks are participating in this scheme - not just VTB, which is eligable for RUB307bn of this money (bne IntelliNews, op cit).