Dialogue with Sberbank

Date: 24 May 2012

Source: Expert-Ukraine magazine

Ruben Vardanyan speaks about why Troika Dialog has merged with Sberbank of Russia and what this will result in

In January of this year, Sberbank, Russia’s largest bank, and Troika Dialog, a Russian investment firm, announced the closing of their merger. The memorandum of understanding for the purchase of a 100% stake in Troika Dialog for one billion dollars was concluded by Sberbank and the investment company’s shareholders in March 2011, following years of negotiations. According to Troika’s founder Ruben Vardanyan, the final agreement for the merger was signed in the office of Sberbank chairman Herman Gref.

Today, Mr. Vardanyan, who has been head of the company since 1992, is seeking a successor. In an exclusive interview with “Expert”, the president of Troika Dialog, co-head of the corporate-investment unit, and head of wealth management at Sberbank of Russia spoke about how much longer he intends to work in the new structure and what its tasks are.

It’s essential to understand what’s happening right now at Sberbank. Under Herman Gref’s stewardship over the past four years, the bank has been seriously transformed. When we say “state-owned bank,” the associated sequence is this: bank deposits, pensioners, queue. We should point out, however, that this remains in the past. For example, new contact centers were created at the bank where the average waiting time totals 30 seconds. Ever more operations are accessible through internet banking – clients can manage their accounts independently from home or using their smartphone. The proportion of transactions using such technologies has nearly doubled since October 2008 to 70%. Lastly, management has been considerably upgraded and specialists have arrived from Western banks and the corporate sector. In my opinion, it is precisely because of managers’ ambitions that Sberbank is considered one of the most interesting places to work both in the former Soviet Union and in Europe. The largest corporate client base in Russia and the CIS, a 27% share of the Russian banking system’s assets, and strong financial results make it possible to invest in people and IT, and to change internal processes. Not everyone in the financial industry today can allow themselves all this.

Three complex processes are happening at once. The first, like I already said, is that Sberbank itself is changing. The second: as part of Troika Dialog’s integration with the Sberbank structure two new business units are being created – the corporate-investment bank (CIB), which encompasses the global markets and investment banking divisions, as well as Sberbank’s corporate clients department; and the wealth management division combining Sberbank’s and Troika Dialog’s asset management businesses (asset management companies, real estate funds and private equity). The third important process is the fact that, because of this restructuring, Troika itself is changing. The most daunting challenge is successfully combining these complex processes.

Yes, there will be an expanded product line. Now clients will be able to receive the full range of financial services in the “one-window” format. Previously Troika Dialog couldn’t provide commercial banking services, and, conversely, Sberbank lacked the kind of investment banking expertise that Troika had. In our case, the synergistic effect of the merger is such that one plus one doesn’t even make three, but eleven. Therefore, there will be many-fold growth and clients will receive more diverse, large-scale, high-volume products.

That statement is taken out of context. What I said then and say now is that in a large state-controlled bank a certain degree of flexibility is lost, and this doesn’t please everyone. Whereas before, for example, when selecting a commercial financial establishment I could offer my clients several options, today, when Troika Dialog is part of a large banking group, I can no longer do this. From the standpoint of corporate ethics and standards this is incorrect. However, thanks to Sberbank, the product line is considerably expanding as access is being provided to the balance sheet of the largest bank in Central and Eastern Europe.

To some clients, what matters most is confidentiality, while to others – reliability. Yes, some investors left us, because they cannot conjure an association between state-controlled banks and the notion of ‘confidentiality.’ Meanwhile, those for whom reliability is most important, on the contrary, positively reacted to the merger of Sberbank and Troika Dialog. Until recently, it was a private investment company and the theoretical risk of its closing, especially at the peak of the financial crisis, was high, yet with Sberbank no such concerns arise – this is the main lender to Russia’s economy.

We respect their choice, and, to be sure, the departure of clients is a loss for us. But there were few of these. Furthermore, keep in mind that Sberbank has roughly 70 million clients, while Troika Dialog has about 90 thousand. So the tie-up with Sberbank gave us the opportunity to considerably expand the pool.

NOT FOR SALE

The shareholders of any financial business should understand that our industry today is undergoing serious changes; its profitability has sharply dropped. For example, Unicredit Group is currently trading at one-fifth of its capital. In other words, one of Europe’s largest banks is an undesirable investment object from the vantage point of its own shareholders, since it’s trading far below its own capital. In terms of price, today is hardly the best time to sell a financial establishment. And the situation in the industry could deteriorate further still.

This question is still under discussion. There are three stages. First, we have to delineate the tasks of the post-merger business. The second stage will involve employee evaluations according to the new tasks and, following its completion, replacing some people. During the third stage, we expect to open up vacancies and bring in new specialists. Across all the countries and regions we operate in, there are approximately 1,300 people currently working at Troika Dialog, while another 300 are employees of Sberbank’s corporate clients department. We are one of only a few financial institutions that are currently hiring personnel.

The corporate-investment bank will combine three business lines: investment banking, the global markets division and Sberbank’s corporate clients department. CIB, in turn, will become part of the “corporate business” unit, which is overseen by Andrey Donskikh, deputy head of management at Sberbank.

The CIB unit will have two co-directors – myself and Alexander Bazarov, who, by the way, is a native of Ukraine, a member of management, vice president and head of Sberbank’s corporate clients department. As a result of the merger, Sberbank’s clients gain direct access to Troika’s leading investment banking platform. For them, of course, the product line is expanding.

The M&A segment, which is picking up right now, structured products, our own retail operations, deals as part of privatization, as well as derivatives, debt market instruments, currencies and commodities. As for asset management, this is the second key area that, along with other investment services for private individuals, we’re folding into the wealth management unit. Troika Dialog has in place well-developed practices with respect to management of client assets, so the business block is being set up on the basis of what the company has.

No. It will remain at the level of one million.

Clients behaved differently in 2007, 2009 and 2012. In 2007, their goal was to maximize profits. In pursuit of this, they were ready to take on any risks. In 2009, they were trying to understand how much they had left, and what the odds were of having just a little cash. In 2012, clients are very cautious; I would say afraid. They’re trying to ascertain where decent results are possible under minimum risks. They’re less inclined to build long-term plans than before.

There aren’t any strong inflows, but overall there’s more money. However, we still haven’t reached the pre-crisis level. Before the crisis, we had approximately four billion dollars under management, whereas now we have slightly more than three billion.

PLATFORM FOR AMBITIONS

Just like it’s happening in Moscow. The same two units will be set up: CIB and wealth management.

The first phase – the stage of integration processes – is practically complete. Switching the brand will take place over the course of this year. Until 2013, under the terms of the deal, Troika Dialog will develop as part of the Sberbank Group as a standalone business with a high degree of independence. The company will finish merging with the group in the spring of 2014.

No, we don’t have such plans right now. We will operate out of the already existing points – Moscow, London and Kiev. Nor do we intend to open a separate office in Eastern Europe; we’ll continue to operate on the basis of the banking business already existing there.

It’s difficult for me to comment on Mr. Dvorkovich’s opinion.

I can only say that turning Sberbank into an absolute market institution is a trend that Herman Gref has steadfastly followed. Perhaps you noticed that among the candidates to the oversight committee for our government bank there are more independent directors and no officials. This means we’re seeing the government bank gradually turned into a veritable market company. The purchase of Troika and Austria’s Volksbanken International are steps on the way to making Sberbank a maximally transparent market player where the government’s stake could be even less than controlling. The president and his advisors have already spoken about this several times.

Answering the first part of your question, I’ll mention that from the managerial point of view the decision to sell Troika to Sberbank was correct – people have every opportunity to realize their professional ambitions, although from the standpoint of the company’s partners, right now perhaps may not be the best time to sell. Hence, in this instance, there’s a particular conflict of interest between the managers and shareholders. You yourself mentioned the possible privatization of Sberbank. If a financial institution switches to private control, there’s no basis for concern over political pressure on the part of the authorities. Now a different question arises: is it good that competition is abating on the Russian market, and there aren’t any private banks left after being squeezed out by the two key players? However, nowadays, consolidation of the banking business isn’t happening only here, but also in Europe and the U.S. This is because of the crisis. Sberbank ranks among the world’s highest league in terms of capitalization and profitability. It is a national “champion”. Is this good for Russia? Yes. Is it bad if a monopoly forms on the financial market? Yes. Undoubtedly, competition is necessary. However, in the current growth cycle, consolidation is an objective process happening across the entire world.

Yes, world statistics on purchases of investment companies by commercial banks are quite grim. Of ten such deals, only three were successful. At the same time, of the ten banks that, rather than buying a company, tried to organically build an investment banking business, only one proved successful. This requires a very serious change of the commercial bank’s corporate culture, and considerable financial resources. This is beyond the strengths of a single manager, even a very strong and charismatic one.

This is in fact that one example of successful organic growth by a commercial bank, although it’s important to understand that then, at the time of setting up the business, a whole team of professionals was bought. All at once, about 400 people started working at VTB Capital, meaning a team of people was acquired rather than a company. Another good example in world experience is when Deutsche Bank merged with Bankers Trust Luxembourg SA, which considerably strengthened its market position. In the case of Sberbank and Troika, I’m sure that our alliance will provide a successful example of the integration of two major financial institutions.

VTB Capital is a very worthy competitor, but we’re in a different weight category. There’s no comparison in terms of both scale and capabilities. Sberbank is of a stronger caliber than VTB.

ADDITIONAL CAPITALIZATION OR PRIVATIZATION

That’s a difficult question. Take, for example, privatization – this is a complicated process that can be conducted while pursuing several goals. Goal number-one is to raise money for the government’s budget. Hapless Greece had to sell off assets in order to somehow close this gap. Russia, unlike Ukraine, doesn’t have the problem of a fiscal deficit.

The second reason for privatization is a political decision about the level and amount of private business the country needs. Russia doesn’t have any budgetary problems; we want to sell more to private owners in order to generate more private business. The third motivation is that the government’s asset sales are not as much intended for those offering the best price than they are for those who, in addition to money, are able to offer high-quality expertise making it possible to bring companies to a higher level and make them more effective. When deciding whether to privatize, one also must account for the state of the industry to which the asset belongs: its value depends on this. If the industry is flourishing, the asset’s value will be higher. The financial sector, for example, right now clearly isn’t growing, so today isn’t the best time for selling banks.

Why? There are many Western banks operating in Russia – Raiffeisenbank, BNP Paribas, Citibank. Among the twenty largest financial organizations in Russia there are seven or eight foreign ones. They’re doing a fine business.

I never intended to devote my entire life to one company. Of course, sooner or later I’ll leave Troika; I think at some point I’ll work on something else.

A good manager is the one upon whose departure the company continues to operate successfully. Today we’re already building a structure where my role will gradually be reduced, while the importance and position of other managers will increase. This is a normal process.

I’ll work on seeing through charity projects. In Russia this industry is currently in its beginning stages. We have an enormous number of people who would like to regularly make small charitable donations. And the creation of funds that will accumulate this money, correctly allocate it and whose operations will be absolutely transparent – this is an important task. It will require many years of work.