Wednesday, September 9, 2020

An AIM International Equity holding: Sberbank of Russia Sponsored ADR (SBCRY, $11.56): “все хорошо - Bullish Russian Economy will Augment Sberbank” by: Erik Floyd, AIM Student at Marquette University

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.


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