Sberbank of Russia PAO –
ADR (OTC: SBRCY, $9.88):
Earnings Estimate Beats
Excite a Disgruntled Russian Economy
By: Jaclyn Godwin, AIM Student at
Marquette University
Disclosure: The AIM 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 of Russia PAO (OTC:SBRCY) is a Russian-based commercial bank that
offers corporate and retail banking products and services to individual
clients, small businesses, corporate customers, and financial institutions. The
firm is headquartered in Moscow, Russia. The Central Bank of the Russian
Federation holds a 50% ownership stake.
·
A
decline in borrowing costs and bad loans has prompted the rise in earnings
during the first half of 2016, exceeding analyst estimates.
·
In a
recent earnings call, the Russian bank emphasized a shift in the loan portfolio
towards the consumer finance space. Convenience is the name of the game for
retail clients, prompting cost reductions and transaction number increases.
·
Although
Sberbank continues to experience a difficult macro-economic environment,
headwinds have lessened with 2016 GDP growth adjusted upward from -2.2% to
-0.7%.
·
The
positive outlook regarding Sberbank’s profitability and cost efficiency
continue into 2016. The firm projects a ROE of 17-20% and a cost to income
ratio of 40% for year-end.
Key Points: SBRCY was added to the AIM portfolio in
late 2015 due to its profitability and cost efficiency metrics. Reported
earnings form 1Q2016 offered reassuring results for SBRCY investors. The firm
posted record net income that nearly tripled in value from 31B rubles to 118B
rubles. The increase can be attributed to a decline in loan-loss provisions and
lower borrowing costs. The second quarter offered comparable results as the
firm almost doubled profits, rising from 55B rubles to 145B rubles. A decrease
in bad loans and an improvement in net interest margins led to increased
profits.
Recent earnings
reports have also brought forth a shift in the firm’s loan portfolio. To
compensate for a deficit of quality demand in corporate loans, Sberbank has
reiterated its focus on mortgage deposit growth from the consumer finance
space. Recent access to new data about
retail client scores, stemming from social media sources, fueled these
efforts. Currently, 90% of all transactions by individuals are made through
distant channels. This emphasis on customer convenience has reduced costs and
also increased the number of transactions. As SBRCY renegotiates the terms of
its corporate loan portfolio, investors should be wary of asset quality.
On a macro
level, headwinds continue for Sberbank. Plunging oil prices and ruble
depreciation hurt company prospects. Since, the region has experienced a bit of
a recovery as oil prices stabilize and the ruble strengthens. Russian GDP
growth, previously projected to decline by 2.2%, was estimated up to
-0.7%.
Despite all
this, Sberbank has continued to show improving profitability and cost
efficiency in a slow growth environment. During the 2Q2016 earnings conference,
management disclosed further full-year guidance for 2016. The firm raised its
target ROE in 2016 from mid teens to high teens, within a range of 17%-20%. On
a cost basis, the firm remains on track from previous guidance with a cost to
income target ratio of 40%. Due to the current low-inflation environment, the
firm may post a figure closer to 41.3% by end of 2016. Though, this will exceed
the firm’s cost to income ratio of 43.6% from 2015.
What has the stock done lately?
SBRCY’s stock
price fared well during 2Q2016. Following the earnings report, released in late
August, the stock increased by ~8.5% to date. Record net income rose above analyst
estimates and prompted a run on the stock. Analysts remain bullish as SBRCY
approaches its conference for end of 3Q2016. The stock is current listed at
$9.88.
Past Year Performance: The stock continues to exceed analyst
expectations, up ~75% on a YTD basis. Over the past couple of quarters, SBRCY
has gained momentum after a brief downturn in early 2016. Within less than
three months, the stock dropped ~30%. The fall can be attributed to a weak
Russian environment. Since, the stock has rebounded exceedingly well. The firm
is valued at a P/B of 1.10x and should be considered a strong portfolio holding.
Source: FactSet
My Takeaway
Since SBRCY was
added to the AIM International fund in late 2015, its fundamentals remain
strong. Earnings beats in 2016 reiterate the initial thesis surrounding cost
efficiency and added profitability. Despite its challenging macro-economic
outlook, SBRCY remains one of the safest stocks within the Russian region.
Moving forward, investors should closely monitor the firm’s corporate loan
quality and remain wary of the macro environment.
Source: FactSet
