Russia: The Bank That Roars

State-owned VTB is growing fast, helped in part by top-flight political connections

At the climax to the World Economic Forum in the Swiss resort of Davos in January, delegates were treated to dazzling performances by Russia's top ballet and opera stars, then invited to sample a selection of the finest traditional Russian dishes, washed down with copious amounts of top-notch vodka. And who was the sponsor of the glitzy extravaganza? Vneshtorgbank. Although not a household name outside Russia, the well-connected, state-owned lender is the country's second-largest bank. And it is making a push to expand in Russia, a push critics say threatens to stunt the growth of private banks.

Chairman Andrei L. Kostin, 48, the host of the splashy Davos party, understands the importance of brand building. Since taking over the helm in 2002, the onetime London embassy-based Russian diplomat has turned the bank from its Soviet-era role -- financing trade and heavy industry -- into a budding universal bank. That has meant diversifying Vneshtorgbank, or VTB, into retail and small business lending, the industry's fastest-growing segments. Kostin aims to double mortgage lending this year, from $130 million last year, and increase the volume of small business lending four times from $50 million in 2004. The bank, which announces annual earnings at the end of March, declined to comment.

VTB has undertaken acquisitions, including the purchase of Moscow area retail bank Guta Bank for a token $36,000, and a merger with Industrial Construction Bank, the largest in St. Petersburg, worth an estimated $500 million. Those deals have given VTB access to branches that are vital to the buildout of its retail business. "The bank is in a very fast expansion phase," says Irina Penkina, an analyst at Standard & Poor's in Moscow.

Indeed, Kostin's strategy seems to be paying off. A big marketing campaign, featuring ads for the bank plastered on the sides of buildings throughout Moscow, helped push up retail deposits 94% last year, to $1.9 billion -- and that's not counting the M&A deals. VTB's growth outpaced industry leader Sberbank, according to Interfax. Private-sector rival Alfa Bank actually saw its deposits decrease by 18.5% in 2004. Similarly, VTB's asset base has grown at a much faster clip than that of its peers. Net profits did fall to $67 million in the first nine months of last year, the most recent figures available, from $116 million in the same period in 2003. However, much of that drop reflects declining income on securities trading. Net fee and interest income grew 58%, to $408 million.

A sound business strategy has clearly helped. But analysts also say that strong state backing has kept VTB well capitalized and helps the bank to borrow cheaply on international financial markets. State ownership also reassures mom-and-pop depositors. Last summer a banking panic led to the collapse of some private banks and shook others, leading deposits to flow into state-owned banks. VTB also took advantage of the crisis to buy and recapitalize Guta Bank with a $700 million low-interest loan from the central bank.

VTB's good fortune has fed speculation that its political connections play a role in its success. One theory among political analysts is that VTB is under the influence of the siloviki (men of power), the group of ex-KGB officers from St. Petersburg who form the inner circle of President Vladimir V. Putin. Even so, the government is officially committed to privatizing VTB. Its privatization is a test case of financial authorities' willingness to open up the sector.

So far there are few signs of progress toward that goal. "We think the share of the state in VTB should be reduced, but the process should go slowly," says Igor Shuvalov, aide to President Putin, who adds that a solid investor "from among the biggest financial institutions" first has to be found. Some doubt the powers that be will ever let VTB out of government hands. "There will be no privatization," predicts Alexei Mukhin, director of the Center for Political Information, a research institute in Moscow. If that's right, VTB's growth may be a sign the economic ambitions of the Kremlin don't stop with the dismantling of Yukos.

By Jason Bush in Moscow

    Before it's here, it's on the Bloomberg Terminal.