VTB Unit Facing Tough Mortgage Deal Turns Inward: Russia Credit

The record mortgage-backed bond sale planned by the retail arm of Russia’s second-biggest bank may need the support of the parent company to succeed.

ZAO VTB24 plans to sell 150 billion rubles ($4.6 billion) of the securities next year, Deputy Chairman Anatoly Pechatnikov said at a Dec. 4 briefing. That would more than double the amount of outstanding mortgage-backed debt in Russia ranked by Moody’s Investors Service, currently $3.37 billion, according to a Nov. 28 report by the ratings company. Brazil had 40.4 billion reais ($17 billion) of mortgage-backed securities as of Oct. 1, according to clearinghouse Cetip SA-Mercados Organizados.

The sale risks struggling to find buyers, partly because pension funds will have less cash available under a government plan to channel 580 billion rubles away from private managers and state-run VEB next year in a stopgap move to pay current retirees. Parent VTB Group will step in to buy the securities if insurers and retirement funds can’t be found, Pechatnikov said.

“It’s going to be a tough sell,” Maxim Tishin, who helps manage $1 billion as a portfolio manager at UFG Asset Management in Moscow, said in e-mailed comments. “The only possible buyers that I know of would be pension funds, but they are quite upset about pension reform and not likely to allocate much.”

Rate Cap

VTB Group’s press service directed requests for comment to VTB24. The retail lender’s mortgage portfolio is forecast to jump 31 percent this year to more than 500 billion rubles and climb a further 40 percent in 2014, Pechatnikov said. It plans to securitize an extra 26 billion rubles through VEB, he said.

While mortgage-backed debt is a safe way to diversify bond investments, it depends on the health of the property market, according to Alexander Losev, chief executive officer of Sputnik Asset Management in Moscow.

“Market participants regard mortgage-backed securities as good and safe instruments, but we have to see future development of the local housing market,” said Losev, who doesn’t hold the securities.

President Vladimir Putin signed a decree last year to cap rates at 2.2 percentage points above inflation by 2018 in a bid to boost living standards. He forecast loan costs would drop to 6.5 percent in a few years.

One Percent

Russian inflation accelerated to 6.5 percent last month, while the average home-loan rate was little changed at 12.4 percent in September, compared with 12.3 percent in the same month the year before, according to the Agency for Housing Mortgage Lending. The state-run agency has a 36 percent share of the mortgage-backed bond market, according to its website.

The slowest economic expansion since 2009 has crimped home-lending growth to 21 percent in the first half from at least 40 percent for the past three years, the agency’s data show. Home loans in Brazil, Latin America’s biggest economy, jumped 27 percent in the year through October.

“A lot of people, for the time being, prefer to take short-term loans to consume rather than taking a long-term mortgage,” Natalia Orlova, an economist at OAO Alfa Bank, said Nov. 29 in London.

Just 1 percent of the population have mortgages and the Russian market is “well below” eastern-European peers like Poland and Latvia, she said.

Ownership Drive

State-run OAO Sberbank, the nation’s largest lender, has about 43 percent of the market, more than double VTB’s 20 percent share, according to the mortgage agency.

“There will be mortgage and, probably, consumer-credit securitizations, if the market allows,” Pavel Sokolov, head of debt capital markets at Sberbank CIB, Sberbank’s investment-banking unit, said in a Dec. 5 interview in St. Petersburg. “We are generally optimistic about this market.”

The yield on the nation’s April 2042 dollar bond fell six basis points, or 0.06 percentage point, to 5.69 percent at 3:09 p.m. in Moscow today. The extra yield investors demand to hold Russia’s dollar debt over Treasuries rose one basis point to 226, according to JPMorgan Chase & Co. indexes.

The local mortgage market is held back by high property prices and the fact that “90 percent” of Russians already own homes after privatizing their apartments in a state drive to spur ownership after the collapse of the Soviet Union, Orlova said. Demand for mortgages is mainly fueled by speculative purchases, with buyers aiming to flip properties in two or three years, she said.

“There isn’t any market or any demand” for securitized mortgages, Andrey Lifchits, emerging-market debt manager at Spectrum Partners and a Russian bond trader since 2002, said in e-mailed comments.

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