UralSib in Russia -
Bank St Petersburg, which operates in the Leningrad region, is currently on a pre-IPO roadshow. Operating in St Petersburg and the Leningrad region, Bank St Petersburg is well placed to exploit the potential of one of Russia's fast-developing regions, which is keeping pace with Moscow in terms of loans per capita and consumer spending.
The bank is the third-largest operator in the region after Sberbank and VTB (via VTB-North-West), holding 10% of regional loans and 9% of regional deposits. In the first half of the year, the bank posted return on average equity (ROAE) of 27%, which exceeded the sector average of 19-22%. We assume that this valuation is justified, but believe that at the upper half of the IPO price range, $4.35-5.65, it's overpriced in light of the bank's ambitious development plans, which could place additional pressure on its costs and raise inherent risks, which we outline below. We urge caution to investors participating in the IPO, and recommend entering at the lower end of the price range. The bank is controlled by its chairman, Andrei Savelyev, who has a 40% stake and several other managers, among them Sergei Matvienko (controlling 5.46%), the son of St Petersburg governor, Valentina Matvienko.
Targeting bottom half of the price-range
The bank intends to place an additional issue of 50.8m shares (18% of the total shares after the IPO) and over-the-counter GDRs, at a ratio of 3 shares per 1 GDR. The company targets to raise $221m-287m from the placement. Bank St Petersburg announced a price range of $4.35-5.65/share, and $13.05-16.95/GDR, suggesting the bank is valued at $1.23-1.6bn. Shares currently trade over-the-counter in the RTS at a bid-ask range of $4.35 to $5.00/share; the last deal was at $4.29/share, valuing the bank at $1.2bn. The IPO pricing will be announced at the beginning of November. We advise investors not to overestimate the bank's prospects and to proceed with caution if participating in the IPO. We only recommend participation at the bottom half of the range at $4.35-$5.0, which implies a valuation of $1.2-1.4bn for the whole bank.
Our positive outlook on Bank St Petersburg stems largely from its favourable location in the fast-developing Leningrad region: annual per capita income in St Petersburg for 2003-05 was at a compound average growth rate of 39%; the Leningrad region posted 2003-05 CAGR of 43%, which compares favourably with the Russian average 2003-05 CAGR of 25%. Despite this, we believe the bank's new strategy has inherent risks that do not inspire confidence at the upper-end of its price range:
--The loan portfolio is highly exposed to construction and real estate operations, which accounted for 32% of total gross loans in the first half;
--The share of retail loans at 7.7% is below those VTB (11%) and Vozrozhdenie (17%). Nevertheless, the bank intends to limit its exposure to real estate going forward. Its loan portfolio is also still highly concentrated, with 20 borrowers representing 31% of the gross loan portfolio;
--Net interest margin fell from 6.9% in 2006 to 5.8% in the first half, due mainly to the bank's switch from mainly raising funds from corporate accounts to raising funds by bond issues and expensive retail deposits. We believe that the decline in profitability will be offset by an increase in the share of retail loans;
--At ROAE of 27% in the first half, the bank's profitability surpassed the sector average of 19-22% due mainly to highly efficient operations, with a 2006 cost-income ratio of 43%, which is superior to that of Sberbank at 54%, URSA Bank at 48% and Vozrozhdenie at 74% over the same period. We note, however, that Bank St Petersburg's efficiency is hardly troubled given a branch network of 32 outlets, which is significantly less than those of its peers: Vozrozhdenie has 158 branches, and Sberbank possesses more than 20,000 branches. That efficiency may come under pressure if plans to roll-out a further 30 branches by 2009 reach fruition;
--Current and deposit accounts held 82% of the bank's liabilities in the first half, giving a deposit and current account to loan ratio of 0.95, which is quite positive under current market condition, given that it is almost impossible to access cheap cash on the market. That said, the fund base consists mainly of corporate accounts and deposits amounting to 68% of total accounts, with 7 large lenders accounting for 19% of this funding, which we believe poses risks for the future sustainability of the fund base;
--Corporate governance is not very transparent at the bank, although it does prepare IFRS financials, which are not released publicly. There is also no investor relations department at Bank St Petersburg; however, bank representatives have promise to remedy the lack of transparency after the IPO.
Vozrozhdenie is a perfect comparable
We believe that Vozrozhdenie bank is a perfect comparable for Bank St Petersburg, as both of these banks are placed in close proximity in Interfax's rating based on asset size, equity and loans. Vozrozhdenie is also a regional player, operating in the Moscow region, but it has low profitability profile primarily due to high operating and staff costs, and the added pressure of a larger branch network - 154 outlets, compared with 32 for Bank St Petersburg. In the meantime, Vozrozhdenie is gradually realizing a strategy aimed at improving efficiency and profitability by controlling costs, while Bank St Petersburg is just starting its expansion programme. Vozrozhdenie's retail client base of 1m customers is twice the size of Bank St Petersburg.
Vozrozhdenie trades at an estimated 2007 price/book value of 3.0, and 2007 price/earnings of 21.3, with a market capitalization of $1.3bn.
Our indicative valuation is based on a comparison between Vozrozhdenie and emerging market peers estimated at 2008 estimated P/BV and P/E multiples. We have two scenarios: the first envisages the bank raising $211m at $4.35/share, the bottom end of its price range, while second scenario sees the bank attracting $287m at $5.65/share, the top end of the price range. Basing the bank's 2007 estimated IFRS bottom line at $70m in 2007 and $120m in 2008, we forecast 2008 estimated equity at $630m based on the first scenario, and $697m based on the second one. Our forecast suggest that ROAE should fall after the placement to a 2007-08 estimate of 18-21% in line with Vozrozhdenie, which recently raised $177m in a share placement.
$4.35/share is attractive, but $5.65/share is over priced
Based on our comparison with Vozrozhdenie and emerging market peers, we estimate that based on our projection of the bank's 2008 P/E of 13.3, the placement would be at a 9.5% premium to Vozrozhdenie based on an offer price of $5.65/share, and at 15% discount to Vozrozhdenie based on an offer price of $4.35/share. Based on our projection of the bank's 2008 P/BV of 1.9, it would place the shares at a 33% discount to emerging market peers at an offer price of $4.35/share, and a 3.3% discount to Vozrozhdenie, which we believe is justified, as its ROAE should fall from 27% in the first half to 18-21% in 2007-08. Taking into account additional risks such as over exposure to real estate and the bank's high concentration of borrowers and lenders, as well as its lack of transparency and an unfavourable market, we opt to target our valuation of the bank at the bottom end of the range and, thus, assume that the bank will be over valued at an offer price above $5.00/share, while an offer price of $4.35/share is more attractive, offering 15% upside to the middle ($5.00/share) of the placement range of $4.35- $5.65/share.
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