Russian Stocks Decline as Bank Shares Drop on Earnings Concern

Russian stocks headed for a fourth weekly loss as financial shares declined on concern higher borrowing costs will crimp earnings.

The benchmark Micex Index retreated 3.2 percent to 1,429.97 by 5:02 p.m. in Moscow, after jumping the most since March yesterday. The dollar-denominated RTS Index dropped 1.4 percent. OAO Sberbank, the nation’s biggest lender, lost 4.6 percent, after Credit Suisse Group AG cut the stock to neutral, while VTB Group slid 2.2 percent.

This week’s surprise interest-rate increase to 17 percent drove up the cost of funds Sberbank borrows from the central bank, putting pressure on the lender’s net interest margins as it charges less on loans to clients, according to Credit Suisse. Brent oil, which traders look at for pricing Russia’s main export blend, gained 1.9 percent to $60.38 after sliding 3.1 percent yesterday.

“The strong increase in the key rate is having a negative impact on the banking sector -- there are concerns about the rising cost of funding,” Vitaly Isakov, a money manager at Otkritie Asset Management in Moscow, said by e-mail. “Oil’s inability to show stable growth is also pressuring shares.”

Funding Costs

Sberbank’s loan-to-deposit ratio has risen to 114 percent from 107 percent this year and the weak ruble will drive it up to 120 percent by year-end, Credit Suisse analyst Hugo Swann said in an e-mailed note. That will push the lender to use central bank funding more frequently, which is negative for net interest margins as Bank of Russia funding has become “more expensive,” Swann wrote. He kept VTB at underperform and cut its price estimate 41 percent.

Credit Suisse forecasts Sberbank’s funding costs will rise 45 percent over 2014-2015 and net interest margins will drop about 60 basis points over the first half of 2015, following an estimated 50 basis-point decline in 2014. .

The benchmark rate of 17 percent could lead to a collapse in loan demand and worsening asset quality for Russian banks as borrowers struggle to meet already high interest payments, Svetla Atanasova, credit analyst at Barclays Plc, wrote in a client note Dec. 17. Barclays expects lenders’ interest margins to come under significant pressure, weakening capital ratios.

‘Calm Day’

AFK Sistema gained as much as 36 percent and traded up 3.4 percent after more than doubling yesterday as its owner billionaire Vladimir Evtushenkov was released from house arrest and President Vladimir Putin said money-laundering charges against him had not been proven.

The Micex trades at 4.6 times the projected 12-month earnings of its members, compared with 11 for the MSCI Emerging Markets Index.

“Today is the first calm day since the start of the week and the market is trying to find a balance,” Vladimir Vedeneev, the chief investment officer at Raiffeisen Capital in Moscow, said by e-mail. “When over five days the RTS index goes from 800 to 550 and back it’s very hard to make any investment choices.”

(An earlier version of this story corrected the percentage decline of the ruble.)

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