Research Notes
Banking: New catalysts needed
| 26.03.10 |
Russian economic conditions saw gradual improvement in recent months, which naturally had a healing effect on the banking system. We are upbeat on the Russian banking sectors’ development prospects, but draw investors’ attention to the fact that the negative consequences of the crisis has not yet been fully exhausted and will put pressure on Russian banks’ financials in 2010.
We view the common shares of Sberbank and Bank Saint Petersburg as the best investment opportunities in the Russian banking industry.
Banking sector conditions improve... Increased availability to funding and the slowing increase in NPL are the main favorable consequences of the economic stabilization in Russia from the viewpoint of the banking industry. Interbank lending rates have dropped below the pre-crisis levels, while the stable inflow of customer funds permitted most banks to replace expensive CBR funding with traditional sources already in 2009. Total NPL have remained fairly stable since October 2009, which has enabled banks to gradually lower provision charges.
... but "blue sky" is still far away. In our opinion, the market has underestimated the following key negative aspects that might affect a bank’s 2010 financials: Firstly, the narrowing of the credit spread, driven by a faster decrease in interest rates in relation to the cost of liabilities, could trigger a NIM reduction. Secondly, in line with banks’ own opinion, the peak in NPL has not been reached yet, and banks plan to go on with heavy provisioning over a major portion of 2010.
Banking stocks need new catalysts. In our opinion, the majority of banking stocks still have upside, but to realize this potential the market will need new catalysts. As the most likely drivers, we point out a reduction in non-performing loans and the renewal of lending growth. As for the loan portfolio, we expect it to start growing in as early as the coming months, while NPL are unlikely to demonstrate any notable decrease until late 2010.
Sberbank and Bank Saint Petersburg are our top picks.
The best investment opportunity among the banking blue chips are Sberbank commons: despite the crisis, the bank expects to receive a record net income in 2010. Among regional banks, we highlight the common stock of Bank Saint Petersburg, which is valued by the market at an unreasonably large discount to both foreign and domestic peers.
Vozrozhdenie and VTB look momentarily less appealing. In accordance with our valuation models, both banks are below their fair prices; however, their stock valuations are unlikely to advance in the mid-term due to the following factors: VTB, a cautious attitude from investors regarding the quality of the bank’s assets and the adverse effects of a forced economic bailout policy; Vozrozhdenie Bank, unexpectedly pessimistic 2010 NI guidance from management.
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Sector: Financial sectorCompanies: Bank Saint-Petersburg, Sberbank of Russia, VTB Bank, Vozrozhdenie Bank