Cyprus VTB Bank is a great investment for the state bank’s partners / Petros Karadjias / AP

Cyprus-based Russian Commercial Bank (RCB) paid out 210 million euros in dividends in 2016, according to its financial statements. The bank is known for its high payouts to shareholders, comparable to its profits (see chart). They allowed VTB managers to quickly recoup their investment in the bank: in early 2009, they bought out RCB's additional issue for $11.71 per share, and in the fall of that year, RCB announced interim dividends of $15.6 per share, more than the placement price.

Now it is the turn of FC Otkritie Bank. It became a shareholder of RCB as a result of an additional issue in November 2014. The securities were placed at $50 and 19.8% of the shares of the Cypriot bank cost Otkritie approximately 87 million euros, according to RCB's financial statements. In 2015, the Cypriot bank paid lower dividends than usual, but made up for lost time the following year.

In 2016, RCB did not change its dividend policy, its representative emphasized: the size of dividends remains comparable to payments in previous years. Their growth is due to the fact that the bank reflected dividends for two years at once in the financial statements, he explains: 128.6 million euros for 2015 (paid in February 2016) and 81.5 million for 2016 (paid in December). Dividends for two years amounted to 210.1 million euros with a net profit of 226.6 million euros, he said.

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As a result, over two years, FC Otkritie received 48.8 million euros in dividends from RCB, having recouped more than half of its investment in the bank's shares. And the 41.6 million euros in dividends received in 2016 even exceeded its net profit. Considering that FC Otkritie's financial result in 2016 was slightly more than zero (RUB 1.5 billion under IFRS - Vedomosti), RCB dividends are significant for it, but their share in operating income is small, says Moody's analyst Petr Paklin.

FC Otkritie declined to comment on RCB’s dividends for 2016. A representative of FC Otkritie said only that the bank considered “the purchase of a minority stake in RCB as an opportunity to expand the business internationally and as a promising financial investment, including taking into account the [Cypriot] bank’s dividend policy.”

On average, the yield on the Russian market is about 5% per annum, you can find instruments with a yield of more than 10% per annum, but this is very rare, says Sberbank CIB strategist Andrey Kuznetsov. But comparing these figures with the yield of non-market instruments is incorrect, he warns.

A representative of VTB (which owns 46.3% of the shares) referred the question about dividends to the Cypriot bank, emphasizing that RCB is not a subsidiary of VTB. For the state bank itself, the dividends of the former Cypriot subsidiary are not that significant. If on average the bank pays 100 million euros in dividends per year, then VTB's income from this investment is about 3 billion rubles, calculated BCS analyst Olga Naidenova. Since VTB is focused on a profit of 100 billion rubles per year, this amount is not decisive for the bank, she concludes. The dividends that RCB paid in 2016 amounted to approximately 20% of what VTB itself paid in dividends over two years (77.4 billion rubles).

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"As a subsidiary of VTB, RCB has historically paid large dividends, but the European regulator has no complaints about it, since the bank has successfully passed all stress tests," Paklin points out. The ECB has recommendations regarding dividend payments, the latest of which was issued in December last year, recalls Yegor Grigorenko, a partner at Bain & Company. The recommendations boil down to the following: after the payment of dividends, all capital adequacy standards must be met, including taking into account individual buffers, he points out. As for the rest, the European regulator recommends paying less, but in general leaves this issue to the discretion of shareholders, he notes. RCB's CET1 capital adequacy ratio is higher than 20% (at least 4.5% excluding surcharges. - Vedomosti), says Grigorenko, this is due to the specific structure of the portfolio, so the risk of entering the violation zone is very low, so the ECB is unlikely to react in any way.

RCB is a systemically important bank of the European Union, its website says, the bank provides corporate and investment and retail products and services. Last year, the bank's assets significantly decreased: by 35% to 8.7 billion euros. Most of them are loans - 7.1 billion euros, with 5.1 billion euros secured by a guarantee from shareholders, according to RCB's reporting. Shareholders account for a significant part of funding: the bank attracted a deposit of 5.1 billion euros from them, and the bank's total liabilities are 8.2 billion euros.

In addition to VTB and FC Otkritie, the bank is owned by the offshore company Crendaro Investments Limited, which is half owned by Kirill Zimarin, who heads the bank, and half by the structure of RCB itself.

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