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Russian Banks
Dimensions of ongoing value destruction
Banks
Alex Kantarovich, CFAAC
(7-495) 967-3172
alex.kantarovich@jpmorgan.com
Anna A Avdokushina
(7-495) 967-3009
anna.a.avdokushina@jpmorgan.com
J.P. Morgan Bank International LLC
See page 49 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Dec 09 PT changes
($) New PT Old PT
Sberbank 0.67 1.60
Sberbank pfd. 0.33 0.80
VTB 1.31 3.37
VZRZ 10.65 59.12
Bank SP 0.88 5.54
BoM 12.95 33.19
URSA 0.34 1.06
Rosbank 3.07 8.09
Source: J.P. Morgan estimates.
Downside risks:
• Resumption of ruble deval;
• Overshooting NPLs;
• Directed lending.
Upside risk: Govt. assuming a wider
role of a bad debt insurer.
Figure 1: P/BV for MSCI Fin Indices
0
5
10
2004 2005 2006 2007 2008
Russia
EM
US
Source: Bloomberg.
• Focusing on the two key dimensions of ongoing value destruction:
1) Surging provisions (JPMe `09 LLR rising by >6pp peaking at 10-15% in
2010e) will hurt earnings and capital; and 2) Lending expansion (JPMe
<10% for Sberbank and >25% for VTB in 2009) amidst negative economic
profit. The government pledging RUB300 bn in partial (50-70%) guarantees
on corporate loans to borrowers of “systemic importance” may help the
banks’ CAR, though it may come with a pricing straightjacket. As capital
adequacy is under threat, we believe recapitalization is possible.
• Debt market dead, deposit dynamics worsen, LLRs surging = lending in
contraction in spite of govt. handouts. Corporate deposits may shrink in
2009 (-10% JPMe) on debt burden while cash flow dries up and accounts’
velocity increases. In retail deposits, pressure on incomes and stubbornly
high inflation may further undermine the propensity to save, although FX
deposit revaluation may still support growth (JPMe 10% in 2009, in line
with M2). Liquidity-haves i.e. state-controlled banks, look set to gain and
private banks to yield market share.
• Capital adequacy under pressure = share issuance. For VTB a common
share issuance of >RUB200 bn (>150% increase of total shares) seems
unavoidable in our view. We believe Sberbank may get away with a modest
"just in case" issuance of prefs, thus minimizing dilution and damage to p.s.
valuation, on a more risk-averse lending and slower expansion. Equity
issuance by BoM, Bank SP, URSA and Rosbank looks likely in our view.
• Estimates/PTs cut. Considering intense macro pressure and the ruble
devaluation, we have cut our estimates (expecting net losses for VTB,
BoM, Bank SP, URSA and Rosbank in `09e). We set new PTs based on
the “franchise” approach (equity+branches+deposits).
• Ratings and recommendations. Given PT upsides and the likelihood of
equity issuance, we are: OW for Sberbank and Vozrozhdenie (55% and
82% upsides resp.), Neutral for Bank SP and URSA (upgrade from UW)
and UW for VTB, BoM, and Rosbank (downgrade from N). In our view
the stable ruble is key to the shares’ recovery.
Table of Contents
Investment case: tracking value destruction.........................4
Russian lending growth story is over.....................................9
Bad debt score card ...............................................................14
Company Profiles...................................................................19
Sberbank .................................................................................20
Walking a fine line.....................................................................................................20
Sberbank: estimates change summary .......................................................................21
VTB ..........................................................................................24
Acute hyperactivity disorder......................................................................................24
VTB: estimates change summary ..............................................................................25
Bank Vozrozhdenie ................................................................27
Good business, but no V-shape recovery for "V-Bank" ............................................27
Bank Vozrozhdenie: estimates change summary.......................................................28
Bank St. Petersburg ...............................................................31
Coping with northern chills .......................................................................................31
Bank St. Petersburg: estimates change summary.......................................................32
Bank of Moscow.....................................................................35
Overvalued and best left to Moscow govt..................................................................35
Bank of Moscow: estimates change summary ...........................................................36
URSA Bank .............................................................................39
Upgrade to N as merger with MDM is comforting....................................................39
URSA Bank: estimate change summary ....................................................................40
Rosbank ..................................................................................43
Exposed valuations, minorities marginalized ............................................................43
Rosbank: estimates change summary ........................................................................44
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