Russia’s state-owned banking behemoth Sberbank became the second most valuable bank in Europe after HSBC on February 26, when its market capitalisation of €91.73bn overtook Spain's Banco Santander. 

Sberbank has become something of a tourist stock – international portfolio investors that want a limited exposure to Russian equities, such as index trackers, tend to buy Sberbank’s shares before any other. Sberbank is the main creditor of the Russian economy and holds the largest share of the deposit market.

The bank’s shares rose to RUB285 on February 26 (and the preferential shares hit RUB235) to bring the bank’s capitalisation to €91.73bn, ahead of Banco Santander’s €91.56bn.

Sberbank had already cemented its lead as Russia’s most valuable company last November after its ordinary share price soared to a record RUB200 on November 7 on the Moscow Exchange. The market capitalisation of Sberbank reached RUB4.5 trillion (€65.3bn), well ahead of state-controlled oil major Rosneft with RUB3.5 trillion and gas giant Gazprom with RUB3.1 trillion.

The Russian stock markets rallied this week following international ratings agency Standard & Poor’s (S&P) decision to return Russia to investment grade rating of BBB- with a stable outlook  after markets closed on February 23.

The ruble-denominated MOEX index hit a new all-time high of 2,376.96 points during February 26, while the dollar-denominated Russia Trading System (RTS) broke out of its 1,000-1,200 band where it has been stuck for nearly two years to close at 1,312.03 on February 26, a gain of about 9% in the year to date. 

Sberbank’s shares have been rising steadily as the Russian economy recovers and have easily outperformed the market, up 19% over the last three months alone.

It has piqued investors interest as not only does it give an effective way to get some exposure to the Russia economic recovery story and the growth of Russia’s middle class, but increasingly investors are realising that Sberbank is one of the biggest banks in Europe and has business in many other countries in Central and Eastern Europe (CEE), where it is a major player in the local markets.

But the bank’s strength is its hold on the huge Russian retail banking market – by far the largest in Europe in terms of clients. Sberbank comprises 14 territorial banks and has more than 16,000 branches throughout the country in all 83 regions of Russia. Sberbank has more than 127mn retail customers in Russia and 10mn abroad, the number of its corporate clients exceeds 1.1mn in 22 countries, according to Tass.

Apart from its size, the bank is also extremely profitable. “Sberbank is still able to deliver 20%+ ROE, showing 10% EPS CAGR in 2018-20 even after tripling EPS over the past two years,” according to Olga Naydenova, a bank analyst with BSC Global Markets. “We project that core revenue will be driven by 8% 2018-20 loan book CAGR and 14% CAGR in fee income. This should further enhance the bank’s business model with fee coverage of operating expenses increasing from over 55% to over 80%.”

Sberbank reported its Russian Accounting Standards (RAS) net profits went up by a third (30.4%) in 2017 to RUB674bn ($11.9bn). Sberbank is due to publish FY17 IFRS results on February and BCS GM is expecting a net profit of Rb187bn, which means 22% return on equity (ROE).

The income was generated from robust loan growth, which also reached a record high of RUB1.8 trillion for individuals and RUB270bn for corporations. Last year the bank’s CEO German Gref said Sberbank was hoping to see its profits top RUB1 trillion ($17.4bn) as soon as 2020.

“While many peers are still focused on addressing past problems, Sberbank’s business model has relieved it of such focus. Rather, the bank is still benefitting from attractive point in the cycle and reduced competition. In addition, Sberbank has been impressively pursuing digital transformation that should secure better efficiencies and improve its risk profile – C/I ratio should decline to 30%, whereas CoR should moderate to 1.3-1.4%. The bank is also building up new revenue streams in the financial and non-financial space potentially contributing c10% by 2020,” Naydenova said in a note on the bank.

The next big trigger for the stock will be a mooted decision for Sberbank to increase its dividend payments to 50% of net profit. Previously Sberbank was under pressure from the government to pay 50% of IFRS net profit already by 2018, but its main shareholder the Central Bank of Russia argued that banks should be treated differently from other state-owned enterprises (SOE) when it comes to dividends, as they have capital standards to comply with. Nevertheless, reports suggested that Sberbank will gradually increase the dividends to 35-40% of net profit in 2018 and to 50% after 2019. For 2016 the bank paid RUB135bn in dividends, translating into 25% of IFRS net profit, up from 20% in 2015.

 

Sberbank: Key financial indicators, RUB bn, %
P&L	2018	2019	2020
Net interest income	1,502	1,573	1,612
Total non-interest income	512	594	679
Total operating costs	-678	-678	-690
Provision expense	-265	-295	-342
Net profit	857	955	1,007
Balance Sheet
Customer loans	20,370	22,128	23,671
Total assets	29,427	31,108	33,013
Total equity	4,041	4,567	5,097
Ratios
ROAE	22.90%	22.20%	20.90%
NIM	5.80%	5.60%	5.40%
Cost of risk	1.30%	1.30%	1.40%
Per share
BVPS	179	203	226
EPS	38.1	42.4	44.7
Source: BCS GM