Quicky #9 on Sberbank

This is part four of my mini series on banks and part #9 within my series of Quickies on new companies.

This is not investment advice. Please read the disclaimer.
I currently own shares (economic interest) in mentioned or related companies.

Sberbank of Russia PJSC (Sberbank or the company) has a $ 55bn market cap as the largest bank in Russia, Central and Eastern Europe, and one of the leading financial institutions worldwide (about). Its mission is to make people’s lives better by helping them fulfill their aspirations and dreams.

Its stock is listed in Moscau (SBER RU). Internationally, ADRs represent 4 shares and may be easier to buy for foreign investors on LSE (SBER LI) or Deutsche Boerse (SBNC GY). It trades at an attractive P/E of 7x and sports a high dividend yield of 9%.

This is another part of my series of Quickies on new companies.

Sberbank’s leading position in Russia is cemented by its market dominating or very strong position in the mortgage sector (50% market share), retail loans (41%) and deposits (45%) as well as corporate loans (32%) and and total assets (31%) as of Q1/Q2 2020 (brief).

extract from Aug 2020 investor presentatio (big file!)

Sberbank shows impressive financial KPIs in addition to these high market shares. It earns a net interest margin or NIM of 5.5% (guiding for >5.3%), a high return on equity or ROE of ~25% (currently depressed) and controls cost for a very low cost income ratio or CIR of 34%. (CIR is calculated on operating income before provisions. When I was an apprentice at a bank (2008-2011) we aimed for a CIR below 50%, or slightly above)

Sberbank is a technology focused bank and could turn out to be an investors dream within the banking sector on this account. What I wrote in Quicky about Banking Industry seems not to apply to Sberbank since it seems Sberbank is very profitable and invests successfully in better technology at the same time.

Many banks never felt the need for better efficiency, since they were hugely profitable before the great financial crisis (GFC). Afterwards, profitability was so low hardly allowing for investments and operations and systems are so complex now, that better efficiency does not come easily.

My Quicky about Banking Industry

But is Sber(bank) reaching too far? Sberbank is not satisfied digitizing its core banking businesses but it aims for providing iEverthing sberEverything apps and services. The company stopped short of axing the ‘bank‘ from its legal entitiy name. Even its Sberbank app is competing for user engagement against social media. The company tries to create an ecosystem, investing in and eventually providing the following services, sometimes using its core banking competencies: eDucation, mobility, media, job portals, logistics, eHealth, communications, eRealEstate, and many more … (investor presentatio).

It might actually work, since banking is an essential service/product and can be the basis for many other services, reducing friction (i.e. slide #15: housing ecosystem). I guess the company has access to a deep pool of Russian digital/coding personnell. Sberbank app is #3 of Russia’s most downloaded free apps, in fact competing against social media. If it really works, scale and efficiency could go through the roof.

Sber continues the development of digital services and touchless solutions, which grew deeper into client habits during lockdown. SberPay wallet for NFC payments was launched in 3Q 2020 for off- and online shopping.

(Q3 2020 release)

Has Sberbank a lower obsolescence risk? We all probably know the below statement from Microsoft founder Bill Gates. And it is not too difficult to understand his logic with todays broad selection of fintech apps all offering a better user experience. When compared to other banks, I guess there is a good chance, that Sberbanks ecosystem might effectively mitigate the risk of obsolescence.

“Banking is necessary, banks are not” — Bill Gates, in 1994

Bill Gates

Q3 results

Sberbank reported record profits for Q3 2020 after a recent bump due to the pandemic. The company reported strong and growing net profits, EPS, and return on assets as well as a quarterly return on equity or ROE above 20%, after ROEs in the teens for the last four quarters.

KFI, extract from Q3 2020 IFRS presentation

Net interest income grew strongly (NII +16% yoy), driven by decreasing interest expenses (-24%) while interest income remained flat. Sberbank’s loan portfolio (base) continues to grow but its net interest margin or NIM declined further due to stable costs of funds. This development is a matter of concern! (needs monitoring)

NIM, amended extract from Q3 2020 IFRS presentation

Operating costs are kept in check. Opex increased +5% yoy for a cost income ratio of 30% (-3%p).

Perceived risks are high compared to other banks. But I guess investing in bank equities is usually more risky than perceived, due to inherent business dynamcis (cyclicality). Political risks play a huge role here! At least from a foreign perspective is seems that way. I guess chances are the risk is overestimated creating the opportunity to buy at a discount (or higher return potential). I guess many internatinal investors shun Russian stocks completely. The fundamentals look promising for me. Sberbank has a dominant market position and is growing strongly, credit risks is above average. But I might be willing to make this tradeoff. Sber’s push into its digital ecosystem brings additional risks, but I like it for the above reasons.

In conclusion I like Sberbank so far and might add to my position.

I hope you enjoyed this post on Sberbank. What is your opinion on it?


5 thoughts on “Quicky #9 on Sberbank

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