By Rustam Botashev, equities analyst at UniCredit Securities
Pre-crisis profits already priced in for VTB, but Sberbank and VZRZ still have room for positive surprises
VTB promises to reach pre-crisis profits in 2010; we see this as possible for all banks under coverage. Bankers are suddenly talking about making solid earnings in 2010E; VTB even expects to reach its pre-crisis profit level next year, Interfax reports. We see such a scenario as realistic given decelerating NPL growth, an improving economic outlook, and ample NPL reserves this year. To have bottom lines at the 2007 level, banks’ cost of credit risk would need to drop by 3.2pp-4.4pp to 2.3%-3.8% next year, we estimate – no reserve releases would be necessary. Sberbank should have little difficulty achieving such a result, in our opinion; Bank Vozrozhdenie is already there under our base case scenario: only VTB would strain to restore its pre-crisis net income. We are less sanguine than the banks on the economic outlook, where we still see risks, thus pre-crisis profitability is not our base-case scenario.
Loan loss reserves solid, NPL growth slows. Russian aggregate coverage of overdue loans was 1.68X in September, compared to 0.8X in Turkey and 0.65X in Poland. The deterioration of asset quality slowed recently, and in September, problem loans decreased for the first time since end-2007 – not only in relative but in absolute terms (by RUB 15bn, or USD 517mn). However, our forecasts do not assume a further NPL decline but rather a slower expansion. If bad loan growth next year halves to 3.5pp-4.0pp, so should provisioning charges, allowing banks to deliver 2007 net income. Increasing collateral or seizing the assets of troubled companies in excess of loan values would also allow banks to limit provisioning.
The market does not fully account for a recovery of profits at Sberbank and VZRZ, but VTB looks expensive even in the best case. Assuming restored net income, Sberbank trades at a 10% discount to EM peers on 2010E P/E, while Bank Vozrozhdenie trades at a single-digit 2010E P/E – one of the cheapest in EM. VTB, on the other hand, trades at a 8% premium to peers, which we see unjustified given its low profitability. Even if it manages to deliver 2007 net income next year (and as such ROE of around 10%), it would still be value-destructive, given a COE of 14.8%.
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