Citi analysts reiterated their Buy rating on Sberbank RF as the bank is well-positioned to deliver a ROE of 16% from 2018.
Simon Nellis and Maria Semikhatova of Citi Research believe Sberbank Rossii OAO (MCX:SBER)’s current share price doesn’t reflect the bank’s dominant position in the under-developed Russian banking market.
Sberbank targets to double its net profit
Sberbank Rossii OAO (MCX:SBER) is Russia’s largest bank, controlling 29% of the country’s assets, 34% of corporate lending, 33% of retail lending and 46% of retail deposits. The bank’s retail branch network is over 10x the size of its nearest competitor. Due to its unique history and startling deposit base, Sberbank enjoys an enormous funding cost advantage relative to its competitors.
Sberbank has recently unveiled its new Development Strategy until 2018, which Citi analysts consider as well thought out and ambitious. The bank will try to double its net profit over the next five years, driven by asset growth and improving operating efficiency and maintaining ROE at 18-20%.
The following table depicts the bank’s key financial targets over the next five years:
The following table depicts the Russian bank’s key targets by division:
In their report, the Citi analysts focus on key financial targets for the overall Group and honed in on three key issues viz.: margin pressure, cost optimization and normalization in cost of risk.
Margin pressure
Citi analysts point out Sberbank Rossii OAO (MCX:SBER) has historically enjoyed best-in-class margins among the Russian universal banks thanks to its dominant position in the domestic retail deposit market. The analysts note that going forward, the bank’s strategy envisages 100-130 bp of margin compression stemming from lower inflation (4.5% in 2018), weaker credit demand, increased competition and disintermediation.
Citi analysts are more upbeat on the margin front. The analysts estimate spread (loan yield – blended funding cost on customer deposits) compression of 94 bp and they anticipate a comparable decline in margins by 2018 (77 bp in NIM on average assets and 87 bp in NIM on average interest earning assets).
Cost optimization
Simon Nellis and Maria Semikhatova point out one of Sberbank’s key tasks over the next 5 years is to grow income faster than expenses to ensure a reduction in cost-to-income ratio to 40-43%. Citi analysts consider this as an ambitious target considering the need to continue to invest in infrastructure and IT.
The analysts point out Sberbank’s management targets average opex growth of slightly over 10% per year in 2014-18, assuming the bank executing targeted cost optimization. However considering the bank’s poor track record in lowering staff levels over the last three years, Citi analysts are more cautious on the headcount reduction. The analysts anticipate the average number of employees to stay largely unchanged and forecast average growth of 9% in staff costs in 2014-18.
Normalization of cost of risk
Again on the cost of risk front, Citi analysts are more cautious. Sberbank anticipates cost of risk to average 1.2 to 1.4% over the next five years. However, by plotting economic growth against risk cost for Sberbank over the past 10 years, the analysts note the implied correlation suggests a cost of risk over 2% in the case of GDP growth hovering around 2.2 to 2.4%.
Reiterates Buy rating
Citi analysts reiterate their Buy rating on Sberbank despite the slowdown experienced in the Russian economy, as the analysts believe the bank is well-positioned to deliver a ROE of 18% on average over their forecast horizon. Further the analysts believe the bank’s current share price doesn’t fully factor the bank’s dominant position in the under-penetrated Russian banking market.
Citi analysts consider Sberbank Rossii OAO (MCX:SBER) as their top pick in CEEMEA with the bank’s solid profitability and attractive valuation and enhanced their TP to RUB 148 from RUB 145.
