VTB’s Discount to Sberbank Shrinking: Russia Overnight

OAO VTB Bank, trading at the narrowest discount to OAO Sberbank in two months, will see the gap shrink by half as lending growth accelerates at Russia’s second-biggest bank, according to Otkritie Financial Corp.

Global depositary receipts of VTB rose 2 percent to $2.96 in London last week, pushing valuations to 5.3 times estimated earnings, a 10 percent discount to American depositary receipts of Sberbank, data compiled by Bloomberg show. Sberbank, Russia’s biggest lender, slipped 0.3 percent in London last week. The Bloomberg Russia-US Equity Index of the most-traded Russian companies in the U.S. fell 0.5 percent to 87.14 last week while RTS stock-index futures dropped 0.3 percent on June 7.

VTB, based in Moscow, is poised to expand its balance sheet as credit demand strengthens in the second half, Otkritie analysts led by Vladimir Savov said in a report June 7. State-run VTB’s corporate lending growth is outpacing the market and rival Sberbank this year, Chief Executive Officer Andrey Kostin said June 5. One-third of 21 analysts covering the London-traded stock recommend buying it, the highest level since April 2012.

“The time has come for VTB to shrink its discount to Sberbank,” VTB’s Savov said in a telephone interview from Moscow June 7. “The deep discount it has now is not justified and has the potential to shrink by half within months.”

VTB’s discount to Sberbank on an estimated price-to-earnings basis has fallen by more than half since reaching 28 percent on May 16, the highest in the past two years.

Shrinking Gap

Asset quality is a bigger risk at VTB than at Sberbank, Otkritie said, pointing to a ratio of non-performing loans that exceeds 5 percent at VTB, compared with about 3 percent at the larger lender.

“Sberbank is a very good, quality asset with a huge footprint in the banking industry, and smaller VTB will probably always trade at a discount to Sberbank,” Savov said. “But the gap is just too big and should shrink as VTB has been showing consistent improvement in all business segments.”

The Market Vectors Russia ETF, the largest exchange-traded fund dedicated to Russian equities, added 0.3 percent to $25.38, posting its first weekly advance in a month. The RTS Volatility Index, which measures expected swings in the stock futures, surged 6.9 percent to 27.05 by 3:06 p.m. in Moscow today. The Micex Index added 0.1 percent to 1,345.75 today.

VTB climbed 0.8 percent to 4.80 kopeks in Moscow, while Sberbank increased 0.3 percent to 99.30 rubles.

Futures expiring this month on the dollar-denominated RTS index declined to 130,080 in U.S. hours June 7. The nation’s benchmark Micex Index declined 2.5 percent in Moscow to a one-year low of 1,316.92.

Better Focus

VTB, which will reduce its stake in Tele2, the mobile phone operator it bought this year, “is on the right track as it exits from non-core businesses and focuses on lending and other financial services,” Mark Rubinstein, the head of research at IFC Metropol in Moscow, said in a telephone interview June 6. “Things are clearly improving for VTB, while no new driver for growth is seen for Sberbank.”

The bank paid $3.6 billion this year to acquire Tele2, Russia’s fifth-biggest mobile carrier, and will cut its stake in the company to below controlling levels by March 2014, VTB Chief Financial Officer Herbert Moss said April 24.

Recommendations to sell VTB’s stock are at their lowest level in five years, with only 14 percent of analysts endorsing a sale, data compiled by Bloomberg show.

VTB’s discount to MSCI Inc.’s Emerging Market Banks Index fell to 37 percent on June 7 from a three-year high of 47 percent on April 25.

Ruble Futures

“Investors don’t fully appreciate Russia’s biggest banks, probably because they are instead focused on slowing economic growth in Russia, insufficient investments in infrastructure and overall Russia’s dependence on commodity and oil prices,” Savov said.

Ruble futures showed the currency little changed at 30.54 to a dollar in U.S. hours June 7. Russia’s ruble weakened 0.2 percent to 32.1675 per dollar June 7 and was little changed at 36.7949 against the dollar-euro basket used by the central bank to manage swings that erode exporter competitiveness.

United Co. Rusal, the world’s largest aluminum producer, dropped 0.3 percent to HK$3.38 in Hong Kong trading as of 11:01 a.m. local time. The MSCI Asia Pacific Index gained 1.2 percent.

Before it's here, it's on the Bloomberg Terminal.