Research Notes
Small-Cap banks: the way through the crisis
| 01.07.09 |
We are starting full coverage of two regional public banks: Vozrozhdenie Bank and Bank Saint Petersburg. The stabilization of the monetary market has had a favorable impact first and foremost on small private banks, as they are most sensitive to changes in the economic climate. The decrease in specific risks has already helped improve these two banks’ stock valuations and current price levels may also open up lucrative investment opportunities.
Loan portfolio structure. Vozrozhdenie Bank has a well diversified loan portfolio, both in terms of industry structure and customer composition. At Bank Saint Petersburg, weak industries stand for almost 50% of the loan portfolio, which poses additional risks of NPL growth.
Non-performing loans. As of April 1, 2009, NPLs at Vozrozhdenie Bank stood for 5.9% of the loan portfolio, compared with 4.3% at Bank Saint Petersburg. We believe, however, that the more risky structure of Bank Saint Petersburg’s loan portfolio could result in an outrunning increase in bad loans by the end of the year. We predict that by late 2009, NPLs could rise to 11% at Bank Saint Petersburg and 10% at Vozrozhdenie.
Funding structure and interest margin. Both banks have significant short-term liabilities, which could lead to a growth in funding costs in 2009. On the downside, we note a possible downturn in the interest margin caused by outrunning growth in interest expenses and an increase in bad loans.
Liquidity cushion. In late 2008 – early 2009, Vozrozhdenie and Bank Saint Petersburg accumulated thick liquidity cushions, which were meant to protect the banks’ financial stability. Of course, such a policy may impair ROA, but is necessary amid unstable economic conditions.
Capital adequacy. The capital adequacy ratio at Vozrozhdenie Bank as of 31 March 2009 stood at 17.7%, compared with the sector average of 16.9%. Bank Saint Petersburg posted a 14.1% capital adequacy ratio. In our opinion, the bank may decide to upsize its capital by way of an additional preferred share issue.
Despite the formal similarities in each of these banks’ business models, we believe that Vozrozhdenie Bank is better positioned to overcome the weakness in the national economy. We assign a BUY rating to Vozrozhdenie Bank commons with a 12-month target price of USD 34.70 per share.
Bank Saint Petersburg’s aggressive expansion prior to the crisis may now result in a dramatic drop in the quality of its loan portfolio. In this case, the bank may decide to upsize capital via an additional preferred share issue. The company is currently valued at 0.6 times its 2009 P/BV and, despite all the negative factors, this valuation seems unreasonably low to us. We assign a Speculative BUY rating to Bank Saint Petersburg with a 12-month target price of USD 2.22 per share.
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Sector: Financial sectorCompany: Vozrozhdenie Bank