Schroders Fund Pushes Stake Limit in Sberbank on Russia Rate Bet

  • GDRs have risen as much as 119% since January amid oil rebound
  • Sberbank’s Moscow shares traded below book value until May

Rollo Roscow has maxed out his holdings of Sberbank PJSC, the Russian lender that has surged as much 119 percent from late January. If he had his way, he’d probably buy more.

The advance in the London-traded stock comes after a 46 percent rally in 2015 and has been driven by a rebound in oil prices and a stabilization in Russia’s economic slump. Roscow, a portfolio manager at Schroders whose International Selection Emerging Europe fund has beaten 85 percent of its peers over the past year, says the advance has further room to go as the central bank’s resumption of rate cuts will reduce opportunity costs to invest in the stock, thus boosting its valuation.

“We are not particularly bullish on Russia’s long term growth outlook but we are bullish on Sberbank,” Roscow said by phone form London last week. “The interest rate cutting cycle is going to be more aggressive than the market anticipates.”

Roscow began increasing the fund’s Sberbank stake in late March as the global depositary receipts sold for about $6.40 a share. They traded at $9.17 at 9:40 a.m. in New York on Monday. It’s now the largest part of the portfolio, accounting for 10 percent of the weighting, the maximum allowed by its investment guidelines.

The lender, whose shares in London have had the fourth-biggest rally worldwide among banks with a market capitalization of at least $4 billion, has rallied this year on signs a retreat in gross domestic product has bottomed out. Russia’s GDP is forecast to grow in the first quarter of 2017 after contracting for two straight years. For Sberbank, often viewed as a proxy for the nation’s economy, this means stabilization in the cost of risk and higher income, according to BCS Financial Group’s Olga Naydenova.

Sberbank reported a fourfold jump in first-quarter profit in May, propelled by lower borrowing costs and a decline in provisions for loan losses. Even so, the stock until May traded below its book value, meaning the shares are selling for less than the value of the company’s assets. The cheap valuation has attracted portfolio managers from Lazard Asset Management to Aberdeen Asset Management Plc.

Sberbank is one of the biggest beneficiaries of the Bank of Russia’s resumption of a rate-cutting cycle after an 11-month pause, Roscow said. Lower interest rates kick-start the economy and make it cheaper for banks to borrow from each other. Russia’s benchmark rate, currently at 10.5 percent, may fall to as low as 5 percent over the next 18 months, Roscow said.

Not Deterred

The rally in Sberbank’s stock may have gone too far, according to analysts covering the stock. The shares will probably drop 23 percent in the next 12 months, according to the mean of six price forecasts. Sberbank is among Russian companies sanctioned by the U.S. and its allies for the nation’s involvement in the conflict in Ukraine.

This doesn’t deter Roscow, who says that while he isn’t optimistic about Russia’s long-term growth, he’s bullish on Sberbank.

“Sberbank had to absorb a great deal of interest rate pressure, which squeezed profitability in 2014 and 2015, but this year the decrease in interest rates and easing of the macroeconomic situation is working in Sberbank’s favor,” Roscow, who also has Russian stocks such as X5 Retail Group NV and Luxoft Holding Inc in his portfolio, said. “Sberbank is in my opinion the biggest beneficiary of a stabilization in a macroeconomic situation in Russia.”

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