European Markets

EXCLUSIVE Russia's VTB expects rising interest rates could hit profit next year -CEO

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VTB bank Chief Executive Andrey Kostin talks to Russian President Vladimir Putin during their meeting at the Kremlin in Moscow, Russia March 16, 2020. Sputnik/Alexei Druzhinin/Kremlin via REUTERS

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  • VTB expects 2021 net profit at over 300 bln rbls
  • Next year's profit could come under pressure amid rising c.bank's key rate - CEO
  • VTB holds 1.75 trln rbls in OFZ bonds, plans to invest 100 bln rbls more
  • Potential new U.S. sanctions on OFZ market 'not a serious threat'
  • Full Kostin quotes in Russian

MOSCOW, Nov 29 (Reuters) - Russia's second biggest bank VTB (VTBR.MM) won't necessarily see 2022 net profit match this year's expected record high as sharp rises in interest rates reduce margins, Chief Executive Andrey Kostin told Reuters.

In October, state-owned VTB lifted its net profit forecast for this year to more than 300 billion roubles ($4 billion), from a previous forecast of 295 billion roubles.

Kostin told Reuters in an interview conducted for publication on Monday that one-off factors including the sale of VTB's 17.3% stake in food retailer Magnit (MGNT.MM) would help drive profit growth this year. read more

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However, rising interest rates are hurting margins and that would be felt more clearly next year.

Rising inflation has prompted the Russian central bank to lift its key interest rate by 325 basis points so far this year and it has signalled more increases to come.

VTB expects another 50 bps rate rise at the central bank's next meeting on Dec. 17 and Kostin said higher interest rates would depress overall retail lending growth in Russia's banking sector to 14.5% next year, from 22% in 2021, and corporate loans growth would be below 10%, down from 10-12% expected this year.

"That said, it is possible that VTB's net profit for 2022 may not be as high as the record (we expect in) 2021 - growth in business would be offset by loss in margins," he said.

Net profit this year is set to rise from 75.3 billion roubles last year, when the impact of COVID-19 hit business, and 201.2 billion roubles in 2019.

The bank will recommend paying 50% of its net profit in dividends on ordinary shares on this year's results but plans to talk to the government on paying less on the preferred shares, Kostin said.

The Russian government controls 92.2% of VTB via ordinary and preferred shares. The remaining 7.8% of VTB is represented by ordinary shares and is in a free float.

GEOPOLITICS AND OFZ MARKET

As political tensions between Russia and the United States increase on everything from the Nord Stream 2 gas pipeline to relations with Ukraine, some U.S. lawmakers recently suggested extending sanctions on Russia's secondary OFZ treasury bond market.

Existing U.S. restrictions already ban U.S. investors from buying into new OFZ bonds but Kostin believes any new sanctions on OFZs, if adopted, would not represent a 'serious threat' for the country's financial stability.

"The Russian market, with such players as Sberbank (SBER.MM) and VTB, major OFZ holders, is incomparable with the OFZ portfolio held by U.S. investors," he said.

Foreign investors hold 21% of total OFZ bonds outstanding, or 3.3 trillion roubles ($44 billion), of which U.S. investors account for around a third - less than VTB alone which has 1.75 trillion roubles of OFZs in its portfolio.

According to Kostin, VTB plans to increase its OFZ portfolio by another 100 billion roubles in the coming months, and to keep that level stable further on.

"I do not think that this (potential new sanctions) is a serious threat for the country's financial stability or for the bank," he said, adding that any new sanctions would hurt U.S. investors first while increased yields, as a result, would allow Russian bond buyers to earn even more.

But overall, Kostin, a former diplomat himself, said he was worried about increasing tensions between Russia and Western nations, calling the current political backdrop "even more alarming than a couple of months ago".

"It is best for all of us to focus on social-economic issues," he said, urging Russian and Western leaders to focus on business and economic issues such as inflation rather than political bickering.

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Reporting by Katya Golubkova; Editing by Susan Fenton

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