President of Russia Dmitry Medvedev: Mr Kostin, how are things going in the state bank that you're in charge of? How have you weathered the storm caused by the financial crisis? Do you have any interesting new projects?
Vneshtorgbank Ceo Andrei Kostin: This year was difficult for the banking sector in general and for VTB in particular, especially the first six months, when the decline in economic growth caused problems with repaying and servicing loans for our corporate clients. However, I must say that the third quarter was a watershed, and the situation began to improve along with the growth of the economy. This enabled the bank to go from a loss-making situation to a profit generating one, so that after the first nine months of this year VTB's profit was about eight billion rubles [more than $270 million]. We expect that these positive results can be maintained until the end of this year.
Dmitry Medvedev: Is this sort of profit comparable with the results of the pre-crisis period?
Andrei Kostin: Of course it is not comparable with the results of the pre-crisis period. Our profit last year was more than 26 billion rubles. We believe that the major negative results, in particular the losses caused by the growth of so-called non-performing or bad loans, are now mostly behind us. Moreover, we expect these bad loans will be recovered within a few years: even though there is no market demand for the collateral assets now, we are generally active in marketing such assets as real estate, oil and gas companies’ stakes, etc. All these should be quite marketable.
Dmitry Medvedev: Do you think the increase in non-performing loans is under control? That is, do you think the bank is in control of the situation?
Andrei Kostin: Yes, absolutely. Bad loans make over seven percent of the overall extended loans today, and this percentage has increased fourfold since the beginning of the year, but we do not foresee a situation in which it could go above eight percent.
That is a perfectly acceptable level for a bank. It should be noted that throughout this period, during all these months, the bank has continued to actively finance the economy, and our loan portfolio has grown since the beginning of the year by 20 percent. During the last quarter alone the increase in VTB's loan portfolio amounted to 150 billion rubles. Of course this has been affected by support measures taken by the Government Cabinet. The Government has supported us by an additional capitalization of 180 billion rubles in September. However, I should note that the value of this additional stock has already grown by 30 percent, because in recent weeks there has been a significant increase in price of our shares. They are up about 30 percent, so you might say that this capitalization package has increased in value quite dramatically.
Dmitry Medvedev: I noticed that and we expected something like that would happen. I would like to ask a question about the instruments and the mechanisms that have been employed. I was discussing this just yesterday with the Government Cabinet. What about government guaranties? Have you taken advantage of these provisions?
Alexei Kostin: Yes, we are actively using government guaranties. We have already issued loans of about 30 billion rubles under government guaranties and before the end of the year we plan to extend further loans of up to 90 billion rubles under such guaranties. There will be about 20 government guaranteed loans issued altogether.
Dmitry Medvedev: Just so I understand this properly: after a fairly lengthy period of approvals, amending procedures for and adjusting mechanisms of providing guaranties, this has now become an attractive tool for you and you're making full use of it?
Andrei Kostin: Absolutely, absolutely. We are using it and it has been a big help for banks faced with the crisis, the resulting instability and the decrease in the value of borrowers’ collaterals. It has been a very useful tool and is now functioning properly. I think that it can now be truly applied. That said, I should reiterate that next year we may be able to give up this mechanism, because the economy will be recovering.
In my view the most important thing now, which is quite clear for the banking community, is not only the growth in the banking sector, which we enjoyed this year, but a qualitative improvement based on innovative technologies. The banks themselves should be using innovative technologies and providing credit for their implementation in the economy. I can give you an example: one of the areas for introducing new technologies is retail banking. We have seen a sharp increase in the number of users of up-to-date banking methods, in particular, via the internet or via a cellphone with access to the internet. The number of such users is growing: it doubled in the past year and we are predicting that it will double again.
Dmitry Medvedev: What sort of transactions are involved here?
Andrei Kostin: Every sort of transaction. Today the internet is not just a source of information but enables people to make payments, access their account and transfer money. Within two or three years we hope to create a system which will make non-contact payments possible. People will be able to use their cellphones to access a special reading device, for example in a shop, and the purchase price will be deducted from their account.
Dmitry Medvedev: So now the bank's customers have become more active in employing internet and their cellphone's capabilities to manage their accounts, make transactions, transfer money, check their account balance – this is what you're pointing out, isn't it?
Andrei Kostin: Yes. About 10 percent of our customers use internet banking. And if we're talking about most active clients, we can even say 20 percent, so this proportion will grow. We believe that the proportion of users of these types of services over the next three years will be as high as 40 percent, perhaps even a little higher.
Dmitry Medvedev: But this is very convenient because they don't need to get up from their kitchen table, so to speak, or they can look at everything from their office?
Andrei Kostin: It is convenient and advantageous because it reduces the transaction cost for both the user and the bank, and it obviates the need for building expensive offices or hiring a large staff. This is the qualitative improvement that is enabling the banking sector to maintain efficiency, especially now that profit margins and earning capacities for banking industry are shrinking.
But there are other areas for improvement in addition to this, particularly in the investment business. I should say a word about innovations in financial instruments. For all the cursing about sophisticated financial instruments and their role in the financial crisis, the modern world simply cannot function without sophisticated financial instruments. In this respect Russia still has a great deal of work to do in developing such instruments.
Under the auspices of our investment bank we are currently introducing a number of more complex credit instruments that will enable us to mobilise foreign investment. I am not talking about a simple loan but a loan that can be tied to the dynamics of the price of, say, raw materials, or a dual currency bond, or a loan that can be tied to the price of some corporate shares. That is, we need to make use of more complex derivative instruments that will enable us to attract a greater diversity of foreign investors. And we are now introducing instruments that are quite exotic for Russia, such as Islamic loans in the form of sukuk governed by the laws of Islam. This will embrace the whole group of investors from, for example, the Persian Gulf.
Dmitry Medvedev: As you say, these new tools are sometimes unconventional, even exotic, but they're necessary in precisely the sorts of scenarios for which you're issuing them. That is, when you offer these tools in foreign markets.
Andrei Kostin: We certainly are establishing ourselves extensively in foreign markets. The competition in the capital markets is becoming more intense. Today there are lots of financial resources available globally. However, where the investment goes largely depends of course on investors' assessment of the country but also on the array of up-to-date credit instruments that it can offer them.
Dmitry Medvedev: As you are well aware, the principal task of Russian banks is first and foremost to devote themselves to the Russian market, to make loans to Russian businessmen and individuals. On the other hand, our major banks and all banks must engage in global financial transactions and be full participants in global financial markets. Given the fact that these markets have come through a very difficult period and are now opening up again, our banking community absolutely must be ready to adapt to the current situation. Russian banks need to be prudent, but at the same time it's obvious that they need to be up-to-date, ready to offer and provide banking instruments that are attractive not only in Russia but also to foreign entrepreneurs. This is where we have to improve.
As for internet banking and abilities of carrying out transactions from one’s office or directly from one’s home, is also a very important area, which of course will make life much easier for our people.