Svyaz-Bank and Globex Bank were in a Severely Poor Condition

№ 106, June 19, 2009
VREMYA NOVOSTEI

In Anatoly’s Tikhonov”s opinion Svyaz-Bank and Globex were in a severely poor condition. “We need not only support problem banks but also give a fresh impetus to boost the economy.” With the advent of the crisis, Vnesheconombank’s financial resources were needed to support the Russian banking system, specifically, to stabilize the troubled Svyaz-Bank’s financial position. First Deputy Chairman of State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’, Chairman of Svyaz-Bank’s Board of Directors Anatoly TIKHONOV told us about Vnesheconombank’s rescue efforts and the future of Svyaz-Bank in his interview with Vremya Novostei.

- Why did Vnesheconombank get involved in rescuing Svyaz-Bank?

- Svyaz-Bank was the first swallow that got into the whirlwind of the crisis. A decision to rescue it was taken in accordance with orders given by the President, the Prime Minister and VEB’s Supervisory Board. We could not let this bank collapse because it handled more than 15 million accounts of pensioners. In the course of several months we managed to correct the imbalance between assets and liabilities, clean up the loan portfolio and make a comprehensive business analysis of the bank. Our line departments examined the situation and proposed a rescue package. In April, VEB made an additional issue of the bank’s shares worth 70 billion rubles. As a result, the bank’s charter capital was increased 15-fold to 75.1 billion rubles. And today the bank is operating normally.

-Were Svyaz-Bank’s problems that necessitated the state’s emergency intervention brought about by the crisis alone?

- No, they were not. The main source of problems is a huge bad debt. By our estimate, it is no less than 40 billion rubles. And a main reason for it was not the market situation but a low quality of the bank’s loan portfolio. In our case, the crisis was a sort of acid test that revealed the existing problems. Loans were extended without proper collateral, under incomprehensible schemes and not only to Russian but also to foreign companies. For this reason, VEB’s Supervisory Board made a decision to set up an interagency task force that incorporated representatives of law enforcement authorities to thoroughly study the situation with problem assets. We believe that we’ll be able to find a solution through legal actions and recovering debts by court.

- How many customers ran on the bank?

In September 2008, when VEB agreed upon a program of financial support for Svyaz-Bank with the Bank of Russia, periods of many deposits were expiring and corporate customers were withdrawing them. In October, the process continued but not as quickly as before. In total, the amount of funds in corporate customers’ accounts shrank from 104 to 58 billion rubles (during September – October). Companies related to the bank’s former shareholders as well as a number of organizations which were not related to the communications sector (construction, industry) accounted for the largest outflow of customers.

Communications companies with which the bank established open and reliable relations, namely, Federal State Unitary Enterprise (FSUE) the Post of Russia, and Svyazinvest are still being serviced by the bank, although the amount of their funds dwindled: the average balance calculated for the first quarter of 2009 with regard to FSUE the Post of Russia fell from 17 to 14.4 billion rubles from the same period in 2008, with regard to Svyazinvest - from17.8 to 16 billion rubles. Since November 2008, the bank has been pursuing an active policy aimed at preserving its customer base and at raising funds from new corporate customers, above all, by way of placing balances into settlement accounts and deposits and implementing its own bill of exchange program. State guarantees and reliability provided to the bank by VEB makes this process more effective. Customer confidence is returning. Moreover, this year the bank is trying to focus on diversifying its loan portfolio due to companies in other industrial sectors.

- Has the structure of corporate customers changed in the last months?

- It remains almost unchanged. Such communications companies as Megafon, Rostelecom, including Westelcom, MMT, Gidrosvyaz still account for the largest deposits. A major transaction in placing Zentrteleom’s funds is nearing completion. Besides the Post of Russia and Svyazinvest such companies as Angstrem. Trust Management Company Dostoyanie and Sinterra have substantial balances in their settlement accounts.

As to the structure of liabilities, short-term deposits (from one to six months) are dominant and customers roll them over if required. Since January the bank has started to work with new customers such as Mining and Steel Group Evraz and Development Company Invest-Group.

- And what happened to natural persons’ deposits?

- At the start of 2008, natural persons’  ruble deposits accounted for 95% of all deposits in the bank’s portfolio - 7.1 billion rubles and 70% of them were owned by VIP-customers. By the start of September the portfolio shrank to 5.2 billion rubles and the proportion of VIP-customers – to 26%. From September to December the amount of liabilities decreased by another 2.4 billion rubles because of deposits withdrawn by VIP customers, the proportion of which shrank to 5.8%. At this year’s start the situation changed for the better: people started to put their money in the bank. From January to May, the growth in deposits was 1.1 billion rubles and their amount increased to 3.8 billion rubles. The pattern of deposits also changed: the proportion of deposits in rubles dropped to 48.2% and in dollars in euros increased twofold and amounted to 21.2 and 28.2% respectively in the total portfolio. It should be noted that almost all deposits in the bank are retail ones and the proportion of VIP- customers declined to 1.6%.

- Did you have to reshuffle personnel?

- We replaced the management staff right away and nominated professional bankers to all key posts. Then we started to optimize the bank’s administration costs, trying to maximally retain personnel in the regions. It numbers about 3 thousand people and there are many real professionals among them.

- Did you have similar problems with Globex?

- No, the situation in Globex was somewhat different. For the most part, its credits are concentrated in one and the same sector, so it didn’t take us a lot of time to clean up its balances. Now the bank’s assets have been handed over to a specially established Vnesheconombank’s subsidiary – VEB-Invest Company.

- How much money has been spent on rescuing Svyaz-Bank?

- The total sum is 87 billion rubles. It includes Bank of Russia’s deposit and VEB’s own funds. For us Svyaz-Bank is an investment project. At the first stage our objective is to solve day-to-day problems, expand the bank’s branch network and offer quality services. And within three-five years we’ll be able to withdraw from the project by selling it to a strategic investor. By the way we are already receiving proposals. For example, recently a major foreign investment bank has turned to us expressing its readiness to enter Svyaz-Bank’s capital but with so far a small stake.

- In line with the Government’s crisis management program VEB started to perform newly-assumed functions of rescuing troubled banks. How does this correspond to typical functions as a development institution?

- There’s no doubt that both Svyaz-Bank and Globex were in a severely poor condition when they were transferred to VEB’s jurisdiction. But it was more a matter of supporting the banking sector rather than rescuing problem banks. We are trying to combine these two seemingly incompatible objectives - providing support and encouraging development. And while the problem is really formidable it is not unmanageable. In the long run we should not only help problem banks get back on their feet but boost the development of the whole economy.

I’d like to give just one example and maybe it’s not the most typical one. The Law on the Bank for Development and the Memorandum on its Financial Policies stipulate that the Bank is to finance major projects with long pay-back periods in certain economic sectors. But in real practice there emerge small projects, around above all, infrastructure projects. It would be wrong not to support them as they are important for the development of the country’s economy and regions. But we can solve this problem by using capabilities of VEB’s two subsidiary institutions - Svyaz-Bank and Globex. These banks have formed a good branch network in the regions. This would help us to channel money to those places where major Moscow’s banks have not come yet. Svyaz-Bank has already been drawn in implementing our regional projects. It is an operator responsible for VEB’s Olympic facilities construction projects. Now we are expanding its branch in Sochi so that it could fully service companies engaged in building Olympic facilities.

- This means that you have already identified Svyaz-Bank’s scope of work?

- Not exactly. We are still considering this issue. And it’s not only a matter of Svyaz-Bank. We are formulating a concept and identifying potential lines of activity for all members of Vnesheconombank Group which incorporates Svyaz-Bank, Globex, the Russian Development Bank and Roseximbank. We turned to a financial consultant – Ernst and Young Company. This Company has completed preparing several options of the concept for reorganizing VEB’s subsidiary banks. The Bank’s Management Board would consider these proposals and make an agreed decision and submit it to approval by the VEB’s Supervisory Board.

-Does this concept encompasses Belarusian Belvnesheconombank and Ukrainian Prominvestbank – Vnesheconombank participates in these banks’ capital?

- No, it does not. We didn’t set this objective.

- What options are under discussion, what do consultants recommend?

- Roseximbank is expected to give top priority to supporting exports. The more so, this function was assigned to VEB. At present, Globex is operating as a universal commercial bank.  We can’t rule out that it would continue to operate like this. There is a very interesting option for Svyaz-Bank. We believe that it might become a very influential sectoral bank operating in the communications sector, may be with functions of a “post bank”. Svyaz-Bank has been cooperating closely and for a long time with the Post of Russia and Svyazinvest, it also services accounts of other telecommunications companies. By joining forces, we’ll be able to create a pivotal bank which would enable us to make a breakthrough in restructuring, developing and financing one of the fastest growing, high-technology economic sectors. This idea was favored by the Telecommunications Ministry, Svyazinvest and the Post of Russia. We set up a joint commission which is to formulate a final decision.

- If such a pivotal bank is established, will it be responsible for servicing companies in a specific sector?

- Not only. Today more than 70% of Russians do not have bank accounts. And to a certain extent such a situation arose because many people do not have access to retail banking. I have already said that Svyaz-Bank is well represented in the regions – it has 49 branches and more than 160 branch offices. But now it’s too early to talk in great length about the bank’s and Vnesheconombank Group’s future core activity as a whole. It remains to be seen later whether the banks’ assets will be consolidated or whether each of them will go its own way. I’d like to stress that so far none of the options have been given high priority. According to our plans, a final scenario would be submitted to the Supervisory Board in July.

VEB purchased Svyaz-Bank and Globex at the last year’s end as part of measures for stabilizing the banking sector. The Central Bank provided financial aid by depositing 2.5 billion dollars with VEB to purchase Svyaz-Bank and 2 billion dollars to purchase Globex Bank.