By the end of 2022, the merger of three banks will be completed: Otkritie and the largest bank in Crimea, RNKB, will become part of the VTB Group. Who will be the main beneficiary of this deal is an open question.
First of all, it is worth pointing out the interest of the Bank of Russia in it. He had been preparing Otkritie for an IPO and further sale for a long time, but in the current conditions, this option had to be abandoned.
At the same time, this commercial financial institution is doing well. According to the results of 6 months of 2022, Otkritie Bank earned 5.7 billion rubles of net profit, increased liquidity and capital adequacy, Mikhail Zadornov, President and Chairman of the Board of the Bank, said at a press conference last week.
According to him, in the first half of the year Otkritie, against the backdrop of a slowdown in the lending market and volatility in investment markets, strengthened its business position. The bank became the fourth among banks that finance developers, the sixth in lending to companies in the agro-industrial complex and the food industry, increased by 0.87 percentage points. up to 7.3% share in the car loan market (fifth place in the market).
The share of Otkritie in the market of deposits and loans to the population increased to 2.6%. The bank’s federal advertising campaign with new brand ambassadors, Marina Kravets and Konstantin Khabensky, turned out to be the most successful in the bank’s history and increased spontaneous awareness of the Otkritie brand by 4 p.p. up to 25% among Russians. This contributed to the growth of applications for bank credit cards by 68%.
According to Russian accounting standards, the assets of Otkritie Bank as of July 1, 2022 amounted to 3.0 trillion rubles.
“We don’t care at all”
As of February 2022, VTB’s net assets amount to more than 19 trillion rubles. In terms of assets, RNKB is significantly behind both it and Otkritie – 314 billion rubles. Accordingly, the total assets of the three banks will amount to more than 22 trillion rubles, which will only slightly bring VTB closer to Sberbank with its 39 billion rubles.
Although all three banks are focused on retail and offer a standard range of services – loans, deposits, mortgages, car loans, cards, insurance – the volume of their loan portfolio also varies greatly. VTB has more than 11.8 trillion rubles as of February 2022 (latest available data), of which 4 trillion are loans to individuals, while Otkritie has only 2.1 trillion rubles, which includes 666 billion rubles individual loans. The loan portfolio of the RNKB at the same time is a modest 204 billion, of which 93 billion are loans to “physicists”.
It is noteworthy that Otkritie, which has been under the control of the Central Bank in recent years, has built a business twice as efficient as VTB and RNCB: in 2021, Otkritie showed a return on capital of 23.71%, which is not far from Sberbank with its 25.34%. At VTB, this indicator at the end of 2021 was only 13.81%, at RNKB 11.34%.
It is worth noting that the accession of RNCB as a separate legal entity will finally block the way for VTB to return to the Western market, but, as Deputy Finance Minister Alexei Moiseev put it on this occasion, “we generally do not care.” However, for VTB, the deal still looks ambiguous: on the one hand, it will cause an increase in assets, on the other hand, it will make it difficult to restructure the mechanics of Otkritie and merge the functionality of the three banks. And the price of the issue is still unknown.
Such different banks
Since the scale of business of the merging banks is incomparably smaller than the value of VTB’s assets, Expert RA believes that there will not be much synergy between the merging banks. “In addition, the business profile of all three banks is universal, so as a result of the transaction, there should not be a noticeable change in the structure of VTB’s balance sheet. First of all, the synergy will affect cost savings, including the maintenance of the network of divisions and employees,” said Lyudmila Kozhekina, director of banking ratings at the Expert RA agency.
Thus, Otkritie is a large bank with a serious federal network, which includes 414 offices in 73 regions, which means that VTB (1,400 branches) will receive both a network and loyal customers, including both individuals and legal entities. Loyal, of course, to Otkritie, so any merger requires a very smooth rebranding strategy and work with its clients, Valeria Minchichova told Expert, director of the Institute of Financial Literacy.
It should be added that a certain part of the branches will most likely be closed after the merger of banks – after all, banks are doing their best to reduce costs by transferring customers to remote service. The same VTB has already announced that its strategic goal is to provide customers with the opportunity to receive up to 100% of retail services in digital form.
As for RNKB, this is a bank mainly focused on serving strategic projects in the Crimea, as well as individuals and legal entities in this region. Obviously, by turning it on, VTB will be under guaranteed sanctions, Valeria Minchichova added. After all, in addition to the SDN (Specially Designated Nationals List) list, with the defendants of which all US legal entities and individuals are prohibited from dealing, and disconnection from SWIFT, VTB will not be able to cooperate with European companies. This state of affairs will take place due to activities in the Crimea, which, according to European politicians, is not Russian territory. But there is a plus for VTB: a representative office in a promising region.
“RNKB already has an image in Crimea and Sevastopol, and as far as I know, there are no plans to rebrand RNKB. Moreover, the control of RNKB will pass to VTB, while an independent legal entity will remain. Against the backdrop of an unprecedented boom in the tourism sector in southern Russia, the need to provide financial services, including Crimea, is obvious. And for VTB, this is a strategy for expanding to new markets with old products,” Valeria Minchichova explained.
What is “Discovery” worth?
The merger of several quasi-state banks is a logical step. There is no longer any need to fear sanctions, everything has already happened and there is no turning back, and you can save money on cost reduction. And, indeed, a possible takeover transaction by the VTB banking group of RNKB Bank together with the Otkritie group has a number of serious lobbyists and certain sources of information present it as a resolved issue, Alexander Baranov, Chairman of the PARTAD Committee on Internal Control, Audit and Management, told Expert risks. However, there are nuances. The most important price is at which VTB will buy Otkritie.
“When the question is about economic feasibility and efficiency, it is necessary to take into account not only the combination of pros and cons for one side of the transaction, but also the interests of the state, as the main owners of all three financial groups,” the expert argues. — On the one hand, VTB Group will become larger. However, behind the scenes remains the question of how significant the scale of the merger will be for VTB itself.”
According to him, in the case of Otkritie (and not only the bank, but also the NPFs and Rosgosstrakh, which are part of the group), estimates based on the value of net assets will hardly work. Considering that the bank’s assets are based on financial and investment investments, the emphasis should be placed on assessing future cash flows, Alexander Baranov believes.
Estimating the value of a bank depends on the level of development of its infrastructure: client base, product line, branch network, IT technologies, management quality, risk management system. Correction for the reputational component (taking into account the value of the brand) can give an additional premium to the cost estimate up to 15-30%.
Recall that the latest transaction for the purchase of Rosbank and a stake in Tinkoff Bank by Vladimir Potanin took place, according to estimates, much lower than capital. There are no exact figures, but there is information that with the capital of Rosbank of 200 billion rubles, he left at a price of 40 billion. The capital of Otkritie is about 369 billion rubles. Whether VTB now has free money to buy is unclear. Its reporting has been closed since March 2022.
“VTB will be interested in lowering the acquisition valuation to improve the efficiency of the acquisition transaction. On the other hand, the Bank of Russia, as a beneficiary from the possible sale of the group, is interested in raising the valuation of the object being sold,” said Alexander Baranov. He added that synergies could help lower the cost of capital of the combined bank in the longer term. However, in the medium term, the consolidation of the businesses of the three banks and forced payments while reducing overlapping divisions and lines of business may significantly reduce this benefit.
Step to reduce competition
“So far, separately, the VTB Group and the Otkritie Group are generating good cash flow in the current conditions for their owners. It is not a fact that the cash flow for the owners of the combined group in the future of a year and a half, taking into account the costs incurred, will be greater. And the question of further monopolization of the financial sector and the reduction of competition remained behind the scenes. From the point of view of the state, it is necessary to take into account not only the interests of one party to the transaction (buyer or seller), but also the interests of consumers of the financial services market,” summed up Alexander Baranov.
However, by 2025, VTB, in any case, wanted to increase the number of retail customers from the current 16 million to 30 million, so 3.5 million Otkritie customers and 2.2 million RNKB will definitely not be superfluous in this case.