The London unit of Kremlin-controlled VTB Capital has slashed its headcount by 22% as part of efforts to shrink its losses, bne IntelliNews can reveal.
The Russian investment bank last year cut its personnel by 22% to 330 from 425 and its operating expenses by 15%, according to a filing submitted to UK Companies House on June 28. That helped the lender to significantly narrow its post-tax loss to $9.5mn from $92.2mn a year earlier.
The bank, which is run by former Soviet diplomat Andrey Kostin, has been aggressively reducing costs and trying to diversify into new geographies to offset a loss of business in Europe and back home in Russia. VTB Capital’s parent was sanctioned by the US and the EU over Russia’s involvement in the Ukraine conflict and the unit has suffered from severe contagion as well as a collapse in commodity prices.
“We now have an effective and balanced team that is able to achieve the company’s business across all product lines,” chairman Herbert Moos said in the filing.
The 134-page filing made by VTB Capital is easily the longest and most in-depth ever made by a Russian bank in the UK. Two years ago, Kostin, the chief executive of parent VTB, accused the UK regulators of making excessive demands of the UK operation due to Russia’s conflict with Ukraine.
The subsidiary, which retains offices in London, New York, Hong Kong, Singapore, Dubai and Sofia, has shrunk its real estate in the UK capital
The bank entered into a commercial lease agreement for office space for five floors at 14 Cornhill, a prestigious building next to the Bank of England.
In the filing, VTB said it had an option to break the lease from August 2024 and it may have well have to further reduce costs. The bank has already entered into a sub-lease deal for two floors of the office space it no longer needs, according to the filing.
VTB Capital may fall foul of new related-party lending rules being drawn up the Central Bank of Russia (CBR), which is trying to clamp down on the practise. The investment bank generated net operating expense worth $234mn last year from transactions with its parent group, according to the filings. That was down from $301mn in 2014.
In the filing, VTB Capital said the interest charged to and by related parties is “at normal commercial rates.”
“A number of banking transactions are entered into with related parties in the normal course of business, with all such transactions complying with US and EU sanctions regulation,” said VTB Capital. “These include loans, deposits and foreign currency transactions all undertaken at ‘arm’s length.’”
The new rules, which are set to come in force by January, would leave about one in four banks in violation, according to the ratings agency Standard & Poor’s. Russian lenders’ exposure to related parties has already played a key role in some of the country’s largest bank collapses. Bank of Moscow, which was bailed out by VTB in 2011, had previously lent billions of rubles lent to a property company controlled by Elena Baturina, the wife of then-mayor of Moscow Yury Luzhkov.
The lender said the size of the corporate’s lending portfolio remained unchanged and was still dominated by a number of medium and long-term senior unsecured lending transactions involving “a number of African sovereign and quasi-sovereign entities.”
Leading Western investors have reined in all trading activities with VTB Capital and other Russian brokerages for fear of drawing regulatory scrutiny and fines. As business has dried up in the US and the UK, both VTB Capital and its parent have made an aggressive push to secure more business in Africa and Asia.
“Our primary focus was – and will continue to be – growth, combined with a high margin model in both our core domestic and new international businesses,” Moos said in the filing. “One of VTB’s priorities is in expanding the company’s presence, in particular in Africa and Asia, where a number of major transactions have been completed.”
However in July, Reuters reported that some holders of Mozambique's restructured "tuna bond" are planning to suing VTB and Credit Suisse after it was revealed the country owed $1bn more to creditors than it had disclosed.
Bondholders have formed an informal group and hired a law firm, alleging that neither the banks nor government made full disclosure of the size of Mozambique's debt. Only after the bond swap and IMF pressure did Mozambique admit the state tuna-fishing firm had an additional $1.35bn in secret government guaranteed debt.
Swiss and UK financial watchdogs are looking into VTB and Credit Suisse’s involvement in organising the deal, sources told Reuters last month. VTB has declined to comment thus far.
The bank said it had made “significant progress” in China as President Vladimir Putin advocated a push by Russian corporates to pivot towards its large Asian neighbor for financing and deal-making.
In 2015, its bankers acted as a financial adviser to ChemChina, the largest chemical company in China, in relation to its cooperation with Russian state oil producer Rosneft. They also worked on a deal by China’s largest public port operator to acquire Kumport, a leading container terminal in the Turkish capital of Istanbul.
VTB Capital has far from given up on Europe and managed to complete a number of noteworthy deals on the continent during the year. It inked its first cross-border M&A deal in Spain, advising the Portuguese fund Finpro on the sale of its stake in the Spanish port company Grup Mantim TCB. It also completed its first M&A transaction in Germany, advising German Prevent Group on its purchase of a car parts manufacturer.
The unit’s maximum credit exposure to any client is a whopping $428mn to insurer Lloyd’s of London, who helped VTB Capital to “de-risk some of its larger African sovereign exposures by writing comprehensive credit insurance.”
VTB Capital’s highest paid director received remuneration of $2.84mn last year, down from $3.42mn in 2014. The name of the director is not given.
Kostin, who mulled removing the bank's listing from the London Stock Exchange in favour of China, previously warned that he doesn't expect US sanctions to be lifted until 2018. The EU prolonged its measures against Russia in July by six months despite growing opposition from officials from Greece, Italy France.
VTB Capital earned just $9mn in fees from arranging bonds, mergers, IPOs and loans in the first six months compared to $27mn for the same period of 2015, according to data supplied by New York-based consultancy Freeman & Co. The business, which has been Putin’s investment banking champion since its inception in 2008, lost ground to state-controlled rivals Sberbank CIB and Gazprombank, which earned $33mn and $28mn, respectively.
VTB Capital was the sole organiser of the Kremlin's controversial $1.75bn Eurobond sale in May.Despite all the hoopla generated by deal, fees paid out to VTB Capital were very low. Based on regulatory filings, Freeman & Co's told bne IntelliNews fees to VTB look to have been only about $875,000.