SBRCY - Sberbank

[Andy Dufresne]

OK, how exactly does one do that? Wouldn't this be akin to having a free lunch? Not that I mind  8)

[matts]

FX forwards are probably the most efficient way. They are not always available to retail investors but most dual listing arbitrage is done by very sophisticated institutional players.

[EliG]

You have a point, but the currency risk could be hedged away by the investor at a cost much less than that spread. So that is unlikely the cause of most of that gap.

 

Are you sure? The cost of currency hedging is a close reflection of the interest rate differential between the base currency and the target currency. Have you seen where Russian interest rates are?

[matts]

You have a point, but the currency risk could be hedged away by the investor at a cost much less than that spread. So that is unlikely the cause of most of that gap.

 

Are you sure? The cost of currency hedging is a close reflection of the interest rate differential between the base currency and the target currency. Have you seen where Russian interest rates are?

 

You are right of course, I mixed up hedging for the duration of the arb if necessary vs longer term currency hedging. My mistake.

 

[petec]

This stock is getting more interesting by the day!

[one-foot-hurdles]

Phil,

Sent u a DM

[60North Investments]

Thanks for the link Phil. Been long the stock from 2014 too, was a little early from a timing point of view but oh well.

 

For me the main point of the presentation was how Sberbank has stayed profitable through the tough times, and for example saw lots of new deposits (up every quarter for the past 5 years actually). Think it's a fairly reasonable probability that we'll see something like 25-27RUB/share earnings in 2018. When that happens the stock should be above 200RUB (in Moscow, now it's 89RUB).

 

Have any of you looked at Tinkoff Bank (trades in London, ticker is TCS)? It's gotten hammered heavily during the past year or so. 500m$ market cap, currently earns something like 40-50m$ (very volatile to converse to USD from RUB obviously) and has earned +150m$ in past years. An interesting company in that they operate online, making the cost structure lighter. Hoping to hear if someone has something to say about TCS.

[TwoCitiesCapital]

Russia's pain continues to be Sberbank's gain

 

http://www.bloomberg.com/news/articles/2015-11-05/russian-banks-face-more-pain

 

This year the central bank has shut down banks at the rate of almost two a week, closing about 9 percent of the total. Regulators say more will be closed. “The central bank says that revoking banking licenses will soon be an extraordinary event,” says Artem Konstandian, head of Promsvyazbank, Russia’s 11th-biggest lender. “We will get to that point eventually, but I don’t think it will be anytime soon.” Nonperforming loans have risen to 14 percent, from 11.5 percent at the start of the year, and are still growing. Banks have put aside 961 billion rubles in loan-loss provisions so far in 2015. Sberbank is offering a special deal to companies that have seen their lenders fail: New corporate clients can get three months of regular banking services at Sberbank for just 1 ruble a month instead of the usual 2,200-ruble fee. The offer’s valid through the end of 2016.

[60North Investments]

Q3 results seemed very good to me. ROE 11.8%, ROA 1.1%, both improving from Q2 and Q1. NIM was 4.7%, also higher than H1. Deposits +15% and loans +7% QoQ, big numbers considering the environment.

 

Depending on how high the NIM can go and what's a reasonable assumption for provisions as percentage of loans, you can get to good, great or awesome returns from today's price, despite the recent run-up. 5.5% NIM, 1.1% provisions/loans and deposit+loan growth of bit below 10% p.a. and you can get to +25RUB EPS by 2018. There are a lot of assumptions but it doesn't look like you need to be overly optimistic about how things will turn out.

[phil_Buffett]

Q3 results seemed very good to me. ROE 11.8%, ROA 1.1%, both improving from Q2 and Q1. NIM was 4.7%, also higher than H1. Deposits +15% and loans +7% QoQ, big numbers considering the environment.

 

Depending on how high the NIM can go and what's a reasonable assumption for provisions as percentage of loans, you can get to good, great or awesome returns from today's price, despite the recent run-up. 5.5% NIM, 1.1% provisions/loans and deposit+loan growth of bit below 10% p.a. and you can get to +25RUB EPS by 2018. There are a lot of assumptions but it doesn't look like you need to be overly optimistic about how things will turn out.

 

yeah i think the same. this bank is a Monster. they are earning in bad times Money and will get rewarded big time in the next years. the smaller Banks are out and after the sanctions will be sometime in the future lifted and the economy is growing again this bank will make a ton of earnings. the fact that a lot of People in russia dont even have a bank account or credit does Sound even better.

 

iam very excited

[TwoCitiesCapital]

Yea - I've been buying and adding for the last 12-18 months. This is one of my favorite positions, but I do have it sized smaller than my other favorites due to the "Russian" risk. This would be a full 10% position for me if it weren't in Russia. That being said, I do have 10% of my portfolio in a slightly more diversified basket within Russia because valuations there are ridiculous.

 

I'm up 15-30% on most of them in the last year, but they still trade at single digit P/Es and fractional book values and the currency is still down significantly which has the potential to help some of them when it rises again after things calm down.

 

Sberbank has had incredible growth and incredible profitability all the while it appears it has maintained good underwriting standards in a country that is underbanked. Good growth. Good profitability. Smart Business. Phenomenal Price. What more could you ask for out of a buy/hold/compound type of investment?

[influx]

Yea - I've been buying and adding for the last 12-18 months. This is one of my favorite positions, but I do have it sized smaller than my other favorites due to the "Russian" risk. This would be a full 10% position for me if it weren't in Russia. That being said, I do have 10% of my portfolio in a slightly more diversified basket within Russia because valuations there are ridiculous.

 

I'm up 15-30% on most of them in the last year, but they still trade at single digit P/Es and fractional book values and the currency is still down significantly which has the potential to help some of them when it rises again after things calm down.

 

Sberbank has had incredible growth and incredible profitability all the while it appears it has maintained good underwriting standards in a country that is underbanked. Good growth. Good profitability. Smart Business. Phenomenal Price. What more could you ask for out of a buy/hold/compound type of investment?

 

Where do you buy ? London SE?

[TwoCitiesCapital]

Yea - I've been buying and adding for the last 12-18 months. This is one of my favorite positions, but I do have it sized smaller than my other favorites due to the "Russian" risk. This would be a full 10% position for me if it weren't in Russia. That being said, I do have 10% of my portfolio in a slightly more diversified basket within Russia because valuations there are ridiculous.

 

I'm up 15-30% on most of them in the last year, but they still trade at single digit P/Es and fractional book values and the currency is still down significantly which has the potential to help some of them when it rises again after things calm down.

 

Sberbank has had incredible growth and incredible profitability all the while it appears it has maintained good underwriting standards in a country that is underbanked. Good growth. Good profitability. Smart Business. Phenomenal Price. What more could you ask for out of a buy/hold/compound type of investment?

 

Where do you buy ? London SE?

 

My purchases thus far have been in the ADRs because the account it's held in doesn't have access to foreign exchanges. Now that I have an account with IB, I could potentially buy shares from other exchanges if the spread to the ADR price was favorable.

[60North Investments]

The spread between Moscow and the ADRs has been about 5% for a long time. Currently it's about 7%. The problem is that for most people it is very hard to buy from Moscow. On the German exchanges I think the liquidity isn't especially great?

[scorpioncapital]

Any thoughts on the new pricing ? It seems to trade around  6x earnings and the bank is more international than ever,a play on emerging markets ?

[Spekulatius]

I think these sanction issues could sting a bit more. Could the ADR get delisted from US stock exchanges? Many institutional investors may not be able to hold stocks from Russia any more, others don’t want to.

[TwoCitiesCapital]

Any thoughts on the new pricing ? It seems to trade around  6x earnings and the bank is more international than ever,a play on emerging markets ?

 

It's a proxy for the Russian market which is why it gets sold indiscriminately when these things happen. Back in 2015/2016, it got as low as $3-4 per share before rocketing to $20 over the next 18 months.

 

It's one of the world's most profitable banks AND one of the cheapest! In addition, while sanctions on Russian companies isn't "good" for it, it's seen as the safe haven and assets flow to it in times of stress for the rest of the economy giving it a natural hedge to the economic cycle in Russia. We saw this in 2009 and again after the first round of sanctions and the collapse in oil prices.

 

As long as it's not a direct target of sanctions itself, I'm a buyer and massively bullish.

 

Double-digit growth with a single digit P/E, a natural hedge to the economic cycle, AND a potential currency kicker?

 

Disclosure: I have been buying this since the first round of sanctions in 2014 and have been loading up each time there's a major drop.

[TwoCitiesCapital]

Any thoughts on the new pricing ? It seems to trade around  6x earnings and the bank is more international than ever,a play on emerging markets ?

 

It's a proxy for the Russian market which is why it gets sold indiscriminately when these things happen. Back in 2015/2016, it got as low as $3-4 per share before rocketing to $20 over the next 18 months.

 

It's one of the world's most profitable banks AND one of the cheapest! In addition, while sanctions on Russian companies isn't "good" for it, it's seen as the safe haven and assets flow to it in times of stress for the rest of the economy giving it a natural hedge to the economic cycle in Russia. We saw this in 2009 and again after the first round of sanctions and the collapse in oil prices.

 

As long as it's not a direct target of sanctions itself, I'm a buyer and massively bullish.

 

Double-digit growth with a single digit P/E, a natural hedge to the economic cycle, AND a potential currency kicker?

 

Disclosure: I have been buying this since the first round of sanctions in 2014 and have been loading up each time there's a major drop.

 

Already 13% higher since the close on 4/13 when I made that post. Not jaw-dropping returns, but pretty good for short-term returns on an incremental add. Other Russian assets that didn't fall half as far have also been performing quite strongly over the last few days.

 

For me, the value available in Russia trumps the risks. If everything were to double, I'd have to re-evaluate. But, it would have to double first. In the meantime, I continue to collect the fat dividends and letting retained earnings * ROE go to work for me.

[Wfearful_Bgreedy]

I realize banks are notoriously hard to evaluate and Munger himself isn’t fond of them in general.

 

- Discount

I have been watching Sberbank take a steep discount for tariffs on aluminum and industries that don’t make up a considerable amount of their business lending, specifically Rusal.

https://www.reuters.com/article/sberbank-dividend/update-1-russias-sberbank-plans-to-double-dividend-payout-idUSL8N1RU3K2

 

In terms of AUM forbes lists the bank as a top 20, point being this isn’t a small community bank it is an international entity.

https://www.forbes.com/pictures/59248d2f31358e03e5596835/sberbank/

 

I suppose the fear for fund managers and institutional investors is that if they lose money for clients in the short term on a Russian bank heads will roll vs losing money in a quarter to Amazon or Netflix. Also putting money in Russia at this time would be politically polarizing for clients and would increase turnover.

 

With dividends increasing at Sberbank I feel there is real cash flow here even though some may have been burned by the Russia collapse way back.

 

- Macro

Russians and Slaves have some of the lowest debt/gdp in the world especially compared to the US and other G20 nations.

https://tradingeconomics.com/russia/government-debt-to-gdp

 

I see the lack of credit as potential energy stored up waiting to be utilized. Compare this to the U.S. where auto, home, and consumer debt is at an all time high. I feel pretty confident in saying that the amount of credit produced in the last decade in the US will be a drag and Russia has been very conservative in this regard

https://fred.stlouisfed.org/release?rid=89

 

I feel like the market is pricing U.S. banks for perfection and Russian banks for doom and gloom. I completely understand not investing in Russia for disagreement with their political actions of which there is no debate. Perhaps someone with more experience on the ground could enlighten us on the state of consumer sentiment and not the headlines we see everyday as I am completely ignorant and would like to expand my circle of competence.

[cameronfen]

I'm not positive, but I think the executives, have a very cozy relationship with Putin.  Outside of the icc factor, this means, the company can get away with a lot which could be construed as a plus, but the executives can get away with a lot at the expense of shareholders which is probably a bigger minus. 

[scorpioncapital]

At the expense of shareholders? #1 shareholder is putin himself! (Russian gov)

Don't think so!

 

[cameronfen]

At the expense of shareholders? #1 shareholder is putin himself! (Russian gov)

Don't think so!

 

it is very easy to screw shareholders not named putin/executives.  renn renn did it in china, mail.ru is doing it in russia by buying the mail.ru's majority holder (and putin crony) personally owned e sports business at an inflated value.  I personally think mail.ru could be a very good investment but its a huge risk for them and especially Sherbank where you can hide tons of earnings syphoning in a black box like a bank. 

[scorpioncapital]

But wouldn't the 50% government stake decrease in market value exceed the value of the corruption? Not sure, but I imagine they must be thinking to raise the price of the stock as it does matter to them , whether as collateral or even for future selling.

[tombgrt]

Mittleman is long with a 4% position. They have been for some time.

 

Comments:

 

Sberbank of Russia (SBRCY), continues to rise along with its earnings, and despite its nearly 28% total return year-to-date,

at $14.27 it still trades at a meager P/E ratio of only 6.2x estimated earnings per ADR of $2.32 for 2018, despite a 21% ROE.

J.P. Morgan Chase (JPM $95.51) has a P/E ratio 13.3x, with an 11% ROE. Even the sickly Deutsche Bank (DB $17.28)

trades at a P/E of 10.1x, with a 4% ROE. And Russia, despite a slower GDP growth outlook than the U.S. or Germany, still

has better long-term growth prospects for financial services such as home mortgage loans, auto loans, and credit cards, as

penetration for these basic credit products is very low in Russia, where household debt is only about 15% of GDP, versus 79%

in the U.S., and 53% in Germany. Our initial purchase of Sberbank was poorly timed, at $10 per ADR in June 2014, on its

way to $3.08 in December 2014 while some were calling Russia “absolutely uninvestable” at the time. But rather than joining

in the panicked selling back then, we bought more on the way down, lowering our average cost substantially in the process.

We now have a large unrealized gain on the position in just over three years since our woefully premature entry point, and

have received decent cash dividends, and view fair value as $24 (68% upside potential) at a P/E of 10.3x. We recognize the

unique risks of investing in Russia, where the price of oil dictates the value of the Ruble and so much of the profitability of

this preeminent banking franchise, and there is geopolitical risk as always. But Sberbank endured the downside of those risks

in 2014 through early 2016, and proved its resilience by not losing money throughout the two years that Russia just spent in

recession, nor did they lose money during the Great Recession / Global Financial Crisis. Profits contracted dramatically, but

they didn’t go into the red, and they quickly recovered. Sberbank should produce USD net income in 2017 that approximates

its prior peak earnings from 2013. Deutsche Bank lost billions in 2008, and has yet to reclaim its prior peak earnings of 2007.

We think 6.2x earnings for Sberbank, one of the largest and best run banks in all of Europe is much too low, including any

discounts that might be reasonably applied for the commodity price, currency value, and corruption risks inherent in a bank

domiciled in Russia. But considering the multiple frauds discovered recently at Deutsche Bank and Wells Fargo (WFC

$55.15, P/E 13x), perhaps the market is applying a valuation discount to the wrong bank.

 

 

After producing a 52.6% total return in 2017, Sberbank continued its ascent in Q1, rising 10%, propelled by strong earnings growth. Despite these gains, SBRCY still has significant upside potential to reach our conservative estimate of fair value, which is currently $25 per share, a P/E of 10x $2.50 in earnings per ADR.

 

But, while this letter is a review of Q1 2018, I would be remiss not to at least comment briefly on the sharp drop that Sberbank's stock has experienced in just the past few days due to a new round of sanctions levied by the U.S. on individuals and businesses in Russia, some of which Sberbank (which is not under sanctions itself), has lent money to. But those secured loans only amount to $9.75B, or 2.5% of Sberbank's $390B in assets, and 16% of their $60B in shareholder equity, and less than one year's worth of net income which is running at about $15B per year now.

 

Again, the sanctions don't directly affect Sberbank, but as the biggest most liquid stock in Russia, it suffers as an easy source of funds. Sberbank's CEO Herman Gref is a reformer, and runs the bank very well with enviable metrics, and I think he is recognized by the West as a man we could do business with in a post-Putin Russia, thus neither he nor the bank is targeted directly by these sanctions. Sberbank remains one of the largest banks in Europe with likely the highest ROE (23%+), a strong balance sheet (CET1= 11.4%), and lowest valuation.

 

And it has vastly outperformed the likes of Bank of America (NYSE:BAC) or Deutsche Bank (NYSE:DB) from 12/31/07 until 03/31/18, with Sberbank up during that period, from $16.73 to $18.65 (plus significant dividends), while BAC is down from $41.26 to $30, and DB is down from

 

$101 to $14. So while Russia is perhaps hopelessly corrupt, they carry very little debt, at the sovereign level and at the household level, which leaves room for further penetration of basic financial services (credit cards, auto loans, mortgages, etc.) over the long term, and Sberbank, with nearly 40% of the country's deposits, is practically a monopoly over there. So while we did sell some during Q1 in the $18 to $21 range to rebalance, with the stock suddenly back down here at $13 yesterday, a P/E of 5.2, with nearly 100% upside to fair value, we'll hold on until the missiles stop flying.

 

Also recall that it was not sanctions that put Russia into recession from late 2014 into early 2016, it was the price of oil, with the Brent oil price dropping from $115 in June 2014 to $27 in January 2016, a 77% drop. Brent oil is now $72 and trending up. So that should outweigh, fundamentally, any negative impact of the new sanctions.

[cameronfen]

But wouldn't the 50% government stake decrease in market value exceed the value of the corruption? Not sure, but I imagine they must be thinking to raise the price of the stock as it does matter to them , whether as collateral or even for future selling.

 

It's very easy for management to divert all the earnings to themselves and report lower earnings while paying off putin a vig.  That's what roseneft and gazprom do all the time while govt holds a large stake.  I dont think putin cares all that much how government holdings perform unless he doesnt get compensated.  Furthermore having a majority of shares while reducing the benefits of funnelling cash or other shenanigans, also increases the safety of such a procedure as no one can vote you out.  This is only exacerbated by the fact that putin actively allows cheating minority holders if he gets his share.  That being said, I'm not in the camp where I think I wouldnt buy a company at the right price and quality even if management were corrupt, depends still on the level of corruption and the potential opportunity.  Mail.ru is one that I would mention as is Ashford inc.  But dont delude yourself into thinking just because each share you own technically is a equal right to a share of earnings, that corrput managment and government wont find a way to make their shares better than yours.