Daily analyst comments

On November 25 Vozrozhdenie Bank released its financials audited to IFRS for 9M 2008. The statement shows that assets increased by 23.1% y-o-y in January-September to RUB 137.1 billion. Total loans amounted to RUB 103.2 billion, up 32.1%. Equity capital rose by 21.1% to RUB 14.4 billion in the first six months of the year.

Table 1. Vozrozhdenie Bank: key financial indices for 9M 2008, mn RUB

The assets rose by 23.1%, slightly exceeding to an average growth of 22.1%. A similar picture could be observed with the bank’s equity capital, which increased by 21.1%, likewise outpacing the average equity growth of 17.9%. The bank said its assets rose by a modest 3.6% in 3Q. In our opinion, asset growth was capped by a shortage of funding over the quarter.

Table 2. Vozrozhdenie Bank: basic indicators of the profit-and-loss statement, mn RUB

We are positive on the bank’s financial performance in 9M 2008. The bank has demonstrated above-average growth in the reporting period, as well as an ability to improve its cost-effectiveness and cost control. The return on equity widened to 25.8% for 9M 2008 from 21% in the year-earlier period, and to 27.8% y-o-y for 3Q 2008. The expense-to-income ratio decreased by 8.8%, from 62.7% to 53.9%.

In our view, changes in the profit and cost-effectiveness indices reflect the outrunning growth in interest rates on loans as compared with the cost of funding, às well as the bank’s ability to control its operating expenses, which grew 26% y-o-y, or by a lower margin than those for rival banks in the sector. The bank has gained another competitive advantage by actively crediting working capital. As a result, the turnover of credit resources has accelerated, enabling the bank to promptly react to changes in interest rates on loans.

On the bright side, we also point out the high quality of the bank’s loan portfolio. Towards the end of the third quarter, the proportion of non-performing loans in the total portfolio was a mere 2.34%, while provisions against bad loans stood at 3.5%. The bank continues to stick to its conservative policy with regard to overdue loans, which include all loans that are overdue for one day or more.

Although the 9M financials reported may be regarded as positive, they do not reflect the drastic deterioration of conditions in the Russian banking sector over the last two months. The main risk now faced by the bank is a possible destabilization of its balance sheet structure as a result of an outflow of client deposits, which could lead to cash deficiencies. Between the start of October and mid-November, the bank lost 13% of its clients. Even though the outflow of clients has ended now, we do not rule out that clients may continue to panick, which could have even more serious repercussions. Another reason for the outflow of deposits lies in a shortage of liquidity, which prompts companies to keep minimal balances on their current accounts. For the time being, the cash gap is covered by Central Bank credits. The bank is also tapping its proceeds from the return of loans. Over the past six weeks, the bank saw its assets shrink by 3%.

We estimate the fair price of one common share in Vozrozhdenie Bank at USD 43.45, with an upside potential of 266%, but we see better investment opportunities in the stocks of sector majors.