By: Conor
Connelly, AIM student at Marquette University
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.
Summary
• Sberbank Russia OJSC Sponsored ADR (SBRCY) provides emerging market
exposure to the financial sector of the AIM International Equity Fund at a time
when the worst of Russia’s turmoil is likely behind them.
• Management is currently
executing a plan to cut costs and optimize efficiency
• Domestic growth in Russia is
forecasted to steadily increase from its 2014 and 2015 lows, propelling
consumption and loan growth.
• At the CFA ENGAGE Symposium on
April 14 in Chicago, investor Bill Miller mentioned Sberbank as a financial
that he would currently buy.
Key
points: 2014 and 2015 were two
years marked with economic turmoil in
Russia. Four macro-economic themes 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. Sberbank
stalled with minimal profitability, poor asset quality, low loan growth,
deleveraging, and a rise in nonperforming loans.
In the last six months, however,
Sberbank has seen a rise in mortgage origination, a growing deposit base, and
an extension of credit into corporate segments. Additionally, management has
begun to execute their cost cutting plan in order to optimize efficiency. They
plan to cut the number of bank branches by 10-20% and lower domestic headcount
by 14% by 2018. Achieving these goals would reduce the cost to income ratio by
over 5%, reaching their 40% goal. It would also boost return on equity from 14%
to 19%. Sberbank has already seen some of the positive effects from this plan.
Net interest margin improved from 2.6% at the beginning of 2015 to 5.1% at
year-end.
Sberbank is a key supplier of
financial resources for the Russian economy. The corporate loan portfolio has
continued to grow over the last two years, even with recessionary growth. About
a third of the company’s corporate loan portfolio is made up of foreign
currency denominated loans.
What
has the stock done lately?
Sberbank was added to the AIM
International Equity Fund in early December of 2015. Since being added, the
stock has returned 20.5%. It took a dip at the end of 2015, but has rallied
strongly in the last four months.
Past
Year Performance: Sberbank has increased 28.8% in value over the
last year. It has outperformed the Russell Global x US by 42.84% on a total
relative return basis. We expect the stock to continue growing into 2016 as its
profitability is just starting to improve.
Source: FactSet
My
Takeaway
Sberbank Russia is just beginning its
cost-cutting program that is expected to boost efficiency and profitability.
Hearing Bill Miller speak highly of the stock at the CFA ENGAGE Symposium in
April enforced our outlook on Sberbank. We believe that this is a holding that
could add a high level of alpha to the portfolio over the next 3 years and is an attractive emerging market play.
