Bonds & Loans: Some 18 months ago CBOM was among a number of major Russian banks facing tough times, as the Central Bank's "cleanse" of the market peaked. With nearly every large independent bank brushing against the threat of de-licencing, CBOM is now showing some of the most solid results across the sector. What were the key strategic moves that helped the bank navigate the difficult period?
Eric de Beauchamp: During the second half of 2017 there was definitely some turbulence in the banking sector, particularly among private-sector banks, provoked mainly by rumors about the financial sustainability of some of the biggest banks. We put together a strong communications effort at the time to explain and demonstrate to the market that CBOM was in a very healthy liquidity position and that there were absolutely no doubts about the financial sustainability of our bank. Our history, strategy and performance were totally different from those of competitors, many of whom, ultimately, were taken over by the fund for consolidation of the banking sector. In parallel, our main shareholder proceeded with some purchases of CBOM Eurobonds at that time, to give a strong signal to the market that he was committed to supporting the bank.
Bonds & Loans: Many of Russia's independent lenders have been raising rates on dollar deposits, some nearing 4%. How does this tie in with the federal drive towards de-dollarisation? What is CBOM’s hard currency rate outlook for the next few months?
Eric de Beauchamp: The “de-dollarisation” of the economy is a process the Russian financial authorities began to engage in and are supporting, but as commodities still make up the bulk of trades in USD, and the Russian economy is still very dependent on commodity exports, this process will take time. That’s the reason why CBOM continues to attract USD funding, mainly to serve its corporate customers, which export commodities.
In 2019, the rouble exchange rate will be mostly affected by two factors: firstly, the geopolitical situation and the investors’ attitude to Russian assets, and, secondly, the strategy of the Russian Ministry of Finance on FX purchases.
Possible new sanctions against Russia and, consequently, resumption of foreign capital outflows, are likely to remain the central factor that will affect the rouble exchange rate. On top of this, purchases of hard currency by the Ministry of Finance and the Bank of Russia, which were postponed for several months, may restart from early 2019.
Recent months have seen no clear correlation between oil prices and the value of the Russian currency. While oil prices have dropped by nearly 20% since this summer, from about USD80 to USD60 per barrel, the ruble has only shed 1.5% of its value against the dollar, from 65.5 to 66.5 per USD. In this regard, an oil price in the range of UDS60 to 80 per barrel should not significantly impact the USD-RUB exchange rate.
Given the geopolitical situation and the need to resume dollar purchases on part of the Ministry of Finance starting early in 2019, we see the rouble likely coming under increasing pressure in the months to follow.
Bonds & Loans: CBOM helped arrange three major placements in October to the value of RUB33bn, including issuances by RZD (RUB10bn), FSK EES (RUB10bn) and RSXB (RUB13bn). Can you share some of the details and highlights of your participation in these deals?
Eric de Beauchamp: As a rule, each placement took place with participation of a wide range of investors, including banks; investment, management and insurance companies, as well as individuals; that provided us with a substantial oversubscription and allowed us to reduce the marketing range. We closed 19 transactions with a total nominal value of about RUB150bn.
Bonds & Loans: Traditionally, the typical dynamic during the tougher stretches in the economy is that corporates shift from bond market borrowing to loans and syndications. Is that trend manifesting itself in the current market? What opportunities is it providing for CBOM and its peers?
Eric de Beauchamp: This year we are indeed witnessing some jitters in the capital markets, associated primarily with sanctions-related negativity, but no more than that. Of course, against this backdrop, the current market situation looks worse than last year and placements of new bond issues decreased. We have already been living under sanctions for several years, and the majority of market participants (both borrowers and representatives of the investment community) have already developed a certain immunity. That said, this year the most negative impact on the market has been driven not so much by the imposed sanctions, but by the uncertainty concerning potential future ones. Nevertheless, we can see occasional windows opening up that enable issuers to make high-quality market placements. In this case, banks that are able to respond quickly to changing market conditions and make swift investment decisions gain an advantage.
CBOM today is one of the largest banks in Russia, sixth in terms of capital and assets, so in terms of funding, we are able to compete successfully with state banks. At the same time, CBOM is a private bank, which gives us undeniable advantages in terms of efficiency, mobility and flexibility in our work with clients. It takes us no more than a week to make all internal corporate decisions essential for simultaneous work with client on several products, set a limit and make a deal, processes that large state banks would usually spend over a month tackling. Thus, the current situation rather expands our capabilities and enhances competitive advantages.
Bonds & Loans: Looking into 2019, what are some of the key strategic initiatives your department will be focussing on? Where do you see the main risks, and the biggest potential opportunities?
Eric de Beauchamp: CBOM will keep developing the corporate lending segment, with predominance of oil, gas and export commodities sectors, as well as focusing on very high-quality blue-chip borrowers to continue to operate at a low NPL level. In parallel, the bank plans to become more active in the retail lending sector, and to pursue the trend, which was initiated during the second half of 2018. Being more active in retail lending was mainly driven by a significant improvement of quality in the new retail loan deals. Finally, the bank will also continue to diversify its sources of funding and increase the part of “fee and commission” income within its total revenues, with the ultimate goal of maintaining a very good level of return on equity, as recorded in 2018.