Russia’s second-biggest lender should fire four in ten employees at its overseas investment banking unit and drop more than two-thirds of its clients after costs rose to 95 percent of revenue, the division’s head wrote.
VTB Capital International has missed its profitability targets for the past five years, Atanas Bostandjiev wrote in a Nov. 15 memo to Yuri Soloviev, deputy chief executive officer of parent VTB Group. Bostandjiev, 38, proposed shutting the equity derivatives, commodities and structured credit trading groups, cutting the client roster to 300 from about 1,000 and eliminating 231 out of 556 jobs, according to the document, which was reviewed by Bloomberg News.
“We need to immediately address and pro-actively take steps to reposition, restructure and refocus the business in order to deliver sustainable and attractive economic returns,” Bostandjiev, hired from Goldman Sachs Group Inc. two years ago to run the unit, wrote in the 12-page document.
Encouraged by the Kremlin to expand into investment banking overseas before the financial crisis of 2008, VTB Capital is struggling to win business in Europe as the region’s sovereign debt crisis damped growth and sapped revenue. VTB Group CEO Andrey Kostin started VTB Capital in 2008 and pledged to spend $500 million building the division.
Within two years, the government-controlled bank became Russia’s biggest arranger of equity and debt sales. Still, return on equity from the overseas arm missed its 25 percent target, exceeding 4.7 percent in only one of the last five years, according to the memo. By comparison, ROE at Barclays Plc (BARC)’s securities unit was 12.3 percent in the year through September.
“We are constantly reviewing the execution of our international strategy,” Alexei Yakovitsky, CEO of VTB Capital, said in a statement. “We are generally happy with the progress we made internationally in the last couple of years and expect further growth in international revenue.”
VTB Capital has offices in cities including London, New York, Hong Kong and Singapore, according to its website. The memo is Bostandjiev’s private opinion and isn’t a working plan, said a person close to the firm who asked not to be identified because they weren’t authorized to speak publicly.
A spokesman for VTB Capital declined to comment by telephone. Bostandjiev didn’t respond to a message left with an assistant in his London office. Soloviev didn’t answer calls to his mobile telephone.
Bostandjiev said that implementing all his plans would save about $104 million a year in costs and boost ROE to 30 percent. The three businesses he proposed shuttering account for 122 people and generated a $30 million loss, according to the memo.
He also said pressure from British regulators to bolster capital is hurting the profitability of overseas banks that operate out of London.
“Due to the challenge of operating efficiently within a regulated U.K. bank platform, the ability for these business lines to generate the required returns over the cycle is severely compromised,” he wrote in the document. “These business lines have failed to deliver meaningful returns or net income over the last few years.”
He also proposed moving jobs in units such as equity research to Moscow to eliminate a further $30 million in costs. The firm could move some activities into unregulated entities such as offshore funds to reduce capital requirements by about $100 million, he wrote.
Bostandjiev added the continued under-performance of the international business will “increasingly attract” the attention of British regulators. The Prudential Regulation Authority is scrutinizing the business of overseas banks operating in the U.K. to ensure they are solvent, according to the memo.
A group of sovereign wealth funds from Norway, Qatar and Azerbaijan agreed in April to buy a $3.3 billion stake in VTB Group, reducing the government’s holding in the lender to 61 percent from 76 percent.
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