Its a good time to be a Russian investment banker.
As Western investment banking giants continue their long retreat from the imperial excesses of the boom era, emerging-markets banks are moving to fill the vacuum left behind. Few are moving as quickly as VTB Capital, the investment banking arm of Russias second-largest bank. In its five years of existence, VTB Capital has grown to dominate its home market and is now starting to show some swagger on Wall Streets doorstep.
At the firms second annual investment forum in New York this week, executives trumpeted the advances VTB Capital has made since opening a U.S. office one year ago. In 2012, VTB Capital became the first Russian bank to secure a place on Dealogics league table of the top 20 global M&A advisers, placing 20th largely on the strength of its role as co-adviser to Rosneft on its $54.5 billion acquisition of TNK-BP; it worked alongside Bank of America Merrill Lynch, Barclays, Citigroup and Deutsche Bank on the deal. In addition, executives are keen to use their New York office to funnel more institutional money from North America into Russian bonds and equities. The investment banks international network also comprises offices in Dubai, Hong Kong, London, Singapore and Sofia, Bulgaria.
But the flow of capital has not been all one way, out of the American money pool and into Russia. Last month VTB became the first Russian investment bank to participate in a domestic corporate debt offering in the U.S. when it co-managed a $4 billion bond issue for Bank of America. Atanas Bostandjiev, CEO of VTB Capitals international operations, says that although VTB has no intention of originating American-based deals on a regular basis, its involvement in the Bank of America issue was very important symbolically. It shows that we have the framework and structure to participate in a very well regulated and mature market, so that were not seen as some cowboy shop that came out of Russia.
Fresh from that early American success, VTB Capital is now embarking on an expansion phase, which will see it collaborate with the rising financial champions of other key emerging markets. This alliance will leave a lighter global footprint than the big Western banks, according to Riccardo Orcel, the deputy CEO who joined the Russian bank in 2011 from Bank of America Merrill Lynch, where he was head of Central and Eastern European investment banking. The key for each bank involved, he says, is to pursue global expansion in a way that captures market share but avoids the mistakes made by the giants of the U.S. and Europe. We dont have the same infrastructure of cost of global banks such as Barclays, Citigroup and J.P. Morgan, he says. The alliance model is very light.
VTB Capital, which was formed in 2008, already has joint ventures in place with BTG Pactual of Brazil and Evercore Group in the U.S. This week executives signaled that the bank is about to announce an agreement for collaboration on cross-border transactions with one of Chinas major investment houses, believed to be CITIC Securities Co., extending the alliance into three key emerging markets: Brazil, China and Russia.
The Chinese see themselves as having limited ability to compete with us in Russia, and we have limited ability to compete with them in China, says Bostandjiev. But it makes sense for us to come together and collaborate on cross-border work between our two home markets. There is a synergy there.
In that event, the cowboy prejudice Bostandjiev says the Bank of America issue helped combat may actually work to VTBs advantage. The bank hopes to show that it understands emerging markets having come from one itself better than the Western incumbents. We understand the core dynamics of emerging markets better than the global institutions being run out of Frankfurt, Paris, London or New York, says Bostandjiev. Thats our core advantage here; we are more lean and agile than the big global banks.
In that sense, the more important transaction for the banks future may not be the Bank of America offering but the $1 billion sovereign bond issue the Russian bank managed for the government of Angola last year. VTB Capital won the deal the largest African sovereign bond of 2012 because of the branch office that the investment banks parent, VTB Group, had already established in Angola.
For now VTB will look to leverage presences its parent has elsewhere in Vietnam and India, for instance while pursuing its own expansion around what it sees as two complementary strategies. First, the bank is focusing on those regions from which Western banks, stricken by the twin blow of euro zone woe and newly stringent financial regulation, are either retreating or absent (Central and Eastern Europe, where Greek, Italian and Austrian banks have traditionally dominated; Sub-Saharan Africa, historical preserve of the French and Portuguese banks; and Southeast Asia). Second, its building out its network of alliances in those regions where the existence of indigenous heavyweights makes the task of claiming market share as a new entrant less appealing.
Paradoxically, even though Bostandjiev claims that VTB identified the global downsizing trend three years ago, this move is not only about seizing on the weakness of the Western banks. Increased competition within the Russian domestic market, in which Orcel says VTB Capital accounts for a market-leading 14 percent share of total investment banking revenues, is also at play, especially as VTBs main competitor, Sberbank, pursues its own expansion, and international banks return to high-interest-rate Russia in search of yield. We had to move outside Russia, he says. When you start thinking about growing business in the marginal dollar in the future, the only way you can do that is if you go somewhere else.
VTBs going out policy symbolizes a new global assertiveness on the part of emerging-markets banks. According to data compiled by Freeman & Co., a New Yorkbased consulting firm, Western banks are rapidly losing investment banking fees in emerging markets to local incumbents. Russian and Eastern European banks, for example, grew their share of fees in their local markets to 23 percent in 2012 from 9 percent in 2005, while the share of their Western counterparts declined; Chinese banks have taken their share to 69 percent from 23 percent over the same period. The market-share leaders in Russia, Latin America and China? VTB Capital, BTG Pactual and CITIC.
Its tempting to see this new global financial architecture, based around spheres of regional influence and strategic cross-border alliances, within the framework of the larger global economic realignment. Indeed, Bostandjiev openly invites that perception, talking of a shifting financial balance of power from the West to the East. But beyond the grandstanding, fin-de-Sandy-Weill-siecle rhetoric, the bank is conscious of the fact that an alliance in itself guarantees nothing in terms of additional revenue. The joint ventures are there to capture cross-border deals, says Orcel. How many U.S.-Russian deals have we seen since the Evercore alliance was announced in October? he asks rhetorically. Not many; but when they happen, theyre big.
Orcel also concedes that the alliance has the potential to create problems when the members compete for business on neutral ground: The bottom line is that we will compete on certain transactions, but he adds that this will not be a problem. Bostandjiev, for his part, says that VTB will retain its edge in the emerging markets over its nominal allies by virtue of product expertise: The Chinese and some of the other emerging-markets players come with a very raw offering here is the money, we want X, and there is one product only. They sort of just offer the entire balance sheet and leave it at that. We want to tailor solutions for every specific need and every specific sector be it in mining, oil and gas, infrastructure or whatever sector it might be.
Assuming the global alliance can hold in the face of this delicate competitive compact and generate meaningful opportunities for all the parties involved something that both Orcel and Bostandjiev concede will depend on the members ability, still largely unproven, to generate cross-border deal flow theres an eagerness to expand its reach beyond the current club of four. According to Orcel, VTB is engaged in discussions to establish a further alliance elsewhere in Asia (he wont say where), and the bank is also seriously looking at Japan, newly flush with liquidity in the wake of the monetary thunderbolt from the new Bank of Japan governor, Haruhiko Kuroda. Were not going to have an alliance in every single country, he says, but if there is an opportunity for advisory and capital markets [work], and for bridging liquidity between Russia and a market that has excess liquidity, we will look at that.
But theres the challenge: How to get global growth without global growing pains. Presumably, at one point, VTBs balance sheet which, Bostandjiev stresses, remains clean and uncluttered by the legacy problems that bedevil many of its Western peers will expand, and expenditure will grow to keep revenues buoyant. From there, pressure may mount, in each of the countries where the bank has a meaningful presence, to add the ancillary services around investment banking that grease the wheels of deal flow. Where will it all end?
We want to be a very specialized global emerging-markets investment bank, Bostandjiev insists. We are wedded to that strategy. The universal bank model being everything to everyone just doesnt work anymore.