Tuesday, May 10, 2016

66th AIM Equity Update by Conor Connelly. Sberbank Russia OJSC (SBRCY). "Emerging Market Value in an Eastern Europe Banking Giant"


Sberbank Russia OJSC Sponsored ADR (SBRCY, $7.62): “Optimizing Efficiency Russian Style”

By: Conor Connelly, AIM student at Marquette University

 Image result for Sberbank Russia

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 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.