(Bloomberg) -- Russia’s two most powerful banks went from their best year ever in 2021 to fighting for their future, with the outlook for Sberbank PJSC only slightly less grim than the Kremlin-friendly VTB Group.
U.S. sanctions imposed on the state-owned lenders over President Vladimir Putin’s invasion of Ukraine caused Sberbank’s European unit to unravel and called into question its ability to pull off a daring bid to become Russia’s version of Amazon.com Inc.
VTB’s situation is even bleaker. Unlike Sberbank, the country’s No. 2 bank is being cut off from SWIFT -- the messaging system behind much of global trade -- and was hit by full blocking sanctions from the U.S., a scenario that Chief Executive Officer Andrey Kostin once likened to “a declaration of war.”
“VTB historically backed state-led projects and lends money to people and companies that enjoy state support,” said Chris Weafer, the founder of Moscow-based Macro-Advisory Ltd. “Sberbank is the people’s bank and wasn’t linked to Putin’s inner circle.”
Western sanctions are targeting Russia’s financial system with the goal of crippling support for Putin’s war machine. Sberbank and VTB, which combined account for more than 50% of Russian banking assets, were key parts of the Kremlin’s efforts to build a financial fortress capable of withstanding an international backlash.
The state controls 92% of VTB and 50% of Sberbank. Deputy Prime Minister Yuri Borisov, who oversees the country’s defense sector, said that the scale of the sanctions was hard to predict, Interfax reported Wednesday.
In 2021, Sberbank generated about $17 billion of profit at last year’s exchange rates, more than any bank in Western Europe. VTB grabbed the sixth spot in the league table for deals involving Eastern European countries and had ridden a boom in Russian stock offerings.
Now, they face a likely spike in loan defaults as the Russian economy gets slammed by sanctions. As nervous consumers and companies pull money from bank accounts, the lenders will have to find more expensive sources of funds.
The nation’s central bank more than doubled its key interest rate to 20% this week in an effort to stem the rout in bonds and the ruble, but that will squeeze banks’ revenue further as costs rise and loan growth stalls. The investment banking deals that were a boon to fees have come to a halt.
What Our Analysts Say:
“Both Sberbank and VTB are now uninvestable for foreign investors. We expect massive earnings downgrades on spikes in the cost of risk, rising funding costs and a credit crunch. While capital is shielded from ruble and yields move, funding and liquidity are under immense pressure.”
--Tomasz Noetzel, Bloomberg Intelligence analyst. Click here for more research
Russia has already taken moves to prop up the banks, saying they can continue to use last month’s foreign-exchange rates and allowing them to tap the central bank for liquidity. That’s meant to guard against collapses like the ones that hit Sberbank’s units abroad, but won’t stop the pain from loan losses and less money coming in.
For now, the companies are saying they’re getting on with basic banking.
“Our focus is on the new challenges that the Russian economy and the financial sector is facing,” Sberbank Chief Executive Officer Herman Gref said on Wednesday after reporting a 64% jump in earnings last year. “Our clients, both corporate and retail, have access to their funds in full.”
Sberbank -- which has almost 100 million retail clients and holds about half of Russian retail deposits -- had invested heavily in an attempt to add services from restaurant delivery to movie streaming and cloud computing. It had expected its e-commerce businesses to contribute as much as 5% of total revenue by 2023, but that strategy looks likely to be reined in.
The government “will now probably look to restrict Sberbank’s commercial adventurism,” said Weafer, a former chief strategist at Sberbank Investment Research. “Keeping people’s deposit base is more important than ever.”
Even before the military buildup on Ukraine’s border, the banks had retrenched to become less exposed to international financial markets. VTB’s London office, once 500 strong, had dwindled to about 150 before London Stock Exchange Group Plc suspended its membership last week.
While Kostin has said 90% of VTB’s business relates to Russia, swanky offices next to the Bank of England served as a signpost for its ambitions and a platform for deals in regions such as Africa, Asia and eastern Europe.
VTB runs a major retail bank, but also maintains close ties with the Russian elite. Last year, it sold a stake in the country’s second-largest retailer to a group run by the son-in-law of Russian Foreign Minister Sergei Lavrov.
The isolation has already started to bite. VTB’s commodities-trading arm has begun winding down its base-metal positions after partners withdrew support.
For Sberbank, the sanctions caused the dissolution of its European arm -- which it had already sought to scale back as part of the retrenchment following Russia’s 2014 annexation of Crimea. That mainly confines Russia’s largest lender to operations in former Soviet states.
In a stunning fall from grace, foreign-listed shares in Sberbank -- which started the year as the best-rated banking stock in emerging Europe -- are now at the level of a penny stock.
Both firms remain critical to the economy, but their dimming fortunes have come surprisingly fast. After a September summit between Putin and U.S. President Joe Biden, VTB’s Kostin remarked how a surge in commodity prices could lead to more Russian companies selling shares to the public.
“There is certain ground for enthusiasm,” Kostin told Bloomberg six months ago.
©2022 Bloomberg L.P.
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