Deutsche Bank Group’s Chief Executive Officer for Russia discusses liquidity crisis, friends and competitors.
Deutsche Bank Russia has seen major personnel changes recently: a top manager, Ilya Scherbovich, president of former Deutsche UFG, left his position in the Company. Deutsche Bank Group’s Chief Country officer and CEO for Russia, Charles Ryan, has told Kommersant what personnel changes may soon take place in Deutsche Bank, how the Bank’s profits were doing during the liquidity crisis and how friendship with Anatoliy Chubais has affected co-operation with RAO UES.
Global stock markets were hit by a crisis in August, and investors are currently assessing its consequences based on published investment companies’ reports for the crisis period. How long will such situation last?
In my view, all major banks that are engaged in selling or securitizing credit portfolios will feel the crisis’ negative impact for another 6 to12 months. However, the situation that we are facing now is no longer a crisis. All that is going on can be compared to what psychoanalysis describes as recognition of human death. The initial reaction is denial, unwillingness to accept the fact followed by indignation, and, eventually, by reconciliation and recognition. As regards the liquidity crisis, there has already begun the process of understanding that the issue exists and has to be reconciled with. Certainly, high-risk mortgage market will not return to its pre-crisis level. Some analysts note that while the losses caused by the savings and loans crisis in the U.S. in 1988 amounted to $200 billion, the companies’ and banks’ losses from this year’s crisis will be double that figure reaching $400 billion.
How has the August crisis affected Deutsche Bank’s activities and, particularly, its profit? What is the volume of deals or offerings that had to be postponed owing to unfavorable market conditions?
We had planned a large number of deals for this autumn, and we were still making preparations for them as recently as during the summer. Many of our clients’ business plans envisaged obtaining foreign loans. They were unpleasantly surprised as they learned how the interest rates rose in September. For instance, a company in May could obtain financement at LIBOR plus 2.5%, while in September the rate went up to LIBOR plus 7%. Thus, the number of clients capable to obtain a loan in the foreign market reduced considerably following the crisis. Besides, some IPOs were put off, and those companies that entered the market reduced the scope of their IPOs. However, Deutsche Bank’s profit in Russia in the third quarter of 2007 grew as compared to the respective period of the previous year.
What were the factors behind the growth?
Our competitors, which successively operate in certain sectors, can hardly offer the entire range of services that we provide. Some of them have a strong investment and banking component, but do not deal with lending. Others, for instance, lack a powerful analytic team. We take advantage of the availability of all these components, which allowed us to function more effectively during the crisis period than many other banks. Besides, Deutsche Bank has quite a large team in Moscow. It allows us to commence the work with clients long before it turns into a deal. Many banks tend to keep the larger part of their teams in London or other financial centers, and sometimes it turns out that they have not even heard the names of some companies with which we have already been working for two or three years. To illustrate, Magnit’s effective entry into the market was not a surprise to us, because we began working with that Krasnodar company as long as four years ago. The third factor that had an impact on our bank’s profit growth is new products. For instance, we now actively deal with real estate, development and infrastructure projects, putting special emphasis on such aspect as private-and-state partnership.
Whom do you view as your competitors in the Russian market?
If we discuss specific sectors of our activities, for example, capital market operations, there are several banks that have first-rate teams in the sector. Morgan Stanley, for instance. By the way, I’ve noticed that the major part of this bank’s Russian team is made up of my former colleagues. I sometimes joke that if someone wants to become Morgan Stanley’s top manager, he has to work for us for a while. That company has a highly professional team and is one of the top players in ECM sector. Yet, it does not have a team, which would deal with lending. It is JP Morgan and Citigroup are our competitors in this segment.
Do you consider competition on the part of Russian banks as serious? Particularly, taking into account that the Russian banks receive mandates to carry out large deals on the equal footing with global banks. For instance, Renaissance partook in Uralkaliy’s IPO, which is considered one of the most successful public offerings during the crisis period.
Certainly, Renaissance Capital’s staff are very professional. They were our competitors when I headed UFG. Alexander Pertsovsky is my old friend. We became friends as long as 12 or 13 years ago, when he joined Rinako Plus. Our relations with Russian investment companies are rather close. We cooperate there where we would not work with foreign competitors. However, Troika Dialog and Renaissance Capital are not our direct competitors. Direct competition for us comes from global investment banks, such as Morgan Stanley and Credit Suisse, while local players rather have a synergic role, acting as partners in some deals.
That is to say, you believe they will never grow up to Deutsche Bank’s level?
I think they hardly will. They have their own niche on the market. However, they do not possess the technologies that we have. Direct competition with them is possible only with respect to the deals, which do not require capital, for example, in M&A market.
Deutsche Bank Russia has recently undergone a significant management reshuffle. Ilya Scherbovich and his deputy Marina Kraschenko left the bank. What was the cause of it? Did the fact that Scherbovich began developing his own business have an impact on his decision to leave?
Marina’s and Ilya’s cases are very different. Marina’s departure was primarily due to personal factors. However, she prepared a good replacement. As regards Ilya, I believe he was ready to leave. And his team was ready for new management. Ilya and I have been partners for a long time, and I highly respect him. We have a common hobby: we both like fishing. I hope his new business will be successful. Besides, he will keep working for us as a consultant till next March. And the staff of United Capital Partners (UCP), the company that Ilya now heads, includes some of my former employees.
What was the impact of the key managers’ departure on the bank’s business?
You know, when 2 or 3 employees leave turns out to be quite noticeable in Russian subsidiaries of U.S. investment banks the staff of which comprises, for instance, 50 or 70 people. Meanwhile, we have over 400 people working for us in the banking unit only. So, if four people leave, it is just one per cent. Certainly, I do not feel glad when an employee leaves. It is not easy to find a professional now. About six banks want to expand their staff to 100-200 people, and they will definitely look at our employees in the first place during their search. However, one should not forget that many professionals have big career growth opportunities inside our bank.
This year, Deutsche Bank took part in carrying out VTB’s public offering. What is the reason that VTB has been trading below its IPO price for a long time already?
The current situation with VTB shares is largely due to the foreign credit crisis: papers are vulnerable to the overall global fall of the banking sector’s share quotations. For, investors worldwide associate the crisis primarily with banks. However, I believe that the IPO was generally successful. It was the first IPO of a Russian bank in London. And I am optimistic about VTB’s prospects. It is hard to forecast the dynamics of its shares until the end of the year. It was mostly strategic investors that invested in VTB, and they usually look at bank’s long-term prospects. The share quotations will undoubtedly go up in the future. VTB has good prospects, and I think that investments in VTB might prove much more successful than investments in U.S. or French banks.
Are there VTB shares in Deutsche Bank’s portfolio?
We hold these papers not for speculative operations. I suppose we will always have these papers in our portfolio, because Deutsche Bank is the largest market maker for VTB shares. And our position in the secondary market is one of our advantages.
Which deals on the Russian market do you consider as the most successful?
I think it was the purchase of UFG. Another success was the deal where we worked as advisors for ENI for the purchase of natural gas assets. By the way, that example shows well how important it is for a bank to have a wide platform with the full range of services. We were able to provide to our clients an excellent team of advisors on M&A deals in the oil-and-gas sector. Besides, we helped them to conduct talks with Gazprom, extended a loan for over $7 billion, and carried out currency exchange operations. Hardly would any other bank have been able to carry out in full such a complicated and large-scale procedure. Some bank could have provided M&A consulting, but would not have had banking license; another bank would have had the license, but would not have been able to act as consultant.
This year, Deutsche Bank was the exclusive financial advisor for the sale of the additional issue of OGK-3 shares. Last year, Deutsche Bank was the organizer of OGK-5 IPO, and this year – OGK-2 IPO. Besides, if I am not mistaken, Deutsche Bank provides consulting to RAO UES on the issues of restructuring. It is because you have good relations with Anatoly Chubais, that you receive mandates there?
Certainly, I have been able to establish good personal relations with many leaders of Russian business over the past years. I began working in Russia for EBRD in the very early 1990s. By the way, Anatoly Borisovich has good relations with many investment bankers. It is, no doubt, wonderful, when working relations have formed between a bank and a client’s top managers. But this is in no way a decisive factor for RAO UES when it chooses financial advisors. The most important thing is that the client gets top quality services from professional experts. Back in 2005, Mikhail Butrin, one of my deputies, drew my attention to the fact that a large number of deals in Russia’s energy sector could be expected soon. He suggested we should set up a special team of eight people who would study that sector thoroughly. Although the prospects in that area were not evident at that time, we decided to invest into that sphere. So, when RAO UES launched its reorganization processes, our energy sector team, headed by Mikhail, had already been working for two years and was the most experienced team on the market. Consequently, our competitors were simply unable to rival us in that sphere.
RAO UES intends to draw a 50-billion-Rouble loan for the buy-out of shares from the shareholders. Is Deutsche Bank participating in the tender?
Yes, we are.
What is the expected volume of the tranche?
I cannot comment on that. At this point, we are one of the applicants.
This year, the bank was the organizer of OGK-2 public offering. What was the cause of undersubscription, and why was the attracted amount only $864 million instead of the planned $1.7 billion?
The IPO’s outcome was largely affected by the market conditions linked to the events on the U.S. mortgage market. In my view, that IPO can undoubtedly be considered successful just because it namely took place in such a difficult crisis period.
For the last year, each of the six board members of Deutsche Bank received a remuneration of around $800,000. However, the income of investment bankers in many other investment banks is higher. What is it that attracts your staff to working for Deutsche Bank, and why do they not go over to your competitors?
Refraining from comments on specific numbers, I can say that we are at the market level. All employees always want the same: good salary and career growth. Moreover, they want to have an interesting job, which would let them grow professionally. From my viewpoint, Deutsche Bank offers the most attractive career opportunities. If it were otherwise, we would not have been able to keep our team together. Early this year, our team’s banking component included around 400 people, and now this figure has gone up to 425. We want our employees’ career growth to take place primarily inside the bank itself. For instance, Dmitry Snesar and Andrei Chulak, the recently appointed co-managers of the investment and banking component of Deutsche Bank in Russia, joined the bank just two years ago. Dmitry was a member of Ilya Shcherbovich’s team in Moscow and was responsible for the metallurgy sector. Andrei worked in London team dealing with M&A transactions. It is important to me that my colleagues see that they can reach top positions as a result of successful work.
Andrei Chulak and Dmitry Snesar became co-managers of the investment and banking component in Russia. Will they keep working together, or are you going to promote one of them?
It will largely depend on how the business develops. It is up to them to decide what they want. Yet, considering the scope of business development and the number or deals in which we are now involved, one person would not be enough to supervise the entire process. Besides, each of them has his own specialization: Dmitry works quite actively in metallurgy sphere; he has worked for a long time in the domestic market and knows well how to build relations with clients. Andrei is one of the best experts on M&A market. This way, they complement each other very well. If they want to change that system in the future, we will discuss the issue. However, that management system will be maintained until the end of 2007 and perhaps next year as well.
Do you personally have any plans to withdraw from operational management over time, and to hand it over to somebody else?
Any professional manager should first see how his team works without him. Hopefully, when I decide to withdraw from my current job, there will be someone capable to replace me. Anyway, there will be no drastic or sudden changes. Certainly, I plan to provide my deputies with an opportunity for further career growth. And I wait for the moment when they become ready for it. However, we might possibly invite a professional from another organization. It is premature to talk about it now. I’ll be in my office today, and tomorrow, and in 2008. Even when I realize that some candidate is ready to replace me, I think I’ll choose to stay for a while longer.
Can Yuri Soloviev, first deputy chairman of the Board of Deutsche Bank, be named as a potential candidate?
Yuri heads Global Markets, the largest division of our business. He is one of the most experienced, brilliant managers and financiers in the market. He should definitely be among the potential candidates.
Alex Rodzianko was previously Deutsche Bank’s chairman of the board. He now works for Credit Suisse. Do you stay in touch with him?
Yes, we do. Rodzianko now supervises wealth (large capital) management department at Credit Suisse. I highly respect him. We used to work very well together, when he was the head of ‘Deutsche’ and I headed UFG. I have heard he has been quite successful in Credit Suisse. Naturally, he is a competitor of ours in the private banking sector. However, Deutsche Bank has been working in this segment in Russia since November 2003, while Credit Suisse has just started operations in Russia. Alex himself, when he was working for Credit Suisse already, pointed out an interesting fact that Credit Suisse and UBS are leaders in private banking in the foreign markets, while in Russia leadership belongs to Deutsche Bank.
What are your personal relations with competitors in the Russian market? For instance, with Morgan Stanley’s CEO Rair Simonyan or Citi’s president Mark Robinson?
Our relations are very kind. Mark is my neighbour. We live in the same apartment block. Speaking about Rair, we have known each other for a long time. He used to work in the Institute of World Economy and International Relations together with my UFG partner Boris Fedorov.
Does the work take all of your time?
I like golf and fishing very much. When I get some spare time, I take an effort to spend it with my family and children. So, I prefer to spend my vacations in America, where my parents, sister and brother live. I have two sons, one is four years old, and the other is seven. I am the coach of my younger son’s football team; it is a team of boys of four to five years old. Every Friday night I have to research the Internet and study theory, so that in the morning I could teach the kids to play the game. Believe me, it is a more challenging task to teach 5-year-old kids to play football, than to manage an investment bank.
“Kommersant” # 210 of 15 November 2007