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VTB Capital To Introduce Austerity Measures

A comment by Andrei Borodin: That is how personal ambitions of a “banker of the decade” eat up shareholders’ funds. This is not the first case and obviously not the last.

Vedomosti

VTB Capital’s international business may be earning five times less than what the shareholder is expecting. This may lead to a reduction in force and abandonment of low-income operations.

The expenditures of VTB Capital International have grown to 95 per cent of proceeds, which requires a reduction of business areas and personnel, Atanas Bostanjiyev, a department head, informed Yuri Solovyov, VTB first deputy chairman and VTB Capital board chairman, in a memo of 15 November, Bloomberg reports citing the memo. Mr Bostanjiyev, general director of VTB Capital plc., manages international business, a VTB officer says. According to data found on the VTB Capital website, the company has offices in London, Singapore, Dubai, Hong Kong, Sofia, Kiev, New York, Paris and Vienna.

In the past five years return on equity (ROE) in the international division of the investment bank only once exceeded 4.7 per cent with the target being 25 per cent, Bloomberg cites Mr Bostanjiyev as writing. He believes that the group needs to reposition and restructure its international business to increase profitability. To improve indicators, he suggests a staff reduction in his division by approximately 40 per cent (by dismissing 231 of the 556 employees), and a customer reduction by more than two-thirds (to 300 from the current 1,000). In addition, Mr Bostanjiyev suggests giving up trade in share derivatives, raw materials and structured credit products. That will save about $104 million and will increase return on own equity to 30 per cent, he wrote. Another suggestion is to transfer the stock market analysis department to Moscow in order to reduce expenditures by $30 million. And to reduce capital requirements by approximately $100 million, the top manager suggested taking some types of business to non-regulated organisations, such as offshore funds.

The profitability of VTB Capital’s international business given by Mr Bostanjiyev is below the average for its competitors. The 13 largest investment banks in the world had an average ROE of 8 per cent last year (according to the McKinsey consulting company). A Sberbank CIB spokesman has failed to respond to a Vedomosti inquiry about the financial condition of the company’s international business.

Alexei Yakovitsky, VTB Capital general director, has told Vedomosti through his representative that the data are “irrelevant.” “The memo in question is not about assessing international business; it is devoted to the operational model of a specific legal entity,” he says, refusing to specify the entity. “The top management does not have a document of that date. It is a working document containing the writer’s personal opinion,” he noted.

In late 2007, VTB president Andrei Kostin announced that $500 million would be allocated over the following two years to establish the investment bank. And Mr Solovyov in his May interview with Vedomosti said: “VTB is a leading financial institution in investment banking. Obviously, the investment business territory has changed with the coming of VTB Capital. If we look at the group, I like the significant dynamism that we are showing.” Mr Yakovitsky said yesterday that he was satisfied with the progress and the results of the implementation of the international strategy: “The share of international business already amounts to 15 per cent of VTB Capital incomes. We are planning to continue an active development of our international business.”

The pre-tax profitability index of VTB Capital plc, registered in the United Kingdom, has indeed not improved over the past few years, Sergei Voronenko, a leading S&P analyst, says: that “mainly reflects the transitional nature of its business.” In spite of a stable growth of operational profit, major capital investment has led to a noticeable growth of the company’s operational expenses, the analyst adds. He expects that the company will optimise its personnel. As a result of expenditure cuts and business growth the company may attain an ROE of 10-15 per cent over the next two years, Mr Voronenko believes and calls that level a goal for VTB group companies.