Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Sberbank of Russia PJSC / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/24142" target="_blank" data-smartkarma-citation="entities:24142:1">Sberbank of Russia PJSC (SBER LI)</a> and <a href="https://www.smartkarma.com/entities/25243" target="_blank" data-smartkarma-citation="entities:25243:1">VTB Bank PJSC (VTBR LI)</a> command Earnings Yields of 14.4% and 16.5%, respectively. On a Franchise Valuation (simply Mkt Cap./Deposits) of 7.6% and a P/Book of 0.8x, VTB is very cheap.Discounts to other EM lenders can be attributed to postcode issues.Russia though is an Investment Grade destination. Considering this fact, assets are under priced - from commodity-related companies to financials. Investors may be reluctant to invest in Russia, we understand, and decisions can be driven by emotion. Having said that, strictly applying the aforementioned logic, one might end up investing nowhere. We are, of course, conscious of specific geopolitical risk.<blockquote>Run, run, run but you sure can't hide. An eye for an eye, a tooth for a tooth. Vote for me and I'll set you free. Rap on, brother, rap on.Just a ball of confusion. Oh yeah, that's what the world is today.</blockquote>Both banks command an extremely high PH Score™ which intimates that shares can perform well over the next 12 months.<div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage. Scores lie between 0 and 10, with higher scores representing more positive signs. Sberbank and VTB score 9.3 and 9.6.</div>While VTB merits attention at these levels, we believe that Sberbank commands a more rounded narrative. The bank is a modern, technology-embedded bank, characterised by a culture of innovation. Management appears committed to empowerment and productivity. The focus is on delivering a cloud-based platform incorporating AI, machine learning, Big Data, IoT, in-memory computing, advanced data analytics, robotics, and biometrics into an ecosystem. Intelligent Management Systems are scaled onto digital channels. Sberbank is branching out forcefully into a broader suite of product-services such as e-health, lifestyle, telco, fintech, cybersecurity, B2B marketplace, and B2C  e-commerce as well as developing opportunities in IoT, gaming, e-education, e-travel, e-employment and e-auto. Management is driving new complementary revenue streams via venture funds, labs, and accelerators. The future looks promising.Sberbank is swallowing up market share in Russia’s creaky, risky, banking space. As the sector retrenches, the bank is omnipresent, commanding a third and 40%, respectively, of the corporate and consumer loan market in Russia and more than 50% of the payroll and mortgage markets. Sberbank has around 150 million clients globally. The operation counts on a growing digital client base (via Text bank, apps and web) of some 54 million users.We view the current share price as compelling in the short term based on value-quality signals as well as the fat Earnings Yield.However, over the medium-term, based on company projections up to 2020, we caution that the PH Score™ may erode somewhat, during a fast growth phase, on challenging comps, especially in key variables such as profitability, margin, and liquidity though our view on capital adequacy, asset quality, and efficiency remains positive. Based on a higher P/Book, and a lower ROE, resulting in a reduced earnings yield, the PH Score™ may look less attractive before very long, crimping its return profile. The bank will then be fairly valued. For now, we believe that shares can push on more from here despite their recent stellar performance.The market pricing of the deposit franchise (unlike VTB) leaves little room for error too.

Sberbank of Russia PJSC (SBER LI) and VTB Bank PJSC (VTBR LI) command Earnings Yields of 14.4% and 16.5%, respectively. On a Franchise Valuation (simply Mkt Cap./Deposits) of 7.6% and a P/Book of 0.8x, VTB is very cheap.Discounts to other EM lenders can be attributed to postcode issues.Russia though is an Investment Grade destination. Considering this fact, assets are under priced - from commodity-related companies to financials. Investors may be reluctant to invest in Russia, we understand, and decisions can be driven by emotion. Having said that, strictly applying the aforementioned logic, one might end up investing nowhere. We are, of course, conscious of specific geopolitical risk.Run, run, run but you sure can't hide. An eye for an eye, a tooth for a tooth.  Vote for me and I'll set you free. Rap on, brother, rap on.Just a ball of confusion.  Oh yeah, that's what the world is today.Both banks command an extremely high PH Score™ which intimates that shares can perform well over the next 12 months.The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage. Scores lie between 0 and 10, with higher scores representing more positive signs. Sberbank and VTB score 9.3 and 9.6.While VTB merits attention at these levels, we believe that Sberbank commands a more rounded narrative. The bank is a modern, technology-embedded bank, characterised by a culture of innovation. Management appears committed to empowerment and productivity. The focus is on delivering a cloud-based platform incorporating AI, machine learning, Big Data, IoT, in-memory computing, advanced data analytics, robotics, and biometrics into an ecosystem. Intelligent Management Systems are scaled onto digital channels. Sberbank is branching out forcefully into a broader suite of product-services such as e-health, lifestyle, telco, fintech, cybersecurity, B2B marketplace, and B2C  e-commerce as well as developing opportunities in IoT, gaming, e-education, e-travel, e-employment and e-auto. Management is driving new complementary revenue streams via venture funds, labs, and accelerators. The future looks promising.Sberbank is swallowing up market share in Russia’s creaky, risky, banking space. As the sector retrenches, the bank is omnipresent, commanding a third and 40%, respectively, of the corporate and consumer loan market in Russia and more than 50% of the payroll and mortgage markets. Sberbank has around 150 million clients globally. The operation counts on a growing digital client base (via Text bank, apps and web) of some 54 million users.We view the current share price as compelling in the short term based on value-quality signals as well as the fat Earnings Yield.However, over the medium-term, based on company projections up to 2020, we caution that the PH Score™ may erode somewhat, during a fast growth phase, on challenging comps, especially in key variables such as profitability, margin, and liquidity though our view on capital adequacy, asset quality, and efficiency remains positive. Based on a higher P/Book, and a lower ROE, resulting in a reduced earnings yield, the PH Score™ may look less attractive before very long, crimping its return profile. The bank will then be fairly valued. For now, we believe that shares can push on more from here despite their recent stellar performance.The market pricing of the deposit franchise (unlike VTB) leaves little room for error too.

Sberbank of Russia PJSC

Sberbank: The Beast from the East