Sberbank
of Russia Sponsored ADR (SBCRY, $11.56): “все хорошо -
Bullish Russian Economy will Augment Sberbank”
By: Erik
Floyd, 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 Sponsored ADR (OTCMKTS: SBRCY) is the largest
bank in Russia, engaging in corporate and retail banking activities such as
corporate loans, asset management, and online banking, as well as financial
services activities including interbank lending, and custody services. The bank
was founded in 1841 and has more than 14,000 branches across all regions in
Russia.
• A superior Net Interest Margin
(NIM) management aiming for more than 5.3% this year could provide a steady
profit income for 2020 in lieu of a consensus below 5% in 2021.
• Positive financial trends in
cost savings, loan volume, and supporting government measures will push
Sberbank to one of the most profitable European banks amidst the COVID-19
Pandemic and produce low teens ROE.
• A strong Q2 performance,
reassuring Russian economy, and the activity Sberbank has in the Russian
Federation will continue to drive the thesis that it can carry as a recession
proof bank with strong diversification.
• Sberbank has continued to
succeed on the digital platform through fintech innovations and acquisitions in
the past year.
Key
points: Sberbank of Russia was originally added to the AIM fund in
2015 with a price target of $7.82 and has consistently outperformed its
forecasts in the years since. Sberbank is the largest bank in Russia and has a
global outreach in the UK, Europe, and the US through its subsidiaries. The
firm is positioned well in responding to recissions, adapting to new fintech
environments, and performing competitively to other global banks.
Sberbank’s ROE recovery to more
than 14% from about 10% in 1Q was driven largely by improved net interest
margin (NIM) (5.61% vs. 5.49%). With a high NIM in 2020, this will continue to
drive profits as the consensus for 2021 is assumed to dip below 5%, which is
very probable given recent monetary easing in Russia.
With projections of a significant
decrease in loan volume following 2020, the bank could receive slower fees
which would add to revenue drag, triggering most cost savings in 2021 and a
likely cost-to-income ratio of 33%-37%. Taking into this into account, Sberbank
changed their cost-of-risk target from 100-110 bps to 230-250bps. This action
will most likely be supported by government measures since the effects of
Covid-19 on asset quality will start showing at the end of 2020 and into 2021.
This could push out low teens ROE making them one of the most profitable banks
in Europe.
Enduring the virus in Q2, The
United States GDP contracted 31.7%, while Russian GDP declined only by 8.5%.
Russia’s strategy has allowed for preservation of the economy and businesses in
the country, as Sberbank has been able to capitalize on this since the majority
of the Russian population uses their services every day. The performance
of Sberbank in Q2 reassures the systematic importance and downside protection
of the bank, and creates a unique opportunity as the Russian Ruble starts to
appreciate against other currencies. In addition to the economic performance,
Sberbank’s largest shareholder is the Ministry of Finance of the Russian
Federation, which supports their ability to operate efficiently and continue to
pay dividends.
As a way to diversify their
portfolio, acquire new customers, and cut operational costs, Sberbank has
significantly expanded into the online banking and fintech field. Sberbank had
a total of 97 million retail customers at the end of June, which accounts for
more than 60% of the Russian population. In addition to their digital retail
platforms, Sberbank recently purchased the electronic payment service Yandex. Yandex’s
platform “Money”, has recently seen an increase in users for the mobile app
MAUs by 2.8% Y/Y to 60 million.
What
has the stock done lately?
Since the beginning of May, Sberbank
has appreciated over 10% to its current price in the market. Trading in the
high $11-$12 range, Sberbank deviates largely from its January high of $17.20,
with the stock pricing at a significant discount from its peers in Russia and
across the globe. With recent price stagnation from missed Q2 earnings,
Sberbank has a great opportunity to continue to operate and capitalize on being
Russia’s largest and most valuable bank.
Source: FactSet
Past
Year Performance: SBRCY has decreased 13.90% in value over the past
year, largely associated to the COVID-19 pandemic and its influences to the
Russian economy, lending, and all other firm operations. Since the stock’s low
on March 18th, there has been an appreciation of 35%. Given the
current environment and unique outreach that SBRCY has, their market valuation
implies a bargain in comparison to its peers.
My
Takeaway
I recommend that Sberbank
continues to be held in the AIM Portfolio because due to the bank’s strong
growth outlook, competitive position, and undervalued market value. Between
Sberbank’s leverage in net interest margins, cost savings, and government
backed loan volumes, there is an exceptional opportunity for the bank to
capture a low teens ROE making it one of the most profitable banks in Europe
amidst a pandemic. In addition to this, I believe that Sberbank has used the
pandemic downturn to prove their strength and stability, as well as using it to
strategically continue fintech acquisitions and innovations.
Source: FactSet
