Sberbank is getting stronger despite the disastrous state of the Russian economy. What's the secret?
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Main page Analytics, Russia
Hot topic
Sept. 22, 2016
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The stock of the largest Russian bank with over 110 million customers has jumped over 100% since 2015 while Russia has been in the midst of economic crisis. Despite the obvious strength of the bank, the experts tell the investors to stay away. Why?

Sberbank (MICEX: Sberbank [SBER]) has been clearly dominating Russia's domestic banking industry in the past years. But what makes the bank's strength even more remarkable is a "disastrous" state of Russia's economy and the entire Russian banking sector. Sberbank's shares are up over 100%, as compared to the bottom levels of 2015, and are at its highest in the decade. At the same time, the company is demonstrating performance results of 2010-2011 "pre-crisis" times when oil traded at over $90 per barrel and Russia's GDP was twice as high as it is right now.

An analyst Vladislav Khabarov conducted a thorough analysis of the factors that contributed to Sberbank's "miraculous" success of the past years and identified several aspects that boosted the growth. However, the expert believes that despite the impressive results, the bank has little room for further improvement and here is why.

To begin with, the success of Sberbank's banking strategy can be mostly explained by the expanded spread between active and passive deposits in Russia's financial market, what opened favorable lending opportunities for the bank to capitalize upon. Therefore, the main factor standing behind the company's rapid growth was the large number of low cost deposits, says the expert. That is why in 2015, when Russia's banking sector was doing worse and worse, Sberbank was consistently growing. According to the following graph, the sector's losses, excluding Sberbank, amounted to over 90 billion rubles while Sberbank made 283 billion rubles (before tax) in the same period.

Khabarov believes that the bank has managed to attract such a large number of low cost deposits mainly due to its strong brand presence as the most trustworthy bank in Russia. In addition to that, the fact that Russia's Central Bank has revoked the licenses of almost 40% of all banks in the country in the last 8 years, only contributed to the growing public distrust and decreased the number of potential Sberbank's competitors. And looking at the number of the bank's customers, it does seem like most citizens trust the bank with their assets.

At the moment, Sberbank is the largest bank in the country, owning approximately 30% of all financial assets of the industry. Out of about 146.5 million citizens of the country, over 110 million are Sberbank's customers, meaning that the bank has the largest customer base in Russia. In addition to that, in many remote regions of Russia, Sberbank is the only bank offering banking services, what only further increases its overwhelming market share. The bank also has almost 30 million customers in Europe, North America and CIS countries. In other words, no other financial institution can compete with Sberbank's brand presence in the country.

Foreign investors drive the stock price

Khabarov claims that strong domestic presence is only one part of the equation. Over 50% of Sberbank's shares are owned by Russia's Central Bank, which, however, does not directly interfere in the stock price as Central Bank doesn't participate in the trading of the shares.

Yet, the second largest chunks of Sberbank (about 44%) is owned by foreign investors. This is the critical investor group that is accountable for the changes in the bank's stock prices at trade. However, this investor group is heavily dependent on the changes in the Russian economy and ruble's volatility. That is why, even though Sberbank's stock has rallied up, it was largely due to the foreign investors taking advantage of ruble's volatility and other economic factors. But Sberbank's stock price is way too unstable for a financial institution of this size, believes the expert.

Factors undermining Sberbank's business

That is one of the main reasons why the analyst advises to stay away from buying Sberbank's stock as the basis of its success is too volatile to provide any significant long-term benefits. A very important factor here is the drastic reduction of Russia's GDP that has been consistently "in minus" since 2014. For Sberbank, this means that it cannot rely on the growth from deposits in a long-term as sagging GDP normally means low demand for credit because more and more companies and individuals are cutting costs and saving money. As Russia is not likely to get out of the recession any time soon, the number of credits will only drop.

Next to that, the following graph shows that the biggest part of all Sberbank's credits come from individuals, service, retail and energy/infrastructure companies. However, Khabarov sees this as an unfavorable trend because all these industries have experienced a drastic decline in the last years, what will only make it harder for the bank to convince more people to take loans.

Retail sector experienced the highest drop in the last decade, similar to that of automotive and real-estate - the industries that the individual clients are interested in the most. This means that much fewer people will take loans at Sberbank in the future and the bank will be facing severe financial challenges when the current loans come to an end. So in order to avoid this, the bank is working on improving the situation in these important sectors:

"As for Sberbank, we are a bit more optimistic. We maintain our guidance with regards to corporate, both loans and deposits. At the same time we'll be better than the sector in terms of retail. Also in deposits, expect us to show substantial growth of deposits in the last quarter this year and in loans. Loans, we continue to focus on mortgages, on consumer finance now. So we'll be better than the sector in terms of retail, both deposits and loans," said Alexander Morozov, Sberbank's Chief Financial Officer in the earnings call last month.

The expert says that just as the foreign investors helped the bank to rise in the situation of an overall decline in the banking sector, they could also be the ones to negatively affect Sberbank's business in the near future. If Russia tries to reanimate its economy by lowering the interest rates from its current level of about 5%, this will drag the already weak ruble even further down. In turn, this means that the foreign investors will want to sell off their stakes in Russian companies to compensate for these losses, which will hit Sberbank very hard. The expert says that the government will be likely to support the real economy by lowering the interest rate even at the cost of weaker ruble.

The bottom line is that investors should not be blinded by Sberbank's recent growth as it is much more volatile than it might look. Therefore, those investors interested in long-term results should stay away from investing in Sberbank at the moment. As of writing, SBER trades at 153.84 RUB.

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