• Short interest in country's biggest lender near 15-month high
  • Total buy ratings decline to lowest since September 2013

It’s been a tough year for OAO Sberbank, the Russian lender that has slumped 16 percent from its high in May. And traders are increasingly betting that it will get even tougher.

Short interest in the London-traded stock rose to 0.3 percent shares outstanding last week, data compiled by Bloomberg and Markit show. That put bets on a decline in the shares at around the same level as April 2014, shortly after President Vladimir Putin annexed Crimea from Ukraine and triggered sanctions that locked it out of capital markets in the U.S. and Europe. Total buy ratings on the bank, widely seen as a proxy for Russia’s economy, have dropped to a two-year low.

Higher financing costs and a contracting economy have crimped earnings at Sberbank, which holds about 46 percent of Russia’s deposits. While a cycle of cuts this year reduced the key interest rate to 11.5 percent from a record 17 percent in December, it’s still twice as high as it was in February 2014. Lower borrowing costs won’t be enough to restore profitability in the country’s banking industry, Moody’s Investor Services said in a report last week. Bank of America Corp. expects a sharp decline in Russian banks’ profitability and a tighter funding environment, it said last week.

Rebound Falters

“Until we see a turnaround in negative trends in the investment climate -- consumption, retail sales and real incomes -- we won’t see too many reasons to buy Sberbank,” Ivan Kachkovski, an analyst at Aton Capital, said by phone from Moscow. “This year is not going to be particularly easy for the lender, and as many investors are not too optimistic about the market in general, they aren’t positive on Sberbank, which is viewed as a mirror of Russia’s economy.”

Investors, who had been returning to Russia after the world’s worst slump in 2014, are backpedaling as oil, the country’s biggest export, dropped 16 percent from this year’s high and a rebound in the ruble wavers. Sanctions the U.S. and European Union imposed on Russia linked to the Ukraine conflict are taking a toll on the broader economy as real wages and disposable income continue to fall.

SBER LI Equity SI
SBER LI Equity SI

“GDP growth is the driver of the asset quality and creditworthiness of borrowers, so if borrowers start defaulting and people start having payment problems, that leads to an increase in delinquencies on the payments,” Irakli Pipia, an analyst at Moody’s Investors Service, said by phone from London on Friday. “This affects the credit quality of the borrowers and, thus, the asset quality of the banks, and subsequently translates into an increased cost of risk, which will drive the banking system into the negative territory for this year.”

Russia’s gross domestic product will probably shrink 3.5 percent this year, according to the median estimate of 42 economists surveyed by Bloomberg.

Earnings Plunge

Sberbank’s net income under Russian accounting standards dropped to 81.6 billion rubles ($1.4 billion) in the first half from 186 billion rubles a year earlier, the lender said in July. Corporate lending fell by 6.6 percent to 10.9 trillion rubles while retail lending shrank by 0.6 percent to 4.05 trillion rubles. The bank will cut its 2014 dividends to 3.5 percent of net income from 20 percent in 2013 to avoid having to raise new capital, Chief Executive Officer Herman Gref said in April. Yavuz Uzay, an analyst at Bank of America Corp, expects Sberbank’s return on equity to plunge to 7.1 percent this year from 15 percent in 2014, he said in a research report last week.

“When risks are high and profit is shrinking, it’s a totally justified decision to cut back on dividends,” Olga Naydenova, a banking analyst at BCS Financial Group in Moscow, said by phone on Friday. “Being the largest lender, Sberbank is inevitably exposed to economic risks, but the lender’s size and magnitude -- as a holder of almost half of Russia’s deposits -- gives it an opportunity not to take on any excessive risks it doesn’t want to take on.”

Analyst Ratings

Sberbank Deputy Chief Executive Officer Alexander Morozov said on a conference call that “it’s not just hard, it’s impossible” to envision a repeat of last year. Phone calls and an e-mail to Alexander Baziyan, a spokesman for the lender, were not returned.

On a scale from 1 to 5, Sberbank’s London-traded shares have a consensus recommendation of 3.7, higher than the average multiple of 3.4 among 11 peers, data compiled by Bloomberg show. Three out of six analysts advise clients to buy the London-traded stock, two rate it hold and one says sell.

Brent crude, the oil grade traders use to price Russia’s main export blend, fell 2.8 percent last week, widening its decline from this year’s high in May to 16 percent. The ruble, the world’s biggest decliner last year, dropped 0.9 percent last week, widening its loss from this year’s high to 16 percent. Sberbank added 4.1 percent to $5.35 in London last week.

Traders in Russian assets were “too optimistic” about a rebound in the ruble and a stabilization in oil prices as the rally wasn’t supported by the economic data, and markets might face a correction in the third quarter, affecting Sberbank, Kachkovski said.

“The macroeconomic situation and restrictions of foreign financing are already affecting Sberbank’s financial and operational results,” Polina Lazich, an analyst at Cjsc IC AK Bars Finance, said by phone from Moscow on Friday. “Being the largest and the most powerful bank, it still faces a lot of headwinds.”

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