Monday, January 4, 2016

20th AIM student update by Conor Conelly. Sberbank of Russia (SBRCY): Russian Bank Dominates

SBRCY (Sberbank of Russia): Seizing Russian Growth!
By Conor Connelly, Student at Marquette University

Image result for Sberbank of Russia logo 

Disclosure: The AIM International Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


·       Sberbank is a corporate and retail bank that serves corporations, small businesses, financial institutions, and individuals in Russia. It has over 17.000 subbranches across the Russian Federation and Eastern Europe.

·       SBRCY’s management has unveiled a plan to optimize efficiency by cost cutting and margin expansion.

·       The worst of Russia’s recession is behind them as consumers have began to use domestic substitutions for imports, driving domestic growth and decreasing dependency on other nations.

Sberbank of Russia (OTC: SBRCY) was added to the AIM International Equity Fund this past December. 2015 marked a year of economic turmoil in Russia. Four macro-economic themes have propelled the country into a recession: accumulated structural problems and decelerated economic growth, a radical drop in oil prices, geopolitical sanctions, and the depreciation of the ruble. While the last year has proved to be difficult for Russian banks, with particular negativity surrounding profitability and asset quality as well as low loan growth, deleveraging, and a rise in nonperforming loans, Sberbank has performed exceptionally.

Sberbank has continued to see mortgage orignination, a growing deposit base, and an extension of credit into corporate segments through 2015. While these metrics have provided Sberbank’s investors with positive returns, the changing economic framework in Russia is pushing Sberbank to adapt heading into 2016.

At a recent investors’ meeting in London, CEO Herman Gref announced Sberbank’s updated strategy to decrease expenditures and push the cost to income ratio below 40%, increase investments in technology, and expand profit margins as revenue growth decreases over time. Revenue trends are expected to become more muted at roughly a 10% CAGR through 2017 while cost cutting and margin expansion is expected to propel ROE to 19.0% by 2017.

Cost cutting is the key lever Sberbank can pull to support returns against a challenging macro backdrop. Sberbank plans to meet these goals by reducing the total number of branches by 10-20% by 2018 and lowering the domestic employee count by 14% over the next 3.5 years.  

What has the stock done lately?

The stock is up 22.8% in the fourth quarter of 2015 as investors have reacted to management’s new strategy. A drop in oil prices has seen the stock fall in the last month, but we believe that this is more of a reaction to short-term volatility and that the intrinsic value of the bank will not be affected.

Past Year Performance

The stock has appreciated 50.9% in 2015 as numerous competitors have struggled. We strongly believe in management’s ability to continue to drive the value of the company higher as they move out of a recession.

Source: FactsSet

My Takeaway

I believe that the best time to get long an emerging market is when their economic growth is low, the currency has depreciated, and the economy is going through an adjustment. That is typically when investors have sold off and the market hits a trough, so you can capture value. Russia is not out of the weeds yet, but the worst of the recession is behind them and Sberbank has shown resiliency and adaptability during a challenging period. I strongly believe in management’s ability to perform and attain their goals. Sberbank will provide value to the AIM International Equity Fund in 2016.

The past quarter has been a strong one for this Russian bank - 2016 should be interesting.

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