Russia's VTB wins sovereign backing for $3.3 billion share issue

MOSCOW Mon Apr 29, 2013 9:25am EDT

People pass by an office of VTB bank in central Moscow, April 3, 2013. REUTERS/Sergei Karpukhin

People pass by an office of VTB bank in central Moscow, April 3, 2013.

Credit: Reuters/Sergei Karpukhin

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MOSCOW (Reuters) - VTB (VTBR.MM) attracted a new class of sovereign investor into Russia with a $3.3 billion share sale, whose proceeds the state-controlled bank pledged to invest in expanding its share of the domestic market.

Russia's second-largest bank is offering stock at a third of the price at which it floated six years ago, reflecting the impact of the global crash, a troubled acquisition and a costly push into investment banking.

The deal was covered before subscriptions were due to open, VTB said on Monday, with backing from state funds from the energy-rich states of Norway, Qatar and Azerbaijan, described by CEO Andrei Kostin as "committed, long-term investors".

While investing in the world's largest oil-producing nation might not be an obvious way for such funds to diversify, sources on both sides of the deal said it offered a cheap entry into Russia's market of 140 million consumers and burgeoning middle class.

Kostin presided over an initial public offering in 2007 and a subsequent stock sale in 2011, both of which were followed by share price falls, but after months of diplomacy the urbane former diplomat has managed to reel in big-ticket investors.

"From now on we are planning to feed only bulls, not bears," Kostin joked on a call with analysts. "Those bears present at this conference, please find another victim."

The buyers, newcomers to Russia, follow in the footsteps of Chinese sovereign fund CIC CIC.UL, which bought VTB stock in 2011 and later acquired stakes in gold miner Polyus (PGIL.L) and fertilizer firm Uralkali (URKA.MM) together with VTB.

"We would certainly hope that we could develop broader relations," Chief Financial Officer Herbert Moos told reporters.

The deal reflects President Vladimir Putin's preference for a state-driven capitalist model, based on long-term strategic partnerships, after the 2008 crash caused finance capital - and some western banks - to flee the country.

TURNING THE PAGE

VTB is selling 2.5 trillion shares on the Moscow stock market at 4.1 kopecks apiece, a discount of 10 percent to last Thursday's close. It will raise a total of 102.5 billion roubles ($3.3 billion).

Stripping out 2012 dividends, to which the new shares are not entitled, the discount narrows to 6.8 percent, VTB said.

For Kostin, the capital-raising marks a chance to turn the page after the ill-fated takeover of Bank of Moscow in 2011, which uncovered a balance sheet hole at the acquired bank and triggered Russia's largest-ever bailout.

The share issue will bolster VTB's Tier 1 capital adequacy ratio - a key measure of a bank's ability to absorb losses - to 11.9 percent from 10.3 percent as of December 31, higher than market leader Sberbank (SBER.MM).

Rather than just filling holes in its balance sheet, as many western banks are being required to do to meet tougher regulatory requirements, VTB wants to deploy the new capital to win market share in Russia's retail lending sector.

The capital injection should see VTB, which is drafting a three-year strategy, through to 2016.

With VTB shares priced at just 0.6 times estimated 2013 book value and five times forecast earnings, analysts at Bank of America Merrill Lynch see potential for the stock to move sustainably higher if the bank sticks to its stated strategy.

"VTB's willingness and ability to focus on the core business, decrease earnings volatility and improve visibility could be major long-term catalysts for the stock to re-rate," analysts Olga Veselova and Maciej Szczesny wrote in a note.

VTB shares rallied 3.7 percent by 9:06 a.m. ET, making them the strongest-performing blue-chips in a mixed Russian market.

CORNERSTONE INVESTORS

Norges Bank Investment Management, Qatar Holding and the State Oil Fund of Azerbaijan signed up for more than half of the offering, buying roughly equal lots, sources said. They were not available to comment.

Norges is the largest of the three, with assets worth more than $700 billion. Qatar Holding is an arm of the Qatar Investment Authority, reputed to run more than $100 billion in assets, while the Azeri oil fund manages $34 billion.

VTB did not confirm reports that Russian tycoons, including billionaire Suleiman Kerimov, were among the buyers of the shares. Kerimov's investment firm, Nafta, declined comment.

The Russian government was expected to waive its right to subscribe to the offering, which would dilute its 75.5 percent stake to 60.9 percent.

Existing shareholders have from May 6 to May 17 to exercise their subscription rights, but even if they decline, the offering would still be fully covered with legally binding investment commitments.

Investors are subject to a six-month lock-up, during which they may not sell their shares, while the Russian government was expected to refrain from selling down its stake for 12 months. Under existing privatization plans, the state may reduce its stake to a bare majority in 2015 or 2016, Moos said.

Citigroup and VTB Capital are acting as global coordinators and bookrunners, while Bank of America Merrill Lynch and J.P. Morgan are acting as joint lead managers. UBS advised Qatar.

(Additional reporting by Megan Davies and Kylie MacLellan; Writing by Douglas Busvine; Editing by David Holmes)

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