World-Beating Russian Bank Shows Recession Priced Out by Traders

  • JPMorgan boosts price target after 85% gains beat global peers
  • Net income at banks outpacing Bank of Russia’s 2016 forecasts

The bank that’s caretaker of half of Russia’s consumer wealth may offer the best evidence yet that the economy is poised to exit recession.

Shares of Sberbank PJSC beat all but one peer worldwide over the past year, rallying 85 percent, while bonds in the country’s biggest lender are generating among the best returns in emerging markets in 2016. Of 18 analysts covering the stock, 11 have raised their 12-month price estimate since May, according to data compiled by Bloomberg. JPMorgan Chase & Co. bumped up its target by 33 percent last month.

Banking industry profits in the world’s biggest energy exporter are heading back to levels last seen in 2014, before the oil shock and sanctions over Ukraine plunged the economy into its longest recession since the global financial crisis, while lenders book larger margins as deposit rates fall. Sberbank, which nearly quadrupled first-quarter net income, still trades at a 25 percent discount to the average for lenders on the MSCI developing world financials index.

"It’s indeed an indicator” the economy is on the mend, said Mikhail Ganelin, an analyst at Aton LLC, who rates Sberbank a buy. “There is still upside potential in shares, despite trading close to record levels. Given the return on equity it shows, it still looks cheap on multiples."

The market gains are supported by forecasts that Russia’s recession will end in the fourth quarter as crude, the engine of growth, stabilizes around $45 a barrel following a 58 percent slide in the past two years. Against this backdrop, the industry’s profit may top a full-year forecast by the Bank of Russia of 500 billion rubles ($7.74 billion), Governor Elvira Nabiullina said July 25. First-half earnings were already 360 billion rubles, a seven-fold increase from a year earlier. 

Sberbank shares gained 37 percent this year, outpacing an 11 percent increase in the benchmark Micex Index. The lender’s Eurobond due in 2023 returned 20 percent so far this year, more than double the average gain for banks in a Bloomberg index of dollar-denominated corporate bonds in emerging markets.

The metrics all point to a “substantial de-risking" of the Russian financial sector, said JPMorgan analyst Alex Kantarovich, who boosted his target prices for Russian bank July 19 based on "sharply higher" earnings estimates. His estimate for Sberbank is now 180 rubles, a 30 percent premium to current levels.

Sberbank’s fortunes are hardly representative of peers, with almost a third labeled as mismanaged or under-capitalized and shut down since Nabiullina took over in 2013. About 240 of Russia’s 680 banks posted a loss in the first half. 

The International Monetary Fund said last month banks may need additional capital after under-reporting bad debt throughout the economic crisis. Profits are still about half what they were in the year that preceded sanctions and loan quality is still deteriorating.

Bottom lines are improving in a large part because banks are on the receiving end of a liquidity surplus engineered by the government to stave off a financial crisis under sanctions. Awash in the most cash in five years, lenders have slashed deposit rates to 8.85 percent last month, a two-year low.

That’s allowed a surge in net-interest margins because loan rates aren’t falling as quickly. Sberbank’s margin increased to 5.3 percent in the first quarter from 3.7 percent a year earlier, while VTB Group’s more than doubled to 3.4 percent.

Surviving the past year has made banks hardier and healthier, and Sberbank is the most “bullet-proof,” said Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, who sees the economy rebounding by 1.7 percent in 2017 after upgrading his forecasts in June. 

"Banks learned to earn in crisis times,” Polevoy said. “The crisis may not be over, but the situation has definitely stabilized.”

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