Sunday, October 23, 2016

A current AIM holding: Sberbank of Russia (SBRCY) by Jaclyn Godwin: "Will Strong Performance Continue or Turn Into a Russian Bear?"

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

Image result for Sberbank of Russia logo 

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.


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

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